The Main Reason for Setting Accounting Standards - Case Study Example

Accounting Journals Name of the student Name of the Institution Date of submission Introduction AASB15 discusses revenue recognition. The underlying principle required in AASB 15 is that revenues should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that is reflected in the contract and to which the provider of services and goods are entitled to (Agoglia et al., 2011). AASB 15 normally considers five steps in revenue recognition. The first transaction is on 1/1/19 DR Cost of hardware purchase $ 210,000 CR Cash $ 210,000 (To record purchase of the hardware for making system) 1/1/19 DR Cash from Fleabag $ 15,000 CR Sales put option 15,000 (To record sale of put option to Fleabag) 31/12/19 DR Cash 115,646 CR Sales of system 115,646 (To record first installment for sale of the system to Fleabag) 31/12/20 DR Cash 115,646 CR Sales of system 115,646 (To record second installment for sale of the system to Fleabag) 31/12/21 DR Cash 115,646 CR Sales of system 115,646 (To record third installment for sale of the system to Fleabag) 31/12/22 DR Cash 115,646 CR Sales of system 115,646 (To record the last installment for sale of system to fleabag) 31/12/22 DR Buying back System $ 50,000 FV option $ 36,012 CR Cash $ 50,000 FV option $ 30,000 Loss/profit on sale of system $ 6012 (To record the transaction of future value and buying option exercised in the clause) Second option 1/1/19 DR Cash $15,000 Cash $ 415,000 CR Call option $ 15,000 System sale $ 415,000 (To record sale of call option and system for Fleabag company) 31/12/22 DR Assets (system) $ 110,327 Loss on buying back $ 19,673 CR Cash on buying asset $ 130,000 (To record the option of buying back the asset at the expiry of the contract period) From the transaction and the company is aiming to maximize revenue, the first option will help the company to maximize revenue since it is in excess of the second option. The AABS 15, states that the revenue is recognized when it is realized, that is why in first option, we record revenue at the end of each year when the payment has been made (Agoglia et al., 2011). Secondly, where the option is exercised by Fleabag, as well as the entries if the option was not exercised, it seems in second option, the company will make a loss while in the first option, the company makes profits hence still using options, the first option is the best for the company since the aim of every company is to make profit. Question Two The main objective of AASB 102 is to prescribe the accounting treatment for inventories. The primary issue in accounting for inventories is the amount of cost to be recognized as an asset and should be carried forward until all other related revenues are recognized. This particular standard provides the guidance on the determination of cost and its subsequent recognition as an expense, which consist of any write-down to net realizable value. AASB 102 provides guidance on the cost formulas that are normally use to assign costs to inventories. First case; During the year the company sold 2,000 base model cars for an average price of $15,000 each. The company estimates it will incur warranty costs of 5% of sales in relation to these sales. Total sales; Number of cars sold 2000 Sold at 15,000; total sales = (15,000 * 2000) = $ 30,000,000 Warranty cost = (5%*30,000,000) = $1,500,000 Journal entries; Dr Cash $ 28,500,000 Warranty expenses $ 1,500,000 CR Sales of base model $30,000,000 (To record sales of base model cars and warranty expenses) The company also sold 1,800 mid-level cars for an average price of $25,000 each. The company estimates it will incur warranty costs of 7% in relation to these sales Number of cars sold 1800 @ 25,000 Total sales = (1800*25,000) = 45,000,000 Warranty expenses = (7% *45,000,000) = $ 3,150,000 Journal entries DR Cash $ 41,850,000 Warranty expenses $ 3,150,000 CR sales of mid-level cars $ 45,000,000 (To record sales of mid-level cars and warranty expenses) The company sold 1,500 luxury cars for an average price of $60,000 each and estimates it will incur warranty costs of 10% in relation to these sales. Total car sold 1500 @ 60,000 Total sales = (1500 * 60,000) = $ 90,000,000 Warranty expenses = (10% * 90,000,000) = $ 9,000,000 Journal entries DR Cash $ 81,000,000 Warranty expenses $ 9,000,000 CR Sales $ 90,000,000 (To record sales and warranty expenses for luxury cars) In addition, the company sold 800 W2 at $1,000 each and 900 W3 at $2,000 each in the current year to customers who wished to upgrade the warranty cover for the cars they bought in the year Sales of W2 @ 1,000 each = (800*1000) = $ 800,000 W3 @ 2000 = (900 *2000) = $ 1,800,000 Journal entries DR Warranties (W2) $ 800,000 Warranties (W3) $ 1,800,000 CR Cash $ 2,600,000 (To record warranties offered in W2 and W3 by the company) In relation to the warranties sold with the cars, by the end of the first year the company had paid $750,000 under W1, $360,000 for W2, and $675,000 for W3. Journal entries for the end year for warranties sold with the car DR Warranties W1 $ 750,000 Warranties W2 $ 360,000 Warranties W3 $ 675,000 CR Cash $ 1,785,000 (To record total warranties expenses for the year) In relation to the warranties sold separately, the company had paid $160,000 for W2 and $405,000 for W3. Journals for warranties sold separately DR Warranties W2 $ 160,000 Warranties W3 $ 405,000 CR Cash $ 565,000 (To record Warranties expenses for warranties sold separately) Under International accounting standard 2, it is assumed that the cost of all inventories shall comprise cost of purchase, costs of conversion and other related cost in bringing inventories to their present location and condition. It is also assumed that all transactions were based on cash basis and took place in one year. In the calculation, it is also assumed that there were no cost of goods sold (COGS) and expenses in the calculation. Therefore, only warranties expenses were the only expenses incurred. Question three On 1/1/19 your company received $1,000,000 cash when it issued debentures with a face value of $1,000,000. These instruments have a life of 4 years and pay a coupon payment of 8% of the face amount annually on 31/12. These instruments are classified as Fair Value. Through the Profit or Loss (FVTPL) Journal entries Date 1/1/19 DR Cash $ 1,000,000 CR debentures $ 1,000,000 (To record issue of debentures at face value) Coupon payment (8% * 1,000,000) = $ 80,000 31/12/19 DR Coupon expense $ 80,000 CR Cash $ 80,000 (To record coupon payment expenses at year end) 31/12/20 DR Coupon expense $ 80,000 CR Cash $ 80,000 (To record coupon payment expenses at year end) 31/12/21 DR Coupon expense $ 80,000 CR Cash $ 80,000 (To record coupon payment expenses at year end) 31/12/22 DR Coupon expense $ 80,000 CR Cash $ 80,000 (To record coupon payment expenses at year end) Using LIBOR rates Dates LIBOR rates Market rates 1/01/2019 5% 8% 31/12/2019 4.75% 7.60% 31/12/2020 4.65% 7.80% 31/12/2021 4.75% 7.90% 31/12/2022 4.50% 8.20% 1.01.2019 Face value = $ 1,000,000 Market rates = (8%* 1,000,000) = 80,000 LIBOR rates = (5% * 1,000,000) = 50,000 DR Coupon expense $80,000 FV $ 920,000 CR loss $ 50,000 Face value $ 950,000 (To record coupon loss and market expenses of the debentures for 1.01.2019) 31.12.2019 Face value = $ 1,000,000 Market rates = (7.6%* 1,000,000) = 76,000 LIBOR rates = (4.75% * 1,000,000) = 47500 DR Coupon expense $76,000 FV $ 924,000 CR loss $ 47,500 Face value $ 952,500 (To record coupon loss and market expenses of the debentures for 31.12.2019) 31.12.2020 Face value = $ 1,000,000 Market rates = (7.8%* 1,000,000) = 78,000 LIBOR rates = (4.65% * 1,000,000) = $ 46,500 DR Coupon expense $78,000 FV $ 922,000 CR loss $ 46,500 Face value $ 953,500 (To record coupon loss and market expenses of the debentures for 31.12.2020) 12.31.2021 Face value = $ 1,000,000 Market rates = (7.9%* 1,000,000) = 79,000 LIBOR rates = (4.75% * 1,000,000) = $ 47,500 DR Coupon expense $79,000 FV $ 921,000 CR loss $ 47,500 Face value $ 952,500 (To record coupon loss and market expenses of the debentures for 31.12.2021) 1.01.2022 Face value = $ 1,000,000 Market rates = (8.2%* 1,000,000) = 82,000 LIBOR rates = (4.5% * 1,000,000) = 45,000 DR Coupon expense $82,000 FV $ 918,000 CR loss $ 45,000 Face value $ 955,000 (To record coupon loss and market expenses of the debentures for 31.12.2012) (b) Why would the standard setters require this accounting treatment? What were they worried about? Comment on the quality of this accounting treatment. When discussing the quality of this rule, you need to have a strong reference point. How can you determine whether this is a ‘good’ or ‘bad’ or ‘useless’ accounting rule? According to GAAP, prudency concept is the main reason for setting accounting standards as this will help in monitoring the reporting for accounting information for decision making and for external users (Alfredson et al., 2013). The IASB which is the standard setters, aim at ensuring accounting information comparability across industry. The rules and regulations are good for accounting purposes as it act as regulators and moderators for accounting practitioners across the globe. It has result into accountability and transparency in the management of financial institutions (Alfredson et al., 2013). Reference Agoglia, C. P., Doupnik, T. S., & Tsakumis, G. T. (2011). Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The Accounting Review, 86(3), 747-767. Alfredson, K., Leo, K., Picker, R., Pacter, P., Radford, J., & Wise, V. (2012). Applying international accounting standards. John Wiley & Sons. Read More