Accounting Theory and Current Issues - HI6025

Week 1

Answers

1. Information Relevant and not Faithfully Represented :

X ltd. sold 500 books to Y bookseller in the year 2018 costing $100 each. In the first week of 2019, Y bookseller returns 50 of these books on grounds of defective items. The sale recorded by X ltd in its financial statements is $50,000. In this case the information is relevant as the sale did happen of 500 books but it is not faithfully represented because sales returns were not taken into account.

2. Information Not Relevant but Faithfully Represented :

A company is showing book value of a tradable security at historical price. The information might be faithfully represented in the books of accounts but is of no use to the user of information as the fair market value of the asset is not recorded, which is more relevant.

3. Information Relevant and Faithfully Represented :

A company records all of its assets based on the revaluation method and discloses all the relvant information. For Example. Recording a sale by taking into consideration all the sales returns, allowances and making a provision of bad debts.

Week 2

Answers

Part a)

Social Contract:-

Social Contract is generally refers to how the business has been interact with the society.

Social contract relate to organizational legitimacy :-

It is relates to implicit and explicit expectations of society. it means how the business should act to ensure for its continuance in the future.

There is no compulsion to make the written agreement with the business. Therefore, a social contract is not necessarily a written agreement, but is what we understand society expects.

A social contract explains the relationship between the society and business where as the organizational legitimacy shows the state in which an organization has complied the terms of the social contract

Therefore, we can say that this is the process by which the terms of a social contract is gained or maintained.

B)

Generally, there are 4 ways how the organization can use the corporate disclosure policy to maintain or regain organizational legitimacy, the two way of it are as –

• Seek to manipulate perception by deflecting attention from the issue of concern to other related issues.
• Seek to educate and inform society about actual changes in the organization’s performance and activities

Corporate Disclosure is used as a technique in each of these 4 strategies specified above. In case any negative news available in the public, an entity might take the steps deliberately and provide the information to negate the negative news which is available in the society.

Corporate Disclosure also use to draw the attention to strengths or to down play information about the negative activities. It is highly used to advertise the comparatives i.e actual changes in corporate performance or its activities.

Week 3 Answers

Following are the journal entries

Date	Particulars	Debit ($)	Credit ($)
1/7/2015	Polishing equipment Dr.	440000
	To Cash/Bank		440000
1/7/2017	Polishing equipment (Note 1) Dr.	64000
	To Revaluation Surplus / Fixed Assets revaluation reserve		64000
1/7/2019	Cash / Bank (Note 2) Dr.	356000
	To Polishing Equipment		318000
	To Gain Sale of fixed asset		38000

 

Note 1 - Polishing equipment carrying value as on 01/07/2015 440000

Less : Depreciation for 2 years {[(440000-40000) / 10] *2} 80000

Carrying value as on 01/07/2017 360000

Less : Fair Value as on 01/07/2017 424000

Revaluation surplus / Fixed assets revaluation reserve 64000 (Will be transferred under reserves & surplus head)

Note 2 - Carrying value as on 01/07/2017 424000

Less : Depreciation for 2 years {[(424000-0) / 8] * 2} 106000

Carrying value as on 01/07/2019 - 318000

Less : Sale Value 356000

Gain on sale of fixed asset 38000 ( Will be shown under other income in income statement)

Week 4 Answers

Part a)

Journal entry –

Date	Particulars	Debit $	Credit $
June 30,2019	Loss on goodwill impairment	500000
	Goodwill		500000
	(Being record of loss on goodwill impairment)

 

Workings-

Goodwill value as on July 1, 2018 =$600000

Carrying value of net identifiable assets excluding goodwill = $4400000

Carrying value of cash generating unit including goodwill =$4400000+$600000 =$5000000

Recoverable amount of cash generating unit = $4500000

Impairment loss = Carrying value of cash generating unit including goodwill - Recoverable amount = une 30,2019 = $5000000-$4500000 =$500000

Impairment on goodwill = $500000

Part b)

Carrying value of cash generating unit including goodwill =$4400000+$600000 =$5000000

Recoverable amount of cash generating unit = $4200000

Impairment loss = Carrying value of cash generating unit including goodwill - Recoverable amount = une 30,2019 = $5000000-$4200000 =$800000

Impairment on goodwill = $600000 (impairment loss of goodwill limited to its carrying value)

Note- The impairment loss of a cash generating unit (CGU) is allocated first to goodwill and then on a pro rata basis to the other assets of the CGU or group of CGUs to the extent that the impairment loss exceeds the book value of goodwill.

Week 5 Answers

Part a)

Proof that interest rate implicit in the lease = 10%

Year	Lease Payment	Discount Factor @10%	PV of Lease
0	$300,000	1	$300,000
1	$225,000	0.909	$204,545
2	$225,000	0.826	$185,950
3	$225,000	0.751	$169,046
4	$225,000	0.683	$153,678
5	$225,000	0.621	$139,707
6	$225,000	0.564	$127,007
7	$225,000	0.513	$115,461
8	$225,000	0.467	$104,964
9	$225,000	0.424	$95,422
10	$225,000	0.386	$86,747
11	$225,000	0.35	$78,861
12	$225,000	0.319	$71,692
13	$225,000	0.29	$65,174
14	$225,000	0.263	$59,250
15	$225,000	0.239	$53,863
16	$225,000	0.218	$48,967
17	$225,000	0.198	$44,515
18	$225,000	0.18	$40,468
19	$225,000	0.164	$36,789
20	$225,000	0.149	$33,445
-	-	-	$2,215,552

Fair value of Lease Payment = $2,215,552

= (Fair value given in the question)

Part b)

Fisher Ltd

Journal Entries

Date	Particulars	Debit	Credit
01.Jul.19	Leased Asset	$2,215,560	-
	Lease Liability	-	$2,215,560
	(Being Lease Recognized)	-	-
01.Jul.19	Lease Liability	$300,000	-
	Bank	-	$300,000
	(Being Lease Payment Recorded)	-	-
30.Jun.20	Lease Liability	$225,000	-
	Lease Expense	$25,000	-
	Bank	-	$250,000
	(Being Lease Payment Recorded)	-	-
30. JUn.20	Interest Expense	$191,556	-
	Lease Liability	-	$191,556
	(Being Interest Recorded)	-
	(2215560-300000)*10%

 

 

 

Part c)

X Finance Ltd

Journal Entries

Date	Particulars	Debit	Credit
1.Jul.19	Lease Receivable	$2,215,560	-
	Lease Asset	-	$2,215,560
	(Being Lease Recognized)	-	-
01.Jul.19	Bank	$300,000	-
	Lease Liability	-	$300,000
	(Being Lease Income Recorded)	-	-
30.Jun.20	Bank	$250,000	-
	Fisher Ltd	-	$25,000
	Lease Receivable	-	$225,000
	(Being Lease Income Recorded )	-	-
30.Jun.20	Fisher Ltd	$25,000	-
	Lease Expense	-	$25,000
	(Being Amount transferred)	-	-
30.Jun.20	Lease Expense	$25,000	-
	Bank	-	$25,000
	(Being Amount Paid)	-	-
30.Jun.20	Lease Receivable	$191,556	-
	Interest Income	-	$191,556
	(Being Interest Recorded)	-