Response to the Two Accounting Issues - Assignment Example

Name: Institution of affiliation: Course: Tutor: Date of submission: Question 1 FROM: PAUL P. O BOX TOWN, AUSTRALIA TO: THE MANAGING PARTNER, SANZO & ROSSO, LEVEL 1, 250 CURRIE STREET, ADELAIDE SA 5000 Dear Sir, RE: RESPONSE TO THE TWO ACCOUNTING ISSUES RAISED IN YOUR LETTER I trust that you are fine. Your missive was received and its content well noted. Please find herewith my response on the two critical accounting issues raised as follows; In accordance with generally accepted accounting principles (GAAP), there are two criteria that a company needs to meet before recording its income in their books of accounts. The first criterion is based on critical events that prompt the process of transaction and that the amount collectable from such transaction can be measured with a certain degree of reliability. It simply means that the company can recognize income when the buyer agrees to purchase their goods and services and the amount to be paid by the buyer is determined. For instance, the company involved in the sale of clothes will recognize income when the customer pays for the clothes. The critical points are when the cashier rings the clothes through the till, the measurable amount being the price of the clothes. The process of revenue recognition is complete as soon as the customer pays for the clothes. In the case highlighted in your circumstances where there is sale of computers, the company will recognize the revenue of $ 1628 as soon as the computer is sold. The critical even is when the employee rings the computer through the till, the measurable value being the price set for the computer which is $ 1628. The process of revenue recognition is done when the buyer pays $ 1628 for the computer. In another rejoinder, company formation is a term used to denote the steps and procedures of incorporating a business. In many occasions, it is referred to as company registration. The aforementioned terms are both extensively used when incorporating businesses in the republic of Australia. Under the Australian law and in virtually most international law, a company is considered to be an entity that is essentially separate from the persons who operate or who owns it. This therefore means that the company can sue and be sued in its own name. In this respect, the assets owned by individual partners become the property of the company. Typically, companies are categorized into two broad categories namely, private and public limited companies. A company can be limited by liability or by shares. A company that is limited by liability means that in case the company incurs losses, then no individual shareholder is held accountable for such losses or their effects thereof. The minimum number of persons required to form a private limited company is two to a maximum of fifty persons. While for public limited companies, the minimum number of persons required to incorporate them is seven with no set limit as to the maximum number of subscribers. The legal procedure required in the formation of a company involves: Paper Process The company ACT requires individuals forming a company to send the following documents alongside the registration fees to the registrar of companies. (a). Articles of Association This document simply known as ‘articles’ is a document which clearly sets out the rules governing the internal affairs of the company. It must be dully signed by the subscribers in front of a witness who must actually attest to the signatures contained therein. (b) Memorandum of Association. Memorandum of association hereafter referred to as MOU contains names and signatures of subscribers who wish to incorporate a company and where the company is limited by shares, it must encapsulate a commitment by potential subscribers to take at least one share each. Further, MOU contains the constitution of the company and forms the edifice upon which the company structure will be anchored. In this respect, MOU is essentially the company’s charter or the constitution of the company because it precisely lays down the objectives of the company and at the same time clearly defines its scope in relation to the outside world or investors. Kindly take note that for a limited company to be formed you must have the following: A Company name: This will be the legally registered name of the company and must not be too similar or the same as the name of any existing company. You will need to check the availability of the desired company name by keying it in an online name check tool provided by companies house or company formation agent. A registered office address: This will be the official address of the company and this is what will be displayed in the public register of the companies after the incorporation of the company. It is important to note that the address can not be a ‘p. o box’ and must be an address within the realms of the jurisdiction of the country in which the company is registered for example in Australia. You may choose to use your personal address but a vast majority of individuals usually choose to keep this information away from the glares of the public by using an alternative registered address. At least one director aged sixteen years and above: The director’s role is to mange the day to day activities and the operations of the company within the confines of the law and in the best interest of the company. As long as one director of the company is a natural person or human, you may choose to appoint other companies as directors. It is worthwhile to note that there is no limit to the number of directors. At least one guarantor or shareholder: Guarantors or shareholders are the legal owners of the company and are known as members. There is no limit to the number of shareholders and they may be individuals or may be other companies. Regarding the sources of capital for your next projects, I hold that there are several sources of capital which includes issuing of ordinary shares, preference shares and debt capital among others. Debt capital financing entails acquiring loans from financial institution at a given interest rate payable over a specified period of time. Loan interest is an expense to accompany and has the effect of reducing profits earned. On the other hand, it is an allowable deduction against income therefore; it reduces tax liability to the company. Let ne also indicate that a share is a unit of capital. Ordinary shares represent the ownership of a limited company. As a source of capital, it is acquired by issuing ordinary shares. However, caution should be taken when opting for fresh issuing of ordinary shares for subscription to the public since it has an effect of diluting the number of shareholders. Owners of ordinary shares earn dividends after it has been declared. Preference shares on the other hand have both characteristics of ordinary shares and debt capital. This is because they earn investors fixed rates of return inform of dividends. They are given preference over ordinary shareholders in terms of dividends. However, such owners do not enjoy voting rights. There are two types of preference shares i.e. redeemable and irredeemable shares. Redeemable preference shares can be bought back by the company upon maturity period thus diluting the number of shareholders just like ordinary shares. Irredeemable preference shares can not be bought back by the company thus does not have dilutive effect. I wish to conclude this segment by pointing out that preference shares has both the attributes of ordinary shares and debt capital. Preference shares has the characteristics of debt capital in the sense that interest is payable on preference shares. Question 2 General journal entries for Tom and Jerry partnership as at 1st, July, 2014 Date Particulars Debit Credit 1st, July, 2014 Accounts receivable Tom Jones – Accounts receivable “ To record the accounts receivable of Tom and Jerry Partnership at fair value” $20,000 $ 20 000 1st, July, 2014 Inventory – Tom and Jerry Partnership Tom Jones- inventory Jerry Singer-Inventory “ To record the total inventory for Tom and Jerry Partnership” $63,000 $ 55,000 $ 8,000 1st, July, 2014 Cash at bank Tom Jones- Cash at bank Jerry Singer- Cash at bank “ To record the total cash at bank owned by Tom and Jerry Partnership” $ 150,000 $ 60,000 $ 90,000 1st, July, 2014 Motor vehicle Tom Jones- Motor vehicle Jerry Singer- Motor vehicle “ To record the total fair value of motor vehicle owned by Tom and Jerry Partnerships” $ 140,000 $ 80,000 $ 60,000 1st, July, 2014 Accumulated depreciation ( motor vehicle) Tom Jones- Motor vehicle depreciation Jerry Singer- motor vehicle depreciation “ To record the fair value of total motor vehicle depreciation” $ 28,000 $ 16,000 $ 12,000 1st, July, 2014 Equipment Tom Jones- Equipment “ To record the fair value of equipment owned by Tom and Jerry partnership” $ 85,000 $ 75,000 1st, July, 2014 Accumulated depreciation- Equipment Tom Jones- Accumulated depreciation “ To record Tom and Jerry total accumulated depreciation of equipment at fair value” $ 22,500 $ 22,500 1st, July, 2014 Building Jerry Singer- Building “ To record the fair value of building owned by Tom and Jerry Partnership” $ 130,000 $ 130,000 1st, July, 2014 Accounts payable Tom Jones- Accounts payable “ To record the fair value of accounts payable owned by Tom and Jerry partnership” $ 60,000 $ 60,000 1st, July, 2014 Mortgage Jerry Singer- Mortgage “ To record the fair value of mortgage owned by Tom and Jerry partnership” $ 53,000 53,000 Question 2 part b Capital contribution- Tom Jones $ 191,500 Jerry Singer $ 223,000 Profit sharing ratio 191,500:223,000 Calculation of profit distribution Tom Jones Jerry Singer Total Total profit to be distributed $ 140,000 Salaries $ 25,000 - ($ 25,000) 10% Interest on capital $ 19,150 $ 22,300 ($ 41,450) Residual profit $ 73,550 Profit distribution $ 33,980 $ 39,570 Question 3 (a). Plant Cost price $ 100,000 Depreciation $ 100,000 * 20% = $ 20,000 Carrying amount as at 30th, June, 2015 $ 100,000- $ 20,000= $ 80,000 Wear and tear allowance (depreciation tax rates) $ 100,000* 15%= $ 15,000 Tax base as at 30th June, 2015 $ 100,000- $ 15,000= $ 85,000 Computer Cost price $ 50,000 Depreciation $ 50,000 * 15% = $ 7,500 Carrying amount as at 30th June, 2015 $ 50,000- $ 7,500= $ 42,500 Wear and tear allowance (depreciation tax rates) $ 50,000* 10%= $ 5,000 Tax base as at 30th June, 2015 $ 50,000- $ 5,000= $ 45,000 (b). Plant Carrying amount $ 80,0000 Tax base ($ 85,000) Deductible Temporary difference $ 5,000 Computer Carrying amount $ 42,500 Tax base $ 45,000 Deductible temporary difference $ 2,500 Total deductible temporary difference $ 5,000 + $ 2,500= $ 7,500 Deferred tax asset thereof $ 7,500* 30%= $ 2,250 The differed tax should be recognized as assets in the balance sheet since the carrying amount of the asset are less than the tax bases. Question 3 (c) Reported accounting profit $ 140,000 Add Back; disallowable expenses Depreciation of motor vehicle (20%) $ 13,000 Long service leave expensed $ 5000 Good will impairment $ 1,000 Doubtful debt expense $ 2,500 $ 161,500 Less; allowable expenses Long service leave expense paid ($ 3,700) Tax depreciation allowed 30% /20% * $ 13,000= $ 19,500 Bad debts written off ( $ 1300) Taxable income $ 137,000 Current tax liability thereof, $ 137,000* 30%= $ 41,100 References Graham, M. (2010). Revenue Recognition. New York: Oxford. Harrison, H. (2008). Understanding the concept of company formation. Berkeley: California Press. Loevy, P. (2009). Analysis of Revenues: Lanham: University Press of America. Revsine, L. (2012). Financial Reporting & Analysis: Prentice Hall. Woods, B. (2010). The tenets of Accounting Principles: Ballina: Free Press Read More