Company Accounting AASB - Assignment Example

Company Accounting Assignment s2 2016 The following questions require you to deal with AASB 15 Revenue from Contracts with Customers, and other relevant documents. You can assume that your company adopted this rule. Reponses based on irrelevant accounting standards, such as AASB 118, or material taught in previous units will incur a 100% penalty. Each group will nominate a member to submit a single word file with the group’s response to the questions. (I do not want separate files for each question.) Submission date and details – as per the unit outline. Question 1 (40 marks) You work for a start-up consulting company in a very competitive area. Your firm provides expertise to entities who wish to reduce their carbon footprint. The firm will typically send a team to a client’s workplace to understand their business processes and identify where improvements can be made. After this, the firm produces a detailed report for the client. In order to build business, the firm gets clients to pay 20 percent of the contract price up front and the remaining 80 percent will be paid on receipt of the report. If the client defaults, the firm can keep the 20 percent received. The firm has decided it will not pursue these claims in court, as the legal costs are likely to exceed the benefits. The managing director of the firm is not wildly delighted with these terms, but has approved them, due to the cutthroat nature of this industry. He expects to manage this risk by selecting clients (such as government agencies, and other entities who can use this sort of report in their marketing) who are unlikely to play nasty games, such as paying their bills. Assume that your firm’s financial year ends on the 30th of June 2019. On the 1st of April 2019, the firm received $200,000 from a client for a report that is expected to be delivered to the client at the end of July 2019. The total contracted price is $1,000,000. Internal budgeting shows that your company expects to pay $550,000 to internal staff and $150,000 to external experts to produce the report. These costs are expected to be incurred evenly over the period. An argument has broken out in the accounting team how these contracts should be accounted for. Kelly states that the company should recognise the $200,000 immediately and the remaining amount when the report is presented. On the other hand, Lee states that the company should recognise all of the $200,000 and some of the $800,000 in the current year, as the company’s profits are not expected to be very strong this year. To further complicate things, Ngoc stated that no income at all should be recognised until the report is completed and given to the client. Required Your manager bumped into you at the end of financial year party. He wants you to clarify this. That is, work out how much income should be reported this year and next year. Just after his 4th glass of red wine and before he fell out of his chair, he mumbled something about working out how many performance obligations there are in this contract. He is expected out of hospital in a couple of weeks. Research AASB 15 and associated relevant documents to determine when your company should recognise the income from the client described above. You need to specify the treatment of the $200,000 and the $800,000. You must identify and state any assumptions you make. These assumptions must be based on authoritative sources, and you must present specific references. (In this case – para XXX of YYY is fine.) In this case there is only 1 (one) performance obligation. That is, the firm is to produce detailed a report that the client will use for their activities. According to paragraph 31 of AASB 15, a performance obligation is satisfied (and the revenue is recognised) once the client assumes control of the asset. Paragraph 32 indicates that the client may obtain control of an asset under two instances only; (1) over time and; (2) at a point in time. Performance obligations are satisfied over time if they meet the following criteria; a) All together the client receives and benefits from an asset as the entity performs b) As the customer controls the asset, the entity creates or enhances it c) The asset created cannot be used in an alternative way and the entity must be paid for performance completed to-date. If the above criteria is not met, then the performance obligation is satisfied at a point in time. The case illustrates a performance obligation that meets the criteria for over time and is, therefore, satisfied over time. According to paragraph 31 of AASB 15, an entity is required to recognise revenue contingent to it satisfying the performance obligation by transferring the commodity to the client. Paragraph 46 indicates that the entity ought to recognise as revenue the amount of the transaction price used to fulfil the performance obligation at the time the performance obligation is satisfied. According to paragraph 47, the transaction price refers to the “amount of consideration that the entity is entitled to in exchange for the goods or services in the contract”. Since the company is expected to fulfil the contract over time, it should recognise the 20%, $200000, in the current financial year ending 31st April 2019. This is because this is the period within which the amount is paid. Assuming that the client does not default to pay the remaining 80%, $800000, the amount should be recognised when received. That is, in the financial year beginning 1st June 2019. Marking guide Question 1 Possible marks Marks achieved Number of performance obligations 5 When is/are the performance obligation(s) satisfied? 10 How to account for the $200,000 15 How to account for the $800,000 10 Total 40 Question 2 (60 marks) You work for a company that buys products from suppliers and then sells them on TV, via direct marketing channels. The company has a policy of allowing customers to have a full refund if they return products within 30 days of purchase. This refund only applies if the goods are undamaged and can be resold to other customers. The proportion of units that are refunded varies a lot, depending on the characteristics of each product. The best products have a refund rate of 3%. The worst products have a refund rate of around 30%. (That is, 30% of units of those products were returned by customers within the 30 day window). The company uses the perpetual inventory system. You can assume that all sales are made via credit cards and these are classified as credit sales. The manager of the company is a good friend of the CFO. You have been told that the manager’s quarterly bonus requires him to show an increase in profits in each quarter. The gossip around the office is that sales have been too low this quarter (ending on March 31) and the manager’s target is unlikely to be met. On the 28th of March 2019 your company started selling a new, revolutionary range of wigs, made from the hides of a special breed of long haired rat. (Don’t worry, the rat is not an endangered species.) The wig is revolutionary, due to its raw materials and because it is stapled onto the head of the customer, preventing it from flying away in strong winds. This is considered a great advantage by the manufacturer. However, there is a concern that these wigs may attract cats. Oddly enough, your company does not have experience dealing with this product, so it is unsure of the percentage of wigs that will be returned in less than 30 days. Each wig costs $40 and is sold for $120. You can ignore mailing costs. On the 28th of March 2019, the company sold 50 of these wigs. The CFO told you he is concerned there is a lot of uncertainty relating to the number of new wigs that will be returned. He suggests it would be better if no revenue was recorded for March. He went on to say that this should be recorded in April, once a clearer picture had emerged of the proportion of wigs returned. The marketing people seem to believe that sales of the new product will grow very quickly, and will stabilise at about 700 per day within a couple of months. The company has also been selling wigs made from synthetic materials for a number of years. These cost the company $10 each and sell for $85 each. Over this time the company has noticed that on average, 5 percent of these wigs are returned within 30 days of sale. On the 28th of June, the company sold 900 of these wigs. Required Part A Answer each sub-part. 1) Prepare journal entries that the CFO wants in relation to the sales of the new wigs made on the 28th of March 2019. (5 marks) COGS = $40 * 50 = $2000 Sales = $120 * 50 = $6000 The entries are; Dr Sales $6000 Cr Cash $6000 Dr COGS $2000 Cr Inventory $2000 2) Prepare the journal entries to show how the company should account for the sales of the synthetic wigs, according to AASB 15. (10 marks) In the transaction, the customer has control of the asset. According to paragraph 31 of AASB 15, revenue needs to be recognised once the obligation has been performed. Therefore, the entries are; Dr Sales $76500 Cr Cash $76500 Dr COGS $9000 Cr Inventory $9000 3) Prepare the journal entries to show how the company should account for the sales of the new wigs, according to AASB 15. If you think the CFO’s suggestion is correct, simply say ‘As per the CFO’s suggestion’. Justify your position with reference to the standard, associated documentation, and the current Exposure Draft of the Conceptual Framework. (Hint, have a look at the material relating to qualitative characteristics.) (20 marks) The entries are; Dr Sales $6000 Cr Cash $6000 Dr COGS $2000 Cr Inventory $2000 The CFO’s suggestion cannot apply in this case because the revenue wil be recognised in the period it has not been earned. Part B Assume that on April 27 (30 days after the date of sale), 7 of the new wigs were returned and refunds were paid. In addition, 43 of the old wigs were returned. All returned wigs were undamaged and were returned to inventory. Prepare relevant journal entries. (15 marks) New wigs Dr Sales returns $840 Cr Cash $840 New wigs Dr Sales returns $3655 Cr Cash $3655 Part C Discuss whether the CFO’s proposal would assist or hinder the manager to obtain a bonus. (10 marks) Since the manager’s bonus is based on the performance of the business, in profits, the CFO’s proposal would hinder the manager to obtain a bonus. This is because if the sales of the new wigs as soon as they begin to be sold they will boost the company’s revenue for March, which has shown a bad performance so far. Besides, the sales of the new wigs according to the marketing team is expected to grow at a fast rate. Therefore, as the sales of the new wigs grow, the company’s revenue will also keep growing and tis will return higher profits that will reflect a higher bonus for the manager. Besides, according to AASB 15, revenue should be recognised when it is earned, that is the obligation is performed. Therefore, it would be against the accounting standards if the revenues are recorded in April. This may be seen as an attempt to flout the standards to paint a good picture, which is actually false. Marking guide to question 2 Question number Marks available Marks obtained Part A (1) 5 Part A (2) 10 Part A (3) 20 Part B 15 Part C 10 Totals 60 Read More