Question #1
The qualitative characteristics of financial information in the Conceptual Framework for Financial Reporting are relevance, faithful representation, comparability, verifiability, timeliness, and understandability.
Explain the meaning of relevance, faithful representation, and comparability with examples in the context of financial reporting.
Answer:
Question #2
The following information relates to inventory for Shoeless Joe Inc.
-
Date
Quantity
Prices
March 1
Beginning Inventory
20
$2
March 7
Purchase
15
$3
March 11
Sale
25
$7
March 12
Purchase
20
$4
Required:
Assuming the company is using a perpetual inventory system.
What amount would be used to report the company’s total cost of goods sold in March if the average cost assumption is used?
What amount would be used to report the company’s March 31 ending inventory if the FIFO cost assumption is used?
Briefly describe the difference between the perpetual inventory system and periodic system in terms of inventory records. Which inventory system is better for management purpose? Why? Support your answer with two reasons in brief.
Answer:
Question #3
Paddington has acquired numerous pieces of land which are accounted for under revaluation model. One particular piece of land is carried in Paddington's statement of financial position at $560,000 at 1 January 2019. At 1 January 2020, further to a revaluation exercise, a fair value of $710,000 is identified in respect of this land.
Prepare the journal entry to account for the revaluation at 1 January 2020, assuming the following separate cases:
The land has only ever risen in value.
Since the land was bought until 31 December 2019, a revaluation loss of $80,000 had been identified and recognised in profit or loss.
Answer:
Question #4
Golding Muirhead Property (GMP), a property construction company, completed the construction of the M Building – a complex of 80 apartments in Shanghai – at the end of March 20X4. On 1 June 20X4, as a result of a lack of buyers in the market, and a recent fall in selling prices, GMP decided to take the property off the market. Instead the company decided to rent out the individual apartments in the M Building until the market improves. Rental arrangements were agreed immediately on all of the apartments. The company expects an improvement in the market to take four years. GMP cost $80 million to develop and had a fair value on completion of $89 million, and fair values of $83.5 million and $81.2 million on 1 June 20X4 and 30 June 20X4 respectively. GMP measures investment properties using the fair value model.
Required:
Prepare all necessary journal entries for the M Building on 1 June 20X4 and 30 June 20X4.
Answer:
Question #5
MHL has a brand name, Magica, which has become well known since MHL developed it ten years ago. Valuation experts have valued the brand name at HK$5 million at the current year end. MHL would like to recognise this brand name as an intangible asset and report it at HK$5 million in the financial statements
MHL owns a 20-year patent which it acquired five years ago for HK$2 million. The patent was recognised at cost in the financial statements. Valuation experts have valued this patent at HK$10 million at the current year end.
Required:
Advise the appropriate accounting treatments for the brand name and the patent of MHL at the current year end.
Answer:
Solution
Answer for Paper 1
Q 1
Relevance
This accounting concept considers the use of accounting information which is helpful in decision-making. This means accounting information is relevant if it provides helpful details about the past translations together with predictive future financial details. For example, When a company is in the process of selecting an option of whether to replace the furniture it has been using for the last 12 years, the cost of the old furniture is irrelevant, and therefore is not helpful in making the decision (Nandwani, 2016) .
Faithful representation
This is an important concept which has to be followed when reporting financial statements and it involves the provision of financial information which is complete, fair and unbiased. That means financial reports should accurately reflect the actual condition of a business. For example, when a business has consistent errors in its financial reports, due to its representatives trying to be biased, this will be considered financial reporting fraud.
Comparability
This is a fundamental requirement that emphases the following standards set by the Accounting Standard Board, accounting principles, and policies. When accounting standards are followed during the preparation of accounting statements, those statements can be compared with other statements in multiple organizations around the world. For example financial statements of Google can be compared to those of Coca-Cola because they were prepared using standard principles.
Question 2
a)
calculate the total cost
Date Quantity Price Amount (Quantity X Price)
1 March 20 $2 $40 (Opening Inventory)
7 March 15 $3 $45 (Purchase)
12 March 15 $6 $90 (Purchase)
Total 50 (Units) $175 (Total Cost)
the cost per unit -
total cost/ number of units purchased
Average price per unit = Total cost ÷ total units
= $175 ÷ 50 units
= 3.5 prices per unit
multiply the per unit cost by the number of units sold,
COGS(Cost of good sold) = number of units sold x per unit cost
= 30 x $3.5
= $105
2. b)
FIFO
The FIFO or the first-in-first-out method of inventory valuation = units purchased first are the ones to be sold first.
The sale made on March 11 will include:
20 units at $2 from March 1 = $40
5 units at $3 from March 7 = $15
Thus the ending inventory will be formed by:
(15-5) units at $3 from March 7 = $30
20 units at $4 from March 12 = $80
Total value of ending inventory = 30+80 = $110
Thus the ending inventory will be $110
Users of the perpetual inventory system recognize or update the inventory accounts immediately. That is when a purchase or sale takes place they record it. While users of periodic inventory system recognize or make records in inventory account at scheduled intervals usually at the end of an operating cycle.
The perpetual inventory system is better for management purposes because data is updated in real time and the information is more robust. Management needs detailed financial information to make important decisions on a daily basis. The perpetual system is not relevant for management decisions because results take longer to come out or be available and are not detailed enough.
Q 3
a)
debiting a $150,000 increase ($710,000 -$560,000) into the Land account (which is a fixed asset) as below:
Journal entry
Dr Cr
Land A/C 150,000
Revaluation surplus 150,000
This is entered in the balance sheet
b)
impairment loss of the fixed asset not more than the revaluation surplus.
both total assets and total equity decrease instead. Journal entry will be:
Dr Cr
Revaluation loss 80,000
Land A/c 80,000
Q 4.
Journal entry for M building
1 June 20x4
80 properties x $89 million (fair value) /48 months (or 4 years) = $148.3 million
Dr Cr
Cash $148.3m
Rent A/c $148.3m
Rent Income is recorded by crediting the account. Cash is debited if cash is received
Fair value - is the estimated price at which an asset can be sold
cost - property's value is equal to the cost of land, plus total costs of construction, less depreciation.
company expects an improvement in the market to take four years (4 years = 48 months)
Journal entry
30 June 20X4
80 properties x ($83.5(fair value)/48) = $139.2m
Dr Cr
Cash 139.2
Rent a/c 139.2
Q 5
MHL’s brand name, Magica, was internally generated and therefore not an intangible asset, as per IAS 38.63.
The standard states that Internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance shall not be recognized as intangible assets.
IAS 38 does not recognize internally generated assets but does recognize purchased brands.
IAS 38.64 states that expenditure on internally generated brands cannot be distinguished from the cost of developing the business as a whole.
Therefore, MHL should not recognize the brand name in its consolidated statement of financial position.
Patent
The company’s patent is amortized to a nil residual value at HKD2 million / 20 years = HKD100,000 per annual.
A patent cannot be revalued under IAS 38 because there is no active market as a patent is unique (IAS 38.78).
IAS 38 does not permit revaluation without an active market as the value cannot be reliably measured in the absence of a commercial transaction.
Therefore, MHL should not revalue the patent in its consolidated statement of financial position.
References
Nandwani, M. (2016, June 18). Top 11 Qualitative Characteristics of Accounting Information. Learn Accounting: Notes, Procedures, Problems and Solutions. https://www.accountingnotes.net/financial-reporting/top-11-qualitative-characteristics-of-accounting-information/5409
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