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MCD2160 Trimester Lecture 12 Revision Questions
Question 1
Business Systems Ltd is a software house, writing and
installing business software for computer systems. Following
enquiries from customers, technicians visit premises and
provide a quote.
When the quote is accepted, customers pay a deposit of 10%
of the quoted price.
The software is then written and tested, which generally takes
between two and eight weeks. If tests prove satisfactory, the
software is installed in the customer’s computer.
Payment of 80 per cent of the quoted price is required 30 days
after installation.
On completion of a further 12 months maintenance period,
and provided no problems remain unresolved, the final 10%
of the quoted price is due to be paid by customers.
The directors of Business Systems Ltd would like to
recognise all revenue from the contract at the time the quote is
accepted.
Required
a) Explain why the point of revenue recognition suggested by
the directors is not acceptable according to the 2020
conceptual framework definition and recognition criteria.
b) Outline the basis of revenue recognition that the company
should adopt according to AASB 15. Justify your answer
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MCD2160 Trimester 1 2022 Lecture 12 Revision Questions
Question 2
Satellite Manufacturing is a company involved in the
manufacture of high-tech components for various types of
computer-controlled equipment. Recently, the company was
required to replace an expensive item of manufacturing
equipment. Details were as follows:
Purchase price of new equipment $1,980,000 net of GST
Trade discount received 10%
Settlement discount offered 5/30, n/90
Installation and testing $145,000 net of GST
The equipment was purchased on 12th June 2010, was
installed and ready for use by 30th June 2010, and was paid for
on 8th July 2010.
Management of Satellite Manufacturing expects the
equipment to be used consistently throughout its life, but
estimates the life may be only 10 years, which is shorter than
the manufacturer’s estimate of 15 years. Due to the
specialized nature of the equipment, it is unlikely to have a
residual value.
Required:
a) Explain how the purchase price, installation and testing, the trade
discount and settlement discount would be accounted for in the
books of Satellite Manufacturing. Justify your answer with
reference to relevant accounting standards where applicable.
b) Assume the asset was recorded in the accounts at $1,927,000 at its
acquisition. Provide the general journal entry for depreciation for
the first year of use, and justify the method you have used.
c) After five years of use, the equipment required modifications to the
value of $420,000 net of GST. These modifications would extend
the useful life of the equipment by three years, and enable it to
manufacture a new component. Explain briefly how these
modifications would be recorded.
d) Show how the equipment would appear in the balance sheet
immediately after the modifications, assuming these modifications
are capitalised (carried forward as an asset).
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MCD2160 Trimester 1 2022 Lecture 12 Revision Questions
Question 3
(a) Kattanga Ltd has an item of plant that cost
$150,000 to purchase on 1 July 2018. It was to be
recorded under the fair value model and depreciated
using the straight-line method over 10 years with no
residual value.
On 30 June 2019, after recording depreciation of $15,000
for the first year, management determined the fair value
of the plant to be $110,000 and performed the
revaluation. After the revaluation, the remaining life was
adjusted to eight years remaining.
One year later, on 30 June 2020, the fair value of the
plant was estimated to be $130,000 and once again, a
revaluation was completed in the accounts.
Required:
Prepare the general journal entries to record:
(i) The revaluation on 30 June 2019;
(ii) Depreciation for the year ended 30 June 2020;
(iii) The revaluation on 30 June 2020.
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MCD2160 Trimester 1 2022 Lecture 12 Revision Questions
Question 3
(b) Whitestock Ltd has an item of machinery with a
carrying amount of $100,000 (original cost of $160,000
less accumulated depreciation of $60,000). It is being
recorded under the cost model. The fair value less costs
to sell is $95,100 while the value-in-use is $96,300.
Required:
Prepare the journal entry(ies) required to adjust the
asset’s value in accordance with the cost model.
(c) The fair value model and the cost model both
prescribe the write-down of non-current assets, yet their
treatment of the valuation reduction is different. Explain
the approach to record the reduction under each method
and the implications on the financial statements.
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MCD2160 Trimester 1 2022 Lecture 12 Revision Questions
Question 4
Electrolux Ltd is a company that has manufactured for many
years a range of home electrical appliance including
refrigerators. Each appliance is sold with a warranty which
provides the purchaser with a guarantee that in the future
Electrolux Ltd will repair defects covered under the warranty
within the warranty period. Within Electrolux Ltd.’s 2020
annual report, the following warranty policy was stated as:
Warranty
A provision is made on all products under warranty in
addition to claims already received.
A warranty is provided for a period of between one to three
years for vehicles sold.
The provision is based on historical claim information
experienced during the period of the warranty.
Required:
In accordance with the relevant definition and recognition
criteria guidance found in the AASB 2020 Conceptual
Framework, how would the provision of the warranty be
recognised in the financial statements of Electrolux Ltd?
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MCD2160 Trimester 1 2022 Lecture 12 Revision Questions
Question 5
Consider the following terms relating to a lease involving
machinery entered into by Sharp Ltd on 1 January 2020:
One initial payment of $100,000 at the date of signing
Three further payments of $100,000 at the end of 2020, 2021
and 2022
A residual payment of $40,000 at the end of 2023
Sharp Ltd will take ownership of the machinery at the end of
2023.
The lease is non-cancellable
The interest rate in the lease is 20%
The machinery is expected to have a five-year life
The present value factor for $1 in four years’ time at 20% is
0.4823
The present value factor for an annuity for three periods at
20% is 2.1065
Required:
(a) Calculate the present value of the minimum lease
payments relating to the lease entered into by Sharp Ltd.
Show workings.
(b) Provide the general journal entries required in the books
of Sharp Ltd in the first year of the lease i.e. during 2020.
