Accounting Theory and Current Issues| Holmes Institute|HI6025
Week 1
Information is relevant if it can influence or change the economic decisions of users and is given in time to influence those decisions (Janssen, van der Voort and Wahyudi, 2017). The information is considered to be relevant if it is material in nature. Information that is relevant has confirmatory or predictive value.
Predictive value is used by users to assess future, present and past events. Confirmatory value is used to confirm those assessments and evaluation (Otley, 2016).
Faithful representation means the presentation of any financial data in accordance with their economic reality and substance, not only in their legal form (Azar, Zakaria and Sulaiman, 2019).
- 1 example where information is relevant but not faithfully represented: Order of $10 million has been recorded but the goods have not been delivered and the payment has not been received. Therefore in the above example we can assess that the order of $ 10 million has been recorded as revenue but the goods has not been sent or the payment has not been received. As the value is of $ 10 million therefore the information is relevant but it has not been faithfully represented as the company should not have been recorded it as revenue.
- 1 example where information is not relevant but is faithfully represented: Order of $ 500 has been received but has not been recorded as revenue. As the value is just $ 500 therefore the value is not relevant but it has not been presented as revenue as the goods has not yet been delivered or the payment has not been received yet, therefore it has been faithfully represented but is relevant for the decision making as the value is very small to be considered.
- 1 example where information is relevant and faithfully represented:the customer has demanded for some service for 1 year and the full year payment of $ 60000 (for 12 months has been received). But the services have been given only for 4 months before the year ended. The revenue has been recorded as (60000/12 *4) = $20000. This representation is correct as for services revenue should be recorded when the services have been delivered and the period for which the services has been delivered. This is an example of relevant because $60000 is a big deal of money and has been faithfully represented.
Week 2
- Agreement with support of government bond between society and members in the society to cooperate and support in need is called social contract (Yao, 2018).
Organizational Legitimacy is the coherence of values that are instilled in an organization with a blend of social context. Legitimacy is the process by which superior systems and partners are given power (Deephouse et al. 2017).
Previously the organization was a much closed space therefor etc. transparency in the system the institutional schools has tried and adopted the blend of social contract where the people give some power to others to control them and legitimacy the process of transferring power. Therefore we can blend both the concepts and conclude that the process by which the partners are given power is governed by the shareholders and thus we can also say that the social contract has also been implemented here as the partners of an organization is governed by the shareholders.
- Organization can use corporate disclosure policy to maintain or regain organizational legitimacy:
- The transferring of power should be voted as it provides an unbiased opinion and the voting should be held in open.
The policies and procedures of the company should be informed and written in the company’s annual report which provides transparency and thus would mitigate the fading away of organizational legitimacy
DATE |
JOURNAL ENTRIES |
DEBIT ($) |
CREDIT($) |
1/7/15 |
Equipment To Bank |
440000 |
440000 |
1/7/17 |
Statement of profit and loss To Accumulated Depreciation |
80000 |
80000 |
1/7/17 |
Equipment To revaluation surplus |
64000 |
64000 |
1/7/19 |
Statement of profit and loss To Accumulated Depreciation |
106000 |
106000 |
1/7/19 |
Bank To Equipment To gain on sale |
356000 |
318000 38000 |
|
|
|
|
From 1/7/15 to 1/7/17 the depreciation of the equipment was charged for 2 years in SLM method. Therefore the depreciation was (440000-40000/10 *2) = $80000.
Carrying value of the equipment on 1/7/17 = 440000-80000= $360000
Revaluation surplus = $(424000-360000) =$ 64000
Depreciation from 1/7/17 to 1/7/19 = $424000 / 8 *2 = $106000
Residual value = $424000-$106000 =$ 318000
Gain on sale = $ 356000- 318000 = $ 38000
Week 3
a)
Carrying value = net assets + goodwill = $(4400000+600000) =$ 5000000
Recoverable amount = $4500000
If carrying value > recoverable amount then impairment exists
Impairment = $5000000-$4500000 = $500000
DATE |
PARTICULARS |
DEBIT($) |
CREDIT($) |
30/6/19 |
Impairment To cash generating unit |
500000 |
500000 |
30/6/19 |
Impairment To goodwill |
500000 |
500000 |
|
|
|
|
b)
Now the recoverable amount is $4200000
Carrying value = net assets + goodwill = $(4400000+600000) =$ 5000000
If carrying value > recoverable amount then impairment exists
Impairment = $5000000-$4200000 = $800000
Therefore in case of impairment goodwill should be impairment first and as the impairment value is greater than goodwill ($800000> $600000), therefore whole of the goodwill should be impaired
Value of goodwill impaired = $600000
Week 4
a)
total lease amount |
2215560 |
|
|
|
initial payment |
300000 |
|
|
|
|
|
|
10% |
|
year |
balance bf |
interest |
payment |
balance cu |
2020 |
1915560 |
191556 |
225000 |
1882116 |
2021 |
1882116 |
188212 |
225000 |
1845328 |
2022 |
1845328 |
184533 |
225000 |
1804860 |
2023 |
1804860 |
180486 |
225000 |
1760346 |
2024 |
1760346 |
176035 |
225000 |
1711381 |
2025 |
1711381 |
171138 |
225000 |
1657519 |
2026 |
1657519 |
165752 |
225000 |
1598271 |
2027 |
1598271 |
159827 |
225000 |
1533098 |
2028 |
1533098 |
153310 |
225000 |
1461408 |
2029 |
1461408 |
146141 |
225000 |
1382549 |
2030 |
1382549 |
138255 |
225000 |
1295804 |
2031 |
1295804 |
129580 |
225000 |
1200384 |
2032 |
1200384 |
120038 |
225000 |
1095422 |
2033 |
1095422 |
109542 |
225000 |
979965 |
2034 |
979965 |
97996 |
225000 |
852961 |
2035 |
852961 |
85296 |
225000 |
713257 |
2036 |
713257 |
71326 |
225000 |
559583 |
2037 |
559583 |
55958 |
225000 |
390541 |
2038 |
390541 |
39054 |
225000 |
204595 |
2039 |
204595 |
20460 |
225000 |
55 |
From the table we can prove that the payment of $250000-$25000=$225000 in arrears is at an implicit rate of 10%. The value $55 has arisen due to decimal and rounding off or else the value would have been 0.
b)
date |
particulars |
Debit($) |
Credit($) |
1/7/2019 |
Cargo ship To lease liability To cash |
2215560 |
1915560 300000 |
30/6/2020 |
finance cost to lease liability |
191556 |
191556 |
30/6/2020 |
Lease liability To cash |
250000 |
250000 |
c)
date |
particulars |
Debit($) |
Credit($) |
1/7/2019 |
Lease receivable To cargo ship |
2215560 |
2215560 |
30/6/2020 |
Cash To lease receivable To interest income |
250000 |
58444 1915 |
References
Azar, N., Zakaria, Z. and Sulaiman, N.A., 2019. The Quality of Accounting Information: Relevance or Value-Relevance?. Asian Journal of Accounting Perspectives, 12(1), pp.1-21
Deephouse, D.L., Bundy, J., Tost, L.P. and Suchman, M.C., 2017. Organizational legitimacy: Six key questions. The SAGE handbook of organizational institutionalism, 4(2), pp.27-54
Janssen, M., van der Voort, H. and Wahyudi, A., 2017. Factors influencing big data decision-making quality. Journal of Business Research, 70, pp.338-345
Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62
Yao, H., 2018. The relationship between human values, bribe acceptance, and contract price in business negotiation: an experimental analysis (Doctoral dissertation, Tartu Ülikool