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Suggested solutions to homework questions Topic 6

Question 3 (Adapted from Loftus, Leo, Picker, Wise & Clark, Understanding Australian
Accounting Standards)
(A) MintyFresh Ltd sells gift certificates in their online designer toy store. The manager,
Joel asks you (the new accountant), what point can revenue be recognised for gift

Gift card revenue can only be recognised when the gift certificate is used by the recipient. This is
because standard setters believe that the underlying transaction is the exchange of goods or
services for the gift certificate. The gift certificate is said in this way to not be a sale but a
conversion of cash into an unearned revenue. The revenue is earned when the gift certificate is
used. There is uncertainty about whether the gift certificate will be used therefore, delay
recognition until the certificate is used.


(B) David Jones often receives cosmetics on consignment from Giorgio Armani. If there
are any un-sold cosmetics they are returned to the Giorgio Armani for a credit or refund.
The manager Giorgio Armani asks you: When can revenue on the sale of Giorgio
Armani cosmetics sold in the David Jones Sydney CBD be recognised by our company?
Giorgio Armani can only recognise the sale of goods when they have been on-sold by David
Jones. Therefore, Giorgio Armani must wait until the end of the period and hear from David Jones
what their sale dates were and these become Giorgio Armanis sale dates. This is because of the
right of return of the goods the risks and rewards are still with Giorgio Armani until the goods
are on-sold to customers of David Jones.


(C) A fashion company has acquired a coffee machine. What would be capitalised and
what would be expensed and provide a reason:
Note: you can argue in different ways and still receive marks for an answer with a
valid supporting argument.

Expense (E) or Capitalise (C)

Coffee beans

E = Expense as they are not going to be on-sold to a third-party, they are

not going to be used in the making of a product for sale (in-house use only).
The value of the coffee beans is also likely to be small so an appropriate
treatment for the immateriality of the item is to expense, e.g.:
DR Coffee beans expense XX
CR Cash or Accounts Payable XX


E = Expense this expenditure does not enhance the coffee machine, it is

regular repairs, therefore, expense.
DR Annual repairs Expense XX
CR Cash or Accounts Payable XX

Major upgrade of
coffee machine to
make cappuccino
froth and auto descale.

C = Capitalise this is a substantial upgrade of the coffee machine,

therefore it will be capitalised:
DR Coffee machine XX
CR Cash or Accounts payable XX
(payment for a major upgrade of the coffee machine)
If you argued that the coffee machine was originally expensed i.e.
written-off at time of purchase due to being immaterial, then you would
also argue that the major upgrade will be expensed as there is not asset to
capitalise it to.

Note: The major repair could be capitalised if the coffee machine itself was capitalised
initially. The coffee machine does provide economic benefits in the form of coffee for
the employees, it is controlled by the company and is from a past transaction, and the cost
is measured as the purchase price. The coffee beans are likely to be of an immaterial
value and are used up quickly. Some students argued that the coffee machine itself be
expensed when purchased because itself could have immaterial value to the company and
may not be worth keeping on the balance sheet (and depreciating it over its useful life).
This argument would be accepted too.


(a) In each of the following independent situations, state how much dollar revenue/
expense will be recognised and the date/period that it is recognised (if no revenue is
recognised state No revenue):
(i) On 9 January 2013, a gold mining company completes the refinement of 1,000 ounces
of 999.9 gold at its processing plant in Pilbarra, Western Australia. The spot price on
that day is USD1700 per ounce. The company sells a futures contract for 1,000
ounces of gold on 8 February 2013 for 30 September 2013 delivery for USD1750 per
ounce. (1 mark for dollar value and date/period of revenue recognition, 1 mark for
Dollar value and date/period
USD1,750,000 on 30 September 2013.

The company has made a definite decision to sell for 30 September delivery; the
provision of the product is completed when delivered to the customer.

(ii) A customer in Sydney places an online order for a laptop computer with Dell
computers on 10 January 2013 for $599, and pays via direct bank account transfer.
Assembly for the laptop is completed on 15 January 2013, and is shipped on 16
January 2013 from its assembly facility in Penang, Malaysia. The customer receives it
on 22 January 2013. (1 mark for dollar value and date/period of revenue recognition,
1 mark for explanation)
Dollar value and date/period
On 16 January 2013 for $599

It is when the provision of the product is fully completed when shipped out to the

(b) An IT consultant buys the Dell laptop mentioned in (a)(ii), above. The IT consultant
buys a new laptop every year because technological change necessitates an annual
upgrade to keep up with the latest product and software innovations and upgrades. State
whether the laptop should be accounted for as an asset/expense/liability. Explain with
reference to accounting principles or conventions. (1 mark for accounting treatment, 1
mark for explanation)
Accounting treatment

While it may technically be categorised as an asset, as it will be disposed of within a year,

it can be considered as an expense. Or, it is an asset that will be depreciated completely
within 1 year.

Note: the futures contract (a)(i) and the laptop (b) questions we can rely on majority of
the work is completed. There are examples where we do have to wait for recognition
after the point of delivery e.g. if there is a warranty with a considerable degree of
uncertainty (and no ability to do a provision for warranty).