Product Quality Information - Essay Example

Advance Accounting Name Date Course Question 1 Researchers have indicated that even the absence of regulation, organizations will still have incentives to provide credible information about their performance to parties outside the organization. The failure to provide the information may lead to the rise in cost of operations. The basis of this belief is based on the lemon market theory. The theory mainly deals with the aspects of quality uncertainty and the market mechanism. According to the theory, information asymmetry quality of goods sold in the market can degrade leading to market failure (Warren, & Young, 2011). The theory indicates that the buyers in most cases are unable to distinguish between the high quality product which referred to as peach and the low quality which is referred to as a lemon. However, given a fixed price the customers will purchase the products. The willingness of the buyers will decrease when the peach leaves the market. An adverse selection problem thus arises when the buyer prices are uniform and the quality of the product is not the same. The seller however has all the information regarding the quality of the products. According to the theory, the low prices have the ability of driving away the sellers with high quality products (Warren, & Young, 2011). This may lead to the collapse of the business. The lemon market theory r utilizes the example of cars. The situation is however the same for most of the products. The failure of providing the customers and other stakeholders therefore has a direct impact on the product. In the absence of regulation, organizations will still be forced to provide information. This is for the purpose of ensuring that the customers fully understand the process as well as quality of the products that they are selling. In the absence of information, the customers may not be in a position to distinguish the quality of the product. As a result of this, they may only be willing to pay les amount and hence impacting negatively on the organization. The organizations may be forced to withdraw high quality products in the market if they do not provide adequate information. Wrong assumptions can easily be made by the customers as highlighted in the lemon market theory. The wrong assumptions in relation to the products is what most of the sellers would want to avoid as it may impacts negatively on their businesses (El-Tawy & Abdel-Kader, 2013). As a result of this, they have no choice than to provide information to the customers even in the absence of regulations. When dealing with some of the products quality is indistinguishable beforehand by the customers. In most cases, the customers may end up refusing to pay for the product is it does not meet their needs. This is mainly attributed to the lack of adequate information. In such incidences, the buyers may be required to upgrade their products and hence increasing the costs. The market may eventually collapse if the conflicts with the customers continue. It is an indication that the survival of the businesses is not confined to regulations. The relationship between the stakeholders has a way of ensuring that the information is provided willingly. Question 2 Items Debit Credit Fixed Asset - Aircraft Components Airframe =  x 12,000,000 6,600,000 Depreciation 10,032 Engine =  x 12,000,000 4,800,000 Depreciation 700,800 Fittings =  x12,000,000 600,000 Depreciation 120,000 Depreciation Airframe =  x 6,600,000 x1 = 10,032 6,589,968 Engine =  x4,800,000 = 700,800 4,099,200 Fittings =  x 600,000 = 120,000 480,000 Total 12,000,000 12,000,000 The aircraft is an asset to the company and it purchase means that the company will have to pay $ 12,000,000. The airframe of the Aircraft is the most expensive component and it is valued at $ 6,600,000 when the Aircraft is still new. However, it value after 15 years will be $ 150,000.This is an indication that the depreciation of the asset per year will be 0.152%.The Engine frame has a lifespan of 20,000 flying hours after which it will not have any value. As of one year later, the aircraft had taken a flight lasting 2920 hours. This means it value had depreciated by 2920/20,000. The means the value of the engine after 1 year is $ 4,099,200. The depreciation of the engine may however not be constant from one year to the next. This is because the flight hours may not be constant from one year to the other. The fitting will completely depreciate after 5 years and it will not have any value. This is therefore an indication that after one year it would have depreciated and its value will be $ 480,000.The journal therefore indicates that the components of the aircraft will lose value at different times. In accounting, the debit as well as the credit side should balance (El-Tawy & Abdel-Kader, 2013). Question 3 Part a Fair value = $1,294,284 Useful life = 6 years. Straight line depreciation rate = 1/6 = 16.67% =  = $ 159,002.95 Part b Journal entity for the year ending 30th June 2016 and 2017 2016 2017 Debit Credit Debit Credit Fixed Asset Machinery 1,294,284 1,294,284 Debt 944,384 594,384 After the lease agreement, the company will have acquired the machinery and hence making it a debiting it. However, not all the amount will have been paid as the payments is being made in leases of $ 350,000 for a period of five years. As of June 2016, the first installments will have been paid. This means that the company will still be in debt of $ 944,384.The same is also applicable for the year 2017 although the company will have paid the second lease installment and hence the reduction in the debt. Part c Financial position for the year ending 30th June 2017 $ Fixed Asset 1,294,284 Depreciation 215,714 Total fixed asset 1,078,570 Liability Debt 594,384 As of June 2017, the company will have paid two installments of the lease. This means that the debt will have been reduced to a considerable level. However, the equipment will also have depreciated considerably since it only has an economic life of 6 years. This therefore indicates that the equipment will have lost about two thirds of its economic value. Depreciation of an asset is a factor that lowers its value and hence affecting the financial performance of the business (El-Tawy & Abdel-Kader, 2013). Journal entity for the year ending 30th June 2016 and 2017 2016 2017 Debit Credit Debit Credit Fixed Asset Machinery 1,294,284 1,294,284 Depreciation 215,714 431,428 Liability 944,384 594,384 An operation lease involves leases that are short term in relation to the useful life of the equipment (El-Tawy & Abdel-Kader, 2013). This therefore means that the company will have to purchase the equipment within a shorter time which may reduce the effects of depreciation. However in such an arrangement, the title of the asset remains with the lessor. This means that the company will not enter the agreement that involves $ 280,000 after the fifth year. The other factors including the installments are however likely to remain constant. In an operating lease arrangement, the lessee may be required to carry out the restoration of the equipment. Question 4 An active market is where there is a very large amount of transactions in goods, bonds as well as stocks (El-Tawy & Abdel-Kader, 2013). As a result of this, there is less divergence in terms of the bid as and the asked prices. This is different from the subdued or quiet market which characterized by a low level of divergence. It is common for an active market to hold when there is generally heavy trading in terms of heavy trading on exchange. This therefore allows for big volume trading of shares without any influence from the direction of the prices. In an active market, most of the trading involves the institutions that are managing the portfolio of the clients. In most cases, the active markets are usually more liquid with smaller bids or ask spreads. The active markets may be characterized by high volumes in specific security or an entire exchange. In terms of pricing in the active market, hierarchy gives the highest priority to identified assets or liabilities that are adjusted. The active market is also considered as finest marketing agency when dealing with different industries. The financial instruments may however have some impacts on the active market which may lead to its vulnerability. The intangible assets mainly involves the monetary assets that are may be non-monetary and lack an identifiable physical substance. It is also considered an asset that is controlled by an entity as a result of the past events. Examples of intangible assets include brand names of the organizations or development related expenditures. Organizations have future expectations in relation to the intangible assets. The intangible assets are rarely recognized in the active market (Warren, & Young, 2011). This therefore means that does not exist in most the active market. This can also be attributed to some of the characteristics of the active markets. The intangible assets have some difficulties during the evaluation process and hence making it difficult to carry put large transactions that involve it. In terms of the useful life, there is no foreseeable limit in which the asset is expected to generate net cash inflows. Amortization method is commonly used for determining the potential benefits of the intangible assets. Reliable determination of the pattern is also difficult and hence the dilemma created in terms of its existence in the active market (Warren, & Young, 2011). Intangible assets do not meet the criteria for being recognized in the carrying amount of asset. The lack of recognition is also a factor that makes it difficult for the recognition the active market to be considered. Reconciliation is also a major problem associate with the intangible assets and hence contributing to the challenge. References Warren, D, L., & Young, M. N. (2011). Integrated accounting principles: A best practices course for introductory accounting. Issues in Accounting Education, 27(1), 247-266. El-Tawy, N. & Abdel-Kader, M. (2013). Accounting recognition of information as an asset. Journal of Information Science, 39(3), pp.333-345. Read More