School of Accounting

ACCT 1511: Accounting and Financial Management 1B

Topic 1

Assets

Student Handout

Content:
1. Learning objectives
2. Readings
3. Seminar Preparation Qs List/PASS Qs list
4. Topic 1, part 1, slides
5. Lecture Workshop questions
6. Topic 1, part 2, slides
7. Lecture Workshop questions
8. Topic 1 Tutorial questions.

Website: http://moodle.telt.unsw.edu.au

Introduction and Learning Objectives

At the end of this topic, you should:
LO1. Revise the concept of double entry bookkeeping and accrual accounting and
completing t-accounts from AFM 1A.
LO2. Understand the definition and recognition criteria for assets, and why they are
important.
LO3. Calculate the cost of an asset
LO4. Be technically competent in calculating depreciation and gains/ losses on
disposals and prepare related journal entries as well as constructing T-accounts
for the purchase, sale and depreciation of property plant and equipment.
LO5. Understand the mechanics of revaluing assets.
LO6. Understand the mechanics of impairment testing.
LO7. Be technically competent in journal entries and T-accounts relevant to asset
revaluation, intangible assets, and inventory measurement.
LO8. Be able to identify the accounting principles relevant to the accounting
treatment of assets.

Required Readings
Required Readings

Trotman, Gibbins & Carson (TGC) 6th edition Chapter 10.1-10.9 (inclusive)
Useful revision: Trotman, Gibbins & Carson (TGC) 6th edition Chapter 6.

Additional References
http://www.aasb.com.au

PASS Questions for Topic 1

Trotman and Gibbins & Carson 6th ed.:

Problem 6.9
Problem 6.11
Problem 10.22

Tutorial Preparation Questions for Topic 1

Trotman and Gibbins & Carson 6th ed.:

Problem 6.12
Problem 10.19
Problem 10.21
Problem 10.23
Problem 10.24
Problem 10.25
Problem 10.26

22/07/2016

UNSW School of Business

Financial Accounting and Regulation

The Australian Securities and Investments Commission (ASIC)
administers the Corporation Act and oversees compliance.

ACCT1511
Topic 1
Assets (1)

Corporation Act 2001:

The financial statements and notes for a financial year must give a true
and fair view of: (a) the financial position and performance of the
company.....s.297
Directors report
Auditors opinion
The financial report for a financial year must comply with the accounting
standards.... s.296

No tutorials this week

No tutorials next week

Accounting Standards
Generally Acceptable Accounting Principles (GAAP): common set of
standards and procedures developed by the accounting profession
The International Accounting Standards Board (IASB) develops
international financial reporting standards (IFRSs)
The AASB develops accounting standards for Australian companies

Objective of Financial Reports

The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. Those
decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of
credit.

From 2005 AASB adopted most of the content and wording of the
IFRSs: Harmonisation
IASB approach to standards setting is principles based
Provides general guidelines rather than specific rules for every example

Objective of Financial Reports

We provide financial information that is useful through the financial
statements:
-Balance Sheet Financial Position.
-Income statement Financial Performance.
-Cash Flow Statement Cash Inflows and Outflows.
However, general purpose financial reports do not and cannot
provide all of the information that existing and potential investors,
lenders and other creditors need. need to consider information
from other sources, for example, general economic conditions and
expectations, political events and political climate, and industry and
company outlooks.
I.e. Numbers in financial statements need context to be interpreted.

Dr Per Tronnes

Characteristics of useful information

What attributes should financial information possess to be useful
and satisfy the users evaluation of financial reports?
The framework identify those qualitative characteristics that financial
information should possess if it is to serve the objective of general
purpose financial statements.
Fundamental characteristics:
Relevance
Faithful representation

Enhancing characteristics:
Comparability
Verifiability
Timeliness
Understandability

Always a trade off! Always subject to cost-benefit constrains!

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Assumptions: things we take for granted

But are fundamental to accounting
Accrual basis

- the matching principle: matching expenses to the same period

when revenue is recognised.

Going concern
Economic entity
Accounting period
Monetary unit
Historical cost

Asset Definition
An asset is a resource controlled by the entity as a result
of past events and from which future economic benefits
are expected to flow to the entity (AASB Framework,
para. 49)
Consequently, Assets have three essential characteristics:
1. Future economic benefit (or service potential)
2. Controlled by the entity
3. Result of past events

Do some revision of Chapter 6! It is an important chapter in the book,

because the framework underpins everything we do in accounting.

Future Economic Benefits

Future Economic Benefits

The potential to contribute, directly or indirectly, to the flow of cash

and cash equivalents to the entity. (para. 53)
So the questions we must ask to determine whether an item has
potential for future economic benefits are, for example:

Example 1: An asset used singly or in combination with other assets in

the production of goods or services to be sold by the company
generate future economic benefits because these goods or services
can satisfy the wants or needs of customers, customers are prepared to
pay for them and hence contribute to the cash flow of the entity.

Does the item form part of operating activities? If yes, then it has a
potential to indirectly contribute to the inflow of cash.

Example 2: An alternative manufacturing process that generates less

waste and therefore saves the company money.

Can we sell the item for cash (or convert it into cash)? If yes, then it has
the potential to directly contribute to cash inflow.
Does the item help us save on costs? If yes, then it has a potential
reduce cash outflow.

Control

Note: Cash itself renders a service to the entity because of its

command over other resources. Therefore cash is deemed to be an
asset.

Past event / Past Transaction

The assets of an entity result from past transactions or other past events (Framework,
para 58).

An entity controls the asset if it controls the benefits expected to flow

to the entity (Framework, para 57).
Although the capacity of an entity to control benefits is usually the result
of legal rights, an item may nonetheless satisfy the definition of an
asset even when there is no legal control.
Example 1: A property held on a lease is an asset if the entity controls
the benefits which are expected to flow from the property.
Example 2: Know-how obtained from a development activity may meet
the definition of an asset when, by keeping that know-how secret, an
entity controls the benefits that are expected to flow from it.

Dr Per Tronnes

Entities normally obtain assets by purchasing or producing them. It the production or the
purchase has already happen then the requirement for past even or past transaction is
satisfied.

However, other transactions or events may generate assets.

Example 1: Property received by an entity from government as part of a program to
encourage economic growth in an area.
Example 2: Discovery of mineral deposits.

Transactions or events expected to occur in the future do NOT, in

themselves, give rise to assets.
Example 1: An intention to purchase inventory does not, of itself, meet the definition of an
asset.

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Asset recognition
Even if an item satisfy the definition of an asset, it is not certain that the
asset can be recognised in the balance sheet. An asset can only be
recognised in the balance sheet if it meets the definition of an asset
and satisfy both of the recognition criteria:
The item must satisfy both recognition criteria (Framework, para 83):
1. It is probable that any future economic benefit associated with the
item will flow to the entity; and
2. The item has a cost or value that can be measured with
reliability.

Asset Recognition: Reliable measure

Asset recognition: probability

It is probable that any future economic benefit associated with the item
will flow to the entity.
- A reflection that there is no certainty when predicting the future, and
that there are uncertainties in the business environment.
- Probably means more likely rather than less likely or greater than
50% chance.
Important: Do not confuse probability of FEB in recognition criteria with
potential of FEB in Asset Definition. They are not the same.
Example: I have purchased a lottery ticket. Because I could win, that lottery ticket has
Future Economic Benefits as there is potential to contribute to the flow of cash. Because I
would also be able to control the flow of any benefits and the lottery ticket has been
purchase (i.e. past transaction), that lottery ticket is an asset. But, it is very unlikely that I
will win anything, so it is NOT probable that the FEB will flow to the entity. Therefore I
cannot recognise the asset on the balance sheet.

Assets: Definition & Recognition

Does the item have all the essential
characteristics of an Asset ?

The item has a cost or value that can be measured with reliability.
Note that it is cost or value. That means that it is enough that one of
them can be measured with reliability.
In many cases, cost or value must be estimated. The use of
reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability.
When, however, a reasonable estimate cannot be made the item is
not recognised in the balance sheet or income statement.

No

Yes
Does the Asset meet both
the recognition criteria?

Details might appear in

the annual report

No

Yes
A recognised in the
entitys balance sheet

Might be separately
disclosed in the notes

Cost vs. Assets vs. Expenses

Cost vs. Assets vs. Expenses

Is Cost/Expenditure and Expense interchangeable?

Answer: No!

In many cases, recording costs as assets is a way of deferring the

recognition of expenses to later periods.
Why would that be beneficial?

Cost/expenditure = Amount of cash/equivalents paid or fair value of

consideration given.

Answer: the matching principle: That is, matching expenses used to

generate the revenue to the same period when that revenue is
recognised. In this way, a better view of the performance (i.e. profit)
of the company is obtained.

We can account for that cost in two different ways:

1. Capitalise the cost and record it as an asset
2. Not capitalise the cost and record it as an expense.

If a costs is incurred and expense is recognised in the same period:

Cost Expense
If a costs is incurred and expense is to be recognised in later periods:
Cost Assets Expense

Dr Per Tronnes

22/07/2016

Cost Assets Expense

Cost Assets Expense

Example 1: An office building with a cost of $20,000 is purchased with

cash, with a 20yr useful life and zero residual value. Depreciation is
calculated on a straight line basis. The building satisfy the asset
definition and the recognition criteria.
1. Capitalising the cost as an asset (Cost Assets)
Dr Building (asset)
Cr Cash (asset)

Example 2: An inventory with a cost of $30,000 is purchased with cash.

The inventory was sold for 40,000 cash.
1. Capitalising the cost as an asset (Cost Assets)

20,000

Dr Inventory (asset)
Cr Cash (asset)

20,000

2. Transforming the asset to expenses in future periods (Asset Expense)

Dr Depreciation Expense 1,000
Cr Accum. Depreciation (contra asset)
1,000
(each year for the next twenty years)

Dr Cash (asset)
Cr Revenue (income)
Dr COGS (expense)
Cr Inventory (asset)

20,000

We have incurred a cost/expenditure.

Dr Asset or Expense? XXX
Cr Cash/Accounts Payable XXX
Does the item have all the essential characteristics of an Asset?

Does the Asset meet both

the recognition criteria?

No
No

40,000
40,000
30,000
30,000

20,000

Assets & Expense : Another Approach

Yes

30,000

2. Transforming the asset to expenses when revenue is earned (Asset Expense)

3. Derecognising the asset after 20 years.

Dr Accum. Depreciation (contra asset)
Cr Building (asset)

30,000

Expense

Yes

Current vs. Non-current Assets

AASB 101, para. 57:
An asset shall be classified as current when it satisfy any of the
following criteria:
a)it is expected to be realised in, or is intended for sale or consumption
in, the entitys normal operating cycle;
b) It is held primarily for the purposes of being traded;
c) It is expected to be realised within twelve months after the
reporting date; or
d) It is cash or cash equivalent (as defined in AASB 107 unless it is
restricted from being exchanged or used to settle a liability for at
least twelve months.
All other assets shall be classified as non-current

ASSET

Current vs. Non-current Assets

In short:
If it is cash current asset.
If it is inventory current asset.
If the asset is expected to be used up within the next 12 months
current asset
If the asset is expected to be used up within the entitys normal
operating cycle current asset

The Value Non-current Assets

1.

Historical Cost (what did we pay for the asset or how much did it
cost to develop the asset )

2.

Current or Market Value (value in exchange) (what could we get

for the asset if we sold it or how much would we have to pay for
the asset today)

3.

Value in use (present value) (what is asset worth to the

company)

4.

Liquidation Value (what could we get for the asset if we have to

sell it really fast )

5.

Price-adjusted Historical Cost (the historical cost of the asset

adjusted for inflation)

What is an entitys normal operating cycle?

The operating cycle of an entity is the time between the
acquisition of assets for processing and their realisation in
cash or cash equivalents (AASB 101, para 68).
When the entitys normal operating cycle is not clearly
identifiable, it is assumed to be twelve months (AASB 101,
para 68).
All other assets are non-current assets.

Dr Per Tronnes

22/07/2016

A simple Illustration
Thunderstruck bought some land for $50,000 five years ago. The
company currently hires out the land for $5,000 a year, and the
management believes they will do so for the next 10 years and
then afterwards sell the land for $55,000. The company,
however, have financial trouble, and have been looking into
selling the property in order to raise cash. Management believes,
with enough time to find a willing buyer, the property will fetch
about $65,000, but if a quick sale is to be made, they may have
to offer a significant discount and management believe they will
only receive $45,000.
Say that time value of money is measured using 10 year
government bond with a yield of 3.7% and that the annual

inflation rate: 2.5%

Methods of Measuring Value

Of the five previous methods for measuring value, three are common and
referred to throughout the accounting standards:
- Historical Cost
- Current or Market Value
- Value in Use
The other two are not so common,
- Liquidation Value: is generally never used unless the
company is not expected to be able continue as a going concern.
- Price Adjusted Historical Cost: is generally never used unless
the company is reporting their financial statements in a
currency from an economy that is experiencing hyperinflation
(AASB 129)

Measurement at Recognition: PPE

The value put on the asset when first recorded.
An item of property, plan and equipment that qualifies
for recognition shall be measured at its cost (AASB
116, para 15)
Elements of costs:
Its purchase price, including import duties and non-refundable
purchase taxes after deducting trade discounts and rebates
Any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating
in the manner intended by management.
The initial estimate of the cost of dismantling and removing the
item and restoring the site on which it is located (if the company
is required to do so)

Dr Per Tronnes

Simple Illustration (cont.)

The value of land for Thunderstruck under these alternative valuation
methods would be:
Historical cost: 50,000
That is the amount the land was originally purchased for.

Current / Market Value: 65,000

That is estimated market value (i.e. what we could sell it for if we can find a
willing buyer)

Value in Use: 79,412*

That is the present value of the future expected cash flows (i.e. 5000 each
year for ten years plus 55000 at the end of those ten years)

Liquidation Value: 45,000

That is the estimated amount if the land has to be sold quickly.

Price adjusted Historical Cost: 56,570**

Historical cost adjusted for inflation over the past 5 years.
*=5000*((1-(1+0.037)-10)/0.037)+55000*(1+0.037) -10
**= 50000*(1+0.025)5
We will not ask you to calculate present values in this course, but you should be familiar with
the concept of time value of money and what present value is (see Chapter 11 Appendix).

Some things to note

If an asset is purchased, at purchase date (i.e. at the initial recognition):
Historical Cost = Current or Market Value
The accounting standards often uses the term Fair Value.
-

The specific definition of Fair value varies a little from one accounting
standard to another.

For Property, Plant and Equipment (PPE), the specific definition of Fair
Value is: the amount that for which an asset could be exchanged between
knowledgeable, willing parties, in an arms length transaction (AASB 116,
para 6).

In other words, Fair value generally means the same as Current or Market
Value.

Measurement at Recognition: PPE

Purchases price is straight forward, but any other costs that
are necessary to get the asset to the location and to the
condition as intended by management can also be
capitalised.
Examples of cost that are directly attributable:
Cost of employee benefits (i.e. Salary, annual leave, etc) arising
directly from the construction or acquisition of the item.
Cost of site preparation
Initial delivery and handling costs
Installation and assembly costs
Cost of testing if the asset is functioning properly
Professional fees (e.g. lawyers fee for fixing the contract etc).

22/07/2016

Measurement at Recognition: Example

Example 1: 25 Jan 2011, FloppPop Pty Ltd purchased a specialised
machine for $25,000. The machine is large and heavy and needed
special delivery at a cost of $5,000. FloppPop hired two people to
install the machine. Each person was paid $250. The machine was
delivered and installed 1 Feb 2011. 15 Feb 2011, the company incurred
$2000 in advertising costs for promoting the new product.

1. How much of the costs are capitalised on the initial recognition of the
asset?

Measurement at Recognition: Example

Purchase Price:
Directly Attributable Costs:
Delivery
Installation
Total Machine Costs

$25,000
$ 5,000
$ 500
$30,500

Advertising is not a directly attributable to making the asset operate in a

manner intended by management. Consequently, the machine is recorded with
a costs of $30,500 on the initial recognition of the asset. The advertising costs
of $2,000 are not capitalised but expensed.

2. At which date do we start to depreciate the Machine?

Depreciation begins when the asset is capable of operating in a manner

intended by management. As the machine was delivered and installed on 1 Feb
2011, that is the date from when we start depreciating the asset.

Measurement after Recognition: PPE

PPE: The Cost Model

An entity shall choose either the cost model or the

revaluation model as its accounting policy and
shall apply that policy to an entire class of property, plant
and equipment. (AASB 116, para 29)

The cost model states that:

So there are two choices:

After recognition as an asset, an item of property,

plant and equipment shall be carried at its costs
less accumulated depreciation and accumulated
impairment (AASB 116, para 30)

The cost model.

The revaluation model (next week lecture)

Depreciation an expense (ACCT1501)

Property, plant, and equipment usually have limited useful lives:
That is, the economic benefits are consumed over time.
For example, if a machine was purchased 10 years ago, the
future economic benefits are likely to be much less now than
when the machine was originally purchased.
Land not usually depreciated because you do not use up the
economic benefits of land.

Depreciation is the systematic allocation of the depreciable

amount of an asset over its useful life.
Depreciation is a process of ALLOCATION OF COST.
Remember the Matching Principle
It is NOT method of VALUATION

Dr Per Tronnes

(so this is what you already know: record the

asset at the historical costs and then
depreciate)

Calculating depreciation
Depreciation starts when the asset is ready for use as
intended by the management.
To choose a depreciation method, we need to make
judgments on:
useful life
residual value (sale or scrap)
pattern of flow of benefits over the useful life.
i.e. the pattern of revenue will determine how
we allocate the costs in the appropriate
periods.
Useful life, residual value and pattern of flow will need
to be reassessed annually.

22/07/2016

Residual value

Useful life

Residual Value defined:

The estimated amount that an entity would currently

obtain from disposal of the asset, after deducting the
estimated costs of disposal, if the asset were already
of the age and in the condition expected at the end of
its useful life
The residual value is used to calculate the depreciable amount (the
amount that must be allocated over the life of the asset).
Depreciable Amount = Asset Cost - Residual Value

Estimated useful life defined:

The period of time over which an asset is expected to
be available for use by an entity; or
The number of production or similar units expected to
be obtained from the asset by the entity.
Note:
Useful life relates to an assets expected utility to the
enterprise.
Useful life differ from physical life of the asset.

The depreciable amount must be allocated on a systematic basis

over an assets useful life.

Depreciation methods
Three

Common Methods (ACCT1501):

straight-line
reducing balance
units of production

Depreciation - Journal entry

For all depreciation methods:
Dr Depreciation expense
XXX
Cr Accumulated depreciation (contra asset) XXX

Issues to think about. Do these methods produce information to

users that are relevant? Is it verifiable?

All depreciation methods are an approximation

The apparent precision of any depreciation
method is illusory
Could be said to be Verifiable in the sense that it
uses established methodology)

Illustration
A machine with an original cost of $50,000 and
accumulated depreciation of $24,000 (as at 30 June
2008)
It was sold on 1 August 2008 for $21,000 cash.
The straight line method was used to record
depreciation on the old asset.
The annual amount of depreciation was $12,000.
Required: Prepare journal entries to record the events
explained.

Dr Per Tronnes

Illustration (Cont.)
Recording depreciation up until Historical Cost
the date of disposal
Acc Depn
Dr Depn Exp 1,000
Carrying/Book Value
Cr Acc Depn
1,000
Cash received (Market
Removing the non-current asset
Value)
from the companys books.
Accounting Gain/(Loss)
Dr Cash
21,000
Dr Acc Depn
25,000
Dr Loss on Sale 4,000
Cr Machinery
50,000

50,000
25,000
25,000
21,000
(4,000)

Gain and loss on disposal is essentially an estimation error.

- Because depreciation is allocation of costs, and not a method of valuation .

22/07/2016

Improvements to Assets
Repairs/Maintenance vs. Improvement to the Asset
Repairs/Maintenance costs are expensed. They do not improve the
asset, but are necessary to get out the existing economic benefits.
Costs that improves the asset is capitalised. If the costs makes the
asset more productive, more efficient or extends it useful life, then
the economic benefits embedded in the asset has increased.
Question to ask: Has there been a betterment to the asset.

Dr Per Tronnes

Lecture Workshop Questions for Topic 1.1

Question 1
Redrum Ltd. purchased a desktop computer for business use at the beginning of the first year
of business. The purchase price was $3,000. The company has a policy of depreciating all
computers over their useful life of 3 years using the straight-line method with no residual
value. At the end of their useful life, the computers are derecognised.
Required:
(a) Construct a three year schedule of the historical cost, depreciation expense, accumulated
depreciation and carrying value of the desktop computer, showing the relevant information as
at the end of each of the financial years.
Year

Historical cost

Depreciation
expense

Accumulated
depreciation

1
2
3
DO NOT WRITE OUTSIDE THE BOX

(b) Write the journal entries for the following events.

Purchase of the computer:

For yearly depreciation:

The disposal of the asset:

DO NOT WRITE OUTSIDE THE BOX

Carrying value

(c) How do the concepts of cost, asset and expense relate to the desktop computer?

DO NOT WRITE OUTSIDE THE BOX

22/07/2016

Australian School of Business

ACCT1511
Topic 1
Assets (2)

Measurement after Recognition: PPE

An entity shall choose either the cost model or the
revaluation model as its accounting policy and
shall apply that policy to an entire class of property, plant
and
equipment. (AASB 116, para 29)
So there are two choices:
The cost model.

No tutorials this week

Tutorials are on next week

The revaluation model.

PPE: The Revaluation Model

PPE: The Revaluation Model

Revaluation model states that:

After recognition as an asset, an item of property plant and equipment whose
fair value can be measured reliably shall be carried at a revalued amount,
being its fair value at the date of revaluation less any subsequent
accumulated depreciation and accumulated impairment losses. (AASB 116,
para 31)

That is, first estimate fair value (i.e. current or market value),
then depreciate the asset based on the fair value until next time
the assets fair value is estimated.
Revaluations shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from what which would be
determined using fair value at the reporting date. (AASB 116, para 31)
That is, it is not necessary to revalue the asset every year, it is enough
that this happens on a regular basis. In practical terms, that is usually
every three to five years. It must also be regular. If its three years, then
it is every three years, no longer and no less. Companies cannot cherry
pick the years they want to do the revaluations.

PPE: The Revaluation Model

The tricky part is that we do not treat increments and decrements similarly. If it
is the first time that we revalue an asset (ignoring depreciation):

An Increment would be recorded as:

Dr Asset (A)
Cr Revaluation Reserve (E)
Revaluation reserve is an equity account in the balance
sheet so it does not increase the period profit (but it will
impact Other Comprehensive Income).
A Decrement would be recorded as:
Dr Loss on Revaluation (Exp)
Cr Asset (A)
A loss on revaluation is recorded in the income
statement so it does decrease profit.

Dr Per Tronnes

A revaluation may either be:

an increment: increasing the value at which the asset is

recorded.
a decrement: decreasing the value at which the asset is
recorded.
Increments and decrements are judged from the assets
CARRYING AMOUNT (That is, after accumulated depreciation is
subtracted).

Can only revalue an asset as part of a whole class of assets.

That means that the company cannot cherry pick the assets it
would like to revalue and the ones it would like to carry at costs.
For example, the company may chose to revalue all its buildings
or choose to carry them all at cost , but it cannot apply the
revaluation method to building A, and then the cost method to
building B.

PPE: The Revaluation Model

It becomes even trickier in subsequent revaluations, because we must
keep track of what kind of revaluations has been done in the past.
Increments that reverses previous decrements:
Dr Asset
Cr Gain on Revaluation (until all prior losses are reversed)
Cr Revaluation Reserve (if greater than previous decrements)
Decrements that reverses previous increments:
Dr Revaluation Reserve (until revaluation reserve is zero)
Dr Loss on Revaluation (if greater than previous increments)
Cr Asset

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Journal Entries to record the revaluations:

PPE: The Revaluation Model

Example 1: A company applies the revaluation method to the only piece of land
that it owns (since it is land, we can ignore depreciation). The company
revalue its land every year. The cost of the land on the initial recognition
was $500,000; in year 1, the company revalued it to 520,000; in year 2, the
company revalued it to $500,000; in year 3, the company revalued it to
$480,000; and in year 4, the company revalued it to $510,000.

510,000
500,000
Year 1

20,000

Year 2- decrement of 20,000:

Dr Revaluation Reserve
Cr Land

20,000

20,000

(decrement but need to reverse out previously recognised increments)

Year 3- decrement of 20,000:
Dr Loss on Revaluation
Cr Land

520,000

Cost at initial
recognition
$500,000

Year 1- increment of 20,000:

Dr Land
20,000
Cr Revaluation Reserve

Year 2

Year 3

Year 4

480,000

20,000
20,000

(no more previously recognised increments to reverse out)

Year 4- increment of 30,000:
Dr Land
Cr Gain on Revaluation
Cr Revaluation Reserve

30,000
20,000
10,000

(Increment but need to reverse out previously recognised decrements)

PPE: The Revaluation Model

Because the asset must be carried at a revalued amount, being its fair
value at the date of revaluation less any subsequent accumulated
depreciation we must write down the asset to its carrying amount
before we record the increment or decrement in value. Consequently,
the revaluation for assets we depreciate can be summed up in four
steps.
1.
2.
3.
4.

Update depreciation
Write down the asset to its carrying amount
Record the increment or decrement
Recalculate the depreciable amount.

Step 3: recording the revaluation (if any):

If it is a increment (revaluation method):
Dr Building
Cr Revaluation reserve (OE)/Gain on Revaluation (IS)
Gain on Revaluation is recorded if there is a prior net valuation
decrement, and until all prior losses on revaluation is reversed.

If it is a decrement (revaluation method):

Dr Loss on revaluation (IS)/Revaluation reserve (OE)
Cr Building
A debit to revaluation reserved is recorded if there is a prior net
valuation increment, and until all prior upward revaluation is reversed.

Dr Per Tronnes

Step 1: Update the depreciation

Dr Depreciation expense
Cr Acc. depreciation Buildings
(To make sure that the all depreciation expenses up until
the date of revaluation has been recorded.)
Step 2: Writing down the asset to its carrying amount:
Dr Acc. depreciation Buildings
Cr Buildings
(Credit accumulated depreciation to asset account to
record the asset at the carrying value)

Step 4: Recalculate Depreciation

If there is no changes in useful life, residual value or
method of depreciation:
If recording a valuation increment: Depreciable amount
have increased and therefore the subsequent yearly
depreciation expense will be higher.
If recording a valuation decrement: Depreciable amount
have decreased and therefore the subsequent yearly
depreciation expense will be lower.

22/07/2016

Example 1. A building is purchased on 1 July 2009 for

500,000. It has an estimated useful life of 10 years, zero
residual value and is depreciated using the straight line
method. The company elect to use the revaluation method
and revalue the building on a regular basis every two years
starting from 30 June 2010. On 30 June 2010 the company
estimated the fair value of the building to be $540,000. One
30 June 2012 the company estimated the fair value of the
building to be $280,000. There is no change in depreciation
method, estimate of useful life or residual value.

1. Purchase of building (1 July 2009):

Dr Building
Cr Cash

500,000
500,000

2. Recording depreciation (until 30 June 2010):

Dr Depn Expense 50,000
Cr Accum. depn
50,000
(50,000=(500,000-0)/10)
3. Write down the asset til its carrying amount (30 June 2010):
Dr Accum. Depn 50,000
Cr Building
50,000
4. Revalue the building (30 June 2010):
Dr Building
90,000
Cr Revaluation Reserve
90,000
(Carrying amount of building $450,000; Fair value estimate $540,000. Record
an increment of $90,000)

Let us complete all journal entries for this building from 1

July 2009 to 30 June 2013.

5. Recording depreciation (until 30 June 2011):

Dr Depn Expense 60,000
Cr Accum. depn
60,000
(60,000=(540,000-0)/9)

6. Recording depreciation (until 30 June 2012):

Dr Depn Expense 60,000
Cr Accum. depn
60,000
(no change in depreciation expense from last year)

PPE: The Revaluation Model

7. Write down the asset to its carrying amount (30 June 2012):
Dr Accum. Depn 120,000
Cr Building
120,000
8. Revalue the building (30 June 2012):
Dr Revaluation Reserve
90,000
Dr Loss on Revaluation
50,000
Cr Building
140,000
(Carrying amount of building $420,000; Fair value estimate $280,000. Record
a decrement of $140,000. Must reverse out previous amounts recognised in
revaluation reserve before any losses can be recognised)
9. Recording depreciation (until 30 June 2013):
Dr Depn Expense 40,000
Cr Accum. depn
40,000
(40,000=(280,000-0)/7)

If an asset under the revaluation method is disposed off, any amount that is left in
revaluation reserve can be taken to retained earnings
This is because those net increments in value belong to previous periods and not the
current period. Previous net decrements will already be included in retained earnings
as those have been recorded as losses in the income statement)
Example 1: Land is revalued from $100 to $220 in year 1 and is in beginning of year 2
subsequently sold for $220 cash. (assume no tax):

Y1

Y2

Dr Land

120
Cr Revaluation Reserve

Dr Cash
Cr Land
Dr Revaluation Reserve 120
Cr Retained Earnings

120
220
220
120

Intangible Assets: Measurement at Recognition

Intangible Assets: Definition

An intangible asset shall be measured initially at cost.

An intangible asset is an identifiable non-monetary asset without

physical substance (AASB 138, para 8)

Elements of costs:
Its purchase price, including import duties and non-refundable
purchase taxes after deducting trade discounts and rebates
Any directly attributable costs of preparing the asset for its
intended use
For internally generated intangibles the cost is the sum of
expenditure incurred from the date when the intangible asset first
meet the recognition criteria (i.e. from the development phase).

Dr Per Tronnes

It must meet the essential characteristic of an asset: i.e. control,

FEB, past event/transaction
In addition, it must be identifiable:
An asset meets the identifiable criterion...when it:
a) It is separable, that is, is capable of being separated or divided
from the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related
contract, asset or liability; or
b) Arises from a contractual or other legal right, regardless of
wether those rights are transferable or separable from the
entity or from other rights or obligations

22/07/2016

Intangible Assets: Definition

Intangible Assets: Recognition Criteria

The definition excludes monetary items: i.e. financial

instruments, for example shares in another company, are
not intangible assets

Only when the item meets two recognition criteria (AASB 138,
paragraph 21):
1.

It is probable that the expected future economic benefit that

are attributable to the asset flow to the entity; and

2.

The item has a cost that can be measured with reliability.

Typical intangible assets include, among others:

patents,
licences,
copyrights,
franchises,
trademarks

Intangible Assets:
Acquisition vs. Internally Generated
We treat intangible assets differently depending on whether they were acquired
or whether they were internally generated.
Separate acquisition: The intangible asset is purchased from outside the
company.
- Example: Company A purchases a patent regarding a new technology
for sharing messages for $20,000 from Company B.
Internally generated: The intangible asset is developed by the company.
- Example: Company A develops a new technology for sharing
messages.

Internally Generated Intangibles/R&D

Accounting for internally generated assets is
harder because it is difficult to assess whether
an internally generated intangible asset qualifies
for recognition because of two problems :
a) Determining whether there is an identifiable asset
that will generate expected future benefits?
b) Determining the cost of the asset reliably. (i.e. is the
cost incurred part of the day to day operation or is it
specific to the asset?).

Dr Per Tronnes

- Notice that for intangible assets there must be a cost that can be measured with
reliability.

Separate Acquisition
Accounting for intangible assets when there is a separate
acquisition is actually quite simple.
Because....the effect of probability is reflected in the cost of the
asset. Therefore, the probability recognition criterion.....is always
considered to be satisfied for separately acquired intangible asset
(AASB138, para 25)
In other words, if we buy an intangible asset, for example a patent,
we recognise it as an asset on the balance sheet.
Dr Intangible Asset
Cr Cash/Accounts Payable

XXX
XXX

Internally Generated Intangibles/R&D

To assess, whether an internally generated assets
meets the criteria for recognition, an entity
classifies the generation of the asset into (AASB
138, para 52):
a) A research phase
a) A development phase

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So what is development?

So what is Research?
Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding.

Development is the application of research findings or other knowledge to a

plan or design for the production of new or substantially improved materials,
devises, products, processes, systems or services before the start of
commercial production or use.
Typical activities that fall in under development:

Typical activities that fall in under research:

1)

1) activities aimed at obtaining new knowledge;

2) the search from evaluation and final selection of, applications of
research findings or other knowledge;
3) the search for alternatives for materials, devices, products
processes systems or services;
4) and the formulation, design, evaluation and final selection of
possible alternatives for new or improved materials, devices,
products, processes, systems or services.

Research - Accounting Treatment

No intangible asset arising from research (or from the research phase
of an internal project) shall be recognised. Expenditure on research (or
on the research phase of an internal project) shall be recognised as an
expense. (AASB 138, para 54).
Why?
In the research phase of an internal project, an entity cannot
demonstrate that an intangible asset exists that will generate probable
future economic benefits... (AASB 138, para 55).

2)
3)
4)

the design, construction and testing of pre-production or pre-use

prototypes and models;
the design and tools, jigs, moulds and dies involving new technology;
the design, construction and operations of a pilot plant that is not of a scale
economically feasible for commercial productions; and
the design, construction and testing of a chosen alternative for new or
improved materials, devices, products, processes, systems or services.

Development Accounting Treatment

An intangible asset arising from the development (or from the
development phase of an internal project) shall be recognised if,
and only if, an entity can demonstrate all of the following (AASB
138 para 57):
a) the technical feasibility of completing the intangible asset so that it will be available
for use or sale.
b) its intention to complete the intangible asset and use or sell it
c) its ability to use or sell the intangible asset
d) how the intangible asset will generate probable future economic benefits....
e) the availability of adequate technical, financial or other resources to complete the
development and to use or sell the intangible asset
f) its ability to measure reliably the expenditure attributable to the intangible asset
during its development.

Therefore, all costs during the research phase are expensed:

Dr Expense
Cr Cash/Accounts Payable

XXX
XXX

Intangible Assets: Measurement after

Recognition
Two choices: cost or revaluation method.
However, if the revaluation method is to be used, fair value needs to
be determined with references to an active market. An active market
is a market where:
The items traded are in the market are homogenous
Willing buyers and sellers can normally be found at any time
Prices are available to the public

Since intangible assets tend to be unique by nature (patents,

trademarks etc) rarely is an active market found. In practice that means
for most intangible assets, only the cost method can be used.

Goodwill A special case

Goodwill is a non-current intangible asset, but it is not identifiable....
Goodwill is an accounting concept meaning the value of an entity over and
above the value of its separate identifiable assets less liabilities.
because of synergies, reputation, loyalty of clients, staff knowledge etc.
so goodwill is the value of all the things that is hard to measure, and not
separately listed on the balance sheet such as buildings, inventory and so
on.

(The following few slides are a somewhat simplification But you will revisit
goodwill in greater detail in Accounting 2B)

(An active market for could possible be found for intangible assets such
as taxi licences and carbon emission quotas)

Dr Per Tronnes

22/07/2016

Recognising and Measuring Goodwill

Consider a simple case. Company A is purchasing Company B for
$30,000. In effect, Company A is purchasing Company Bs assets
and liabilities for $30,000. Let us say that the Company Bs assets
and liabilities had a market value of 40,000 and 20,000, respectively.
What is the Goodwill amount?
Goodwill as of the acquisition date is measured as:
1) The consideration transferred,
2) less the fair value of the net identifiable assets acquired and the
liabilities assumed.
That is, purchased goodwill is calculated as the amount paid for a
business less the estimated market value of the net assets
obtained.

Goodwill
Some things that you might have understood:
The 10,000 goodwill of Company B due to synergies, reputation, loyalty of
clients, staff knowledge or whatever it else it is can only be valued at
10,000 because company A acquired Company B.
Therefore, it was no goodwill in Company Bs books before Company A
acquired it. That is, before company A acquired Company B, a value could
not be put on the synergies, reputation, loyalty of clients, staff knowledge
etc.
As you can probably see, the goodwill is a somewhat funny accounting
concept. Pinning down exactly what the goodwill amount represent is
difficult. As it is measured, the more money Company A pay for Company B,
the higher the goodwill in Company As books. One way of interpreting
goodwill (somewhat critically) may be that Company A paid too much for
Company B.
Accounting for goodwill is, however, necessary. Without a debit to Goodwill
in Company As books, the journal entry would not balance.

Simple Illustration
Cost of Business:
Fair Value of Identifiable Assets:
Fair Value of Liabilities Assumed:
Fair Value of Net Assets:
Goodwill:

$30,000
$40,000
$20,000
$20,000
$10,000

Journal entries in Company As books:

Dr Identifiable Assets
Dr Goodwill
Cr Liabilities
Cr Cash

40,000
10,000
20,000
30,000

Impairment
An entity shall assess at each reporting date whether there is any
indication that an asset may be impaired (AASB 138, para 9.)
Simply stated, at each reporting date we check whether there is an
indication that any of the assets value are overstated.
If there is an indication that an asset value is overstated, then we must
test for impairment. If there is no indication that an asset is overstated,
then we just leave everything as it is, and there is no need to test for
impairment.
Note: Intangible asset with an indefinite useful life and Goodwill must,
irrespective of indication or not, be tested for impairment at least
annually

Indicators of impairment

So how do we test for Impairment

External Sources:

So if there is an indication that an asset may be impaired,

we must test for impairment.

1) an asset market value has declined significantly,

2) changes with adverse effect in the technological, market,
economic or legal environment.

Internal Sources:
1) obsolescence or physical damage of an asset,
2) changes making an asset idle, plans to discontinue or
restructure operations to which asset belong, plans to dispose of
asset before the previously expected date,
3) internal reporting indicates the economic performance of an
asset will be worse than expected.

Dr Per Tronnes

We test for impairment by comparing the carrying value of

the asset on the balance sheet with the highest value we
think we can recover from the asset by either selling or
using the asset.
This should make sense. If the recorded value of the asset
is higher than what we get from using the asset, or what we
can get from selling the asset, then the value of the asset is
overstated and we should do something about that.

22/07/2016

Impairment testing

Asset is impaired, then what...

1.

We know the carrying value of the asset.

2.

We then need to find the recoverable amount.

If asset is impaired, the value must be written down to its

recoverable amount:

The recoverable amount is the higher of:

a)

b)

3.

Fair value less cost to sell (the amount obtainable from the sale of an
asset in an arms length transaction between knowledgeable, willing
parties, less cost of disposal)
Value in use (the present value of the future cash flows expected to
be derived from an asset)

Compare the assets carrying amount to the assets recoverable amount.

a) If carrying amount<recoverable amount asset is not impaired

b) If carrying amount>recoverable amount asset is impaired
If asset is impaired, we need to write down the assets value to its
recoverable amount.

Reversal of an Impairment Loss

If impairment loss have been recognised in a previous period, but the estimates of the
assets recoverable amount have increased since the last impairment, then there is a
reversal of the impairment loss.
Dr Accumulated Impairment
Cr Gain on Reversal of Impairment
Reversal of impairment cannot increase the carrying amount to exceed the carrying
amount (net of depreciation or amortisation) had no impairment taken place. (AASB 138,
para 117).
Any impairment recognised for Goodwill can never be reversed.
If the revaluation method is used, then any reversal of impairment loss is treated as a
revaluation increase (AASB 138, para 119)
Dr Asset
Cr Revaluation Reserve (or Gain on Revaluation)

Dr Loss on Impairment

Cr Accumulated Impairment
If the revaluation method is used instead of the cost method, then any
impairment loss is treated as a revaluation decrement (AASB 138, para
60)
Dr Loss on Revaluation (or Revaluation Reserve)
Cr Asset
(Note that this is exactly as the if the asset is revalued downwards, and
any previous net increments are reversed out of the revaluation
reserve).

Impairment
As noted above, if the revaluation method is used, any impairment is treated
exactly the same as if it were a downward revaluation. But it is important to
recognise that the revaluation method and impairment are two distinct concepts
(and covered in different accounting standards). Just because a company is
using the revaluation method, that does not mean it can ignore indications of
impairment.
Example 1. A company uses the revaluation method for its buildings. The
company revalue its buildings with sufficient regularity every 3 years. The last
revaluation was done in 2012 and its next revaluation is to take place in 2015.
In 2013, however, the property market for where the company had its buildings
crashed and property values have declined.
In this example, the company cannot ignore the indication of impairment just
because it uses the revaluation method. Although the next revaluation is to take
place in 2015, the company must test for impairment in 2013 even if this is
outside their regular revaluation dates.

Inventory (ACCT1501)

Cost of inventory (ACCT1501)

Inventories are assets:

The cost of inventories comprises:

held for sale in the ordinary course of business

in the process of production for such sale, or
in the form of materials or supplies to be consumed in the
production process or in rendering of services.

Inventory types:
raw materials
work in progress
finished goods inventory

costs of purchase
costs of conversion
other costs incurred in bringing the
inventories to their present location and
condition.

merchandise inventory.

Dr Per Tronnes

22/07/2016

Inventory cost flows:

Merchandising operation (ACCT1501)

Raw materials
$$$

Merchandise inventory
$$$

Inventory cost flows:

Manufacturing operations (ACCT1501)
COGS
$$$

$$$
Labour
$$$

Cost of goods sold

Work in process
$$$ $$$

$$$
Overhead
$$$

Finished goods
$$$ $$$

Cost of goods sold (ACCT1501)

Comparison of inventory methods (ACCT1501)

Opening inventory

In periods of rising prices:

FIFO results in the highest ending inventory,
highest gross profit, highest net profit and the
lowest COGS.
LIFO results in lowest ending inventory, lowest
gross profit, lowest net profit and the highest
COGS (not used in Australia).
Weighted average results fall between FIFO and
LIFO.

Purchases

Goods available for sale

Ending inventory

Cost of goods sold

Mis-measurement in Inventory (ACCT1501)

Inventory: lower of cost and net realisable value

Ending Inventory should be measured at the lower of cost and net realisable
value (also referred to as lower of cost and market value).

Overstatement of ending inventory leads to:

understatement of current periods COGS
overstatement of current periods profit.

Definition of net realisable value:

the estimated selling price in the ordinary course
of business less the estimated costs of completion and
the estimated costs necessary to make the sale.
Net realisable value might be lower than cost because of:

Understatement of ending inventory leads to:

overstatement of current periods COGS
understatement of current periods profit.

obsolescence
damage
demand
Any loss from the application of this rule is recorded as an expense in the
accounting period in which the write down occurs.

Rule applied at item level.

Dr Per Tronnes

22/07/2016

Accounts Receivable & Doubtful debts (ACCT1501)

Example 1: Assume that the cost of inventory is calculated
to be $140 000. However, the net realisable value is only
$125 000.
Journal entries to apply the lower of cost and net realisable
value rule.
Dr Inventory Loss (Expense)
Cr Inventory (Asset)

15 000
15 000

The allowance for doubtful debt is usually estimated based

on past experience. For example, 3% of all credit sales,
10% of all debts outstanding for greater than 60 days.

Estimate the doubtful debts in the same period as sales

happens.
Dr Bad debts expense
Cr Allowance for doubtful debts
Write off all the bad debts when it becomes clear that they
are not collectable.
Dr Allowance for doubtful debts
Cr Accounts receivable

Relevance vs Reliability

Prudence / Conservatism

The debate regarding the appropriateness of historical cost versus

market value (fair value) as the basis for valuing assets goes back to
the qualitative characteristics of relevance and reliability.

Much of the asset valuation issues covered this week relates to the concept of
prudence/conservatism (not in the framework any more, but it used to be). That
is, we are careful not to overstate assets and income and careful not to
understate liabilities and expenses.

Advocates of greater use of market/current value argue that this is

more relevant information than historical costs.

Example 1: Under the revaluation model, revaluation decrements recognised in

the income statement but revaluation increments are not. That is, we count
decrements as expenses by increments is not counted as income.

Advocates of historical cost argue that this information is more reliable

and much harder to manipulate than estimates of market values.

Example 2: When testing for impairment, the fundamental concern is whether

the asset is overvalued. That is, we make sure that the asset is not overstated
but we do not really care whether it is understated.

In the past few decades, a greater use of market value has become the
norm as accounting standards have adopted this a legitimate way of
valuing certain assets.

Dr Per Tronnes

Example 3: The lower of cost and net realisable value rule for inventory means
that inventory can never be recorded at a value higher than cost, but it can be
recorded at a lower value. That is, we make sure that inventory is not
overstated but we do not really care whether it is understated.

Lecture Workshop Questions for Topic 1.2

Question 1
TuneIn Pty Ltd produces headphones using cutting edge technology. The company spends
significant effort on improving its technology, and employees have a legal duty to maintain
confidentiality. A project to create a new sound technology that was started in 2008 had a
significant breakthrough in the beginning of 2009 that finally caused the management to
believe that all costs could be recouped through future sales. It is expected that the project
would be ready for production and sales within a year or two.
In 2008, TuneIn Pty Ltd incurred costs of the project amounted to $65,000 and the activities
were concerned with obtaining new knowledge and finding suitable materials. In 2009,
TuneIn Pty Ltd incurred costs of $75,000 in assembling a pre-production prototype and an
additional $20,000 testing the prototype. TuneIn Pty Ltds financial year end is 31 December.
Required:
(a) How much of the project costs can be recognised as assets on TuneIn Pty Ltds 2008
balance sheet? If no assets can be recognised on the balance sheet, write Zero.

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If you have recognised any assets in TuneIn Pty Ltds 2008 balance sheet (question (a)
above), explain how the transaction satisfies the essential characteristics and recognition
criteria of Assets. If you have not recognised any assets, explain how the transaction does
not satisfy these criteria.
(b) Application of essential characteristics:
Future benefit:

Control:

Past event/transaction:

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(c) Application of recognition criteria:

Probable:

Reliable measurement:

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Question 2
You are working as an accountant for MagicLand Pty Ltd.
In the first year of business, MagicLand Pty Ltd purchased land for $5 million. In the second
year, a reputable, independent property valuers report shows that the value of the land is
estimated at $4 million. In the third year, the value of the land is estimated at $7 million. At
the beginning of the fourth year, MagicLand Pty Ltd sold the land at $6 million and received
cash in full. Assume no tax.
Required:
(a) Assume that MagicLand Pty Ltd adopts the revaluation method for land, and revaluation
was applied both in the second and the third year. With respect to the land, write the journal
entries for the following transaction or event.
Revaluation of land in the second year of business:

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Revaluation of land in the third year of business:

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Sale of land in the fourth year of business:

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(b) With reference to the journal entries made in the third year above, briefly explain in what
way the treatment above reflects Conservatism.

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(c) Discuss the Relevance and Verifiability of the value of land on the balance sheet under
the revaluation method.
Relevance:

Verifiability:

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Tutorial Questions for Topic 1

Q1: Problem 10.18 (Adapted): Repairs versus Capitalising
Gibbs Ltd operates a manufacturing facility to produce its key products. On 1 July
2016, the balance of an equipment account was as follows:
Manufacturing equipment
Accumulated depreciation

$120,000
($78,000)

During 2017 financial year, Gibbs Ltd incurred the following costs which were paid
in cash:
Equipment maintenance and repairs
Major equipment upgrade to improve efficiency

$1000
$35,000

The equipment, when first purchased, had an expected useful life of 20 years, and
residual value is $7,200. Gibbs Ltd depreciates equipment on a straight line basis.
There have been no changes in the estimates of useful life, residual value and the
depreciation method.
Required:
a) What is the journal entry that was made on 30 June 2016 for depreciation on
manufacturing equipment? Show your workings.

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b) Indicate the effects of the two expenditures during 2017 on assets, liabilities and
shareholders equity:

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c) Give the journal entries to record the two expenditures during the 2013 financial
year:

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Q2: Asset Disposal

Cavalier sold two assets in the 2013 financial year end. On 1 July 2012, prior to their
disposal, the following were shown in the companys account:
Machine

Costs

1
2

$40,000
$62,500

Residual
value
$5,000
$7,500

Expected
useful life
7 years
10 years

Accum. depn
(straight line)
$15,000
$0

Machine 1 was sold on 1 July 2012 for $10,000 cash. Machine 2 was sold on 30 June
2013 for $30,000. $20,000 was received in cash, and the remaining $10,000 on credit.
Required:
What journal entries are required to record the disposal of Machine 1?

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What journal entries are required to record the disposal of Machine 2?

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Q3: Mid-session exam 2010, semester 2: Question 1 (version a) Adapted.

The following information is taken from the accounts of Ray Ltd.
Motor Vehicles, 1 January 2006
Motor Vehicles, 31 December 2006
Accumulated Depreciation Motor Vehicles, 1 January 2006
Accumulated Depreciation Motor Vehicles, 31 December 2006
Depreciation Expense Motor Vehicles, year ended 31 December 2006
Gain on sale of motor vehicle, year ended 31 December 2006
Cost price of motor vehicles sold during the year
Required:
By using relevant t-account(s),
(a) calculate the cash proceeds from sale of Motor Vehicle, and

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(b) calculate the cash paid for the purchase of a new Motor Vehicle.

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$000
620
740
230
290
150
10
130

(d) Discuss how the concepts of cost, asset and expense relate to the motor
vehicle in the accounts of Ray Ltd.

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Q4: Mid-session exam 2011, semester 2: Question 2

You are working as an accountant for MagicLand Pty Ltd.
In the first year of business, MagicLand Pty Ltd purchased land for $5 million. In the
second year, a reputable, independent property valuers report shows that the value of
the land is estimated at $4 million. In the third year, the value of the land is estimated
at $6 million. At the beginning of the fourth year, MagicLand Pty Ltd sold the land at
$7 million and received cash in full. Assume no tax.
Required:
(a) Assume that MagicLand Pty Ltd adopts the revaluation method for land, and
revaluation was applied both in the second and the third year. With respect to the land,
write the journal entries for the following transaction or event.
Revaluation of land in the second year of business:

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Revaluation of land in the third year of business:

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Sale of land in the fourth year of business:

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(b) Under the revaluation method, why is revaluation increments recorded in the
equity section but revaluation decrements recorded as expenses?

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(c) List three pros and cons of using the revaluation method and stating the asset at its
current market value:
Pros:

Cons:

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Q5: Final exam 2014, semester 1: Question 2 (Adapted)

You are working as the accountant for the company Jailbreak Pty Ltd. Jailbreak Pty
Ltd produces bolt cutters, a tool used for cutting chains, padlocks, bolts and wire
mesh. When starting up in 2006, the following transactions took place in relation to
the start-up of the operations:

1 September 2006, Jailbreak Pty Ltd bought the machinery for $575,000 cash. In
order to get the machinery ready to be used, Jailbreak Pty Ltd spent an additional
$50,000 cash to have the machinery installed on 1 October 2006. The machinery
has an expected useful life of 10 years and an expected residual value of $25,000
and the machinery is depreciated on a straight-line basis.

Jailbreak Pty Ltds the chief accountant and your superior, Angus Young, decided to
account for the machinery is accounted for using the cost method.
As at 30 June 2007, there was an indication that the machinery might be impaired. In
preparing for the impairment testing, you have estimated, as at 30 June 2007, the
machinerys fair value less cost sell to be $345,000 and its value in use to be
$354,000. As at 30 June 2007, the useful life of the machinery was revised to be only
seven years; there was no change in the original assessment of the residual value or
the depreciation method.
As at 30 June 2009, Jailbreak Pty Ltd. shut down its operations and sold its machinery
for $200,000 and received cash in full.

Required:
(a) With respect to the machinery, write the journal entries for the following
transactions or events (if any). Assume no tax.
1st September 2006:

DO NOT WRITE OUTSIDE THE BOX

1st October 2006:

DO NOT WRITE OUTSIDE THE BOX

30th June 2007:

DO NOT WRITE OUTSIDE THE BOX

30th June 2008:

DO NOT WRITE OUTSIDE THE BOX

30th June 2009:

DO NOT WRITE OUTSIDE THE BOX

Q6: Final exam 2015, semester 2: Question 2 (Adapted)

TuneIn Pty Ltd produces headphones using cutting edge technology. In 2010, the
company started a new research and development program that finished at the end of
2011. Employees have a duty to maintain confidentiality. The following costs had
been incurred:
Costs
Obtaining knowledge
Finding suitable material
Building pre-production prototype
Testing the prototype
Project Related Wages
Advertising costs

2010
$90,000
$140,000

$46,000

2011

$56,000
$30,000
$59,000
$5,000

At the very beginning of 2011, the project had a significant breakthrough that finally
caused the management to believe that all the costs of the project could be recouped in
the future. TuneIn Pty Ltds financial year end is 31 December.
a) How much of the costs over the life of the project can be capitalised and
recognised as assets (write Zero if no asset can be recognised)? (1 mark)

DO NOT WRITE OUTSIDE THE BOX

b) How much of the costs over the life of the project must be expensed (write
Zero if nothing must be expensed)? (1 mark)

DO NOT WRITE OUTSIDE THE BOX