ARA totorial 5 - The written script of tutorial PDF

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Accounting Analysis and Reports Tutorial 5: Statement of Profit and Loss Made by Rafael Chen Exercise 1: Revenue Recognition •A retail store sells gift cards whereby the purchaser pays an amount in exchange for a card that then carries that value. •The cardholder may then present the card to any of the retail chain’s outlets in exchange for goods to the value of the card. •The card’s expiry date is 6 months from the date of purchase. Discussion: •Discuss how a $100 gift card should be recorded by the store at each of the following dates: –sale –redemption –expiry The store has an “unofficial policy” of honouring expired gift cards if they are presented within a reasonable time after the expiry date. Discussion: •Discuss how the entity would record such an event assuming all expired cards are recognised as revenue at the expiry date. •How might this “unofficial policy” impact on how revenue should be recognised if there was such a widespread practice that customers routinely presented gift cards after the due date? The store’s experience is that one-third of its cards are never redeemed. Accordingly, management has a desire to recognise one-third of the value of unredeemed cards at June 30 as revenue even though they have not expired. Discussion: •Discuss why management may wish to recognise these unexpired cards as revenue •Discuss whether this accounting policy would be appropriate

Exercise 2: A case study: depreciation Included in a manufacturing firm’s PPE is a piece of equipment purchased on 1 July 2016 at a cost price of $80,000 Required •Suggest how an estimation of the equipment’s useful life would be determined •Assuming the estimated useful life is 10 years, –Calculate the annual depreciation charge –Calculate the carrying amount of the asset on 30 June 2022 The equipment continues to operate for an 11thyear and on 30 June 2027 is considered to have future benefit still Required •State the impact on the FY27 financial statements On 30 June 2022 (6 years after purchase) the equipment becomes obsolete and is considered to have no future benefit Required •State the impact on the FY22 financial statements On 30 June 2022, the equipment becomes obsolete and is considered to have no future benefit Required •State the impact on the FY22 financial statements if the equipment’s life was estimated to be 8 years instead of 10 •What impact does the estimation of useful life have on reported profit?

Exercise 3: Discontinued Operation •If an entity has sold or has a decided to sell a part of its business during the reporting period, AASBs require the entity to disclose, if material, profit or loss from such discontinued operations. Discussion: •Discuss the benefit of information about profit or loss from discontinued operations to a user of an entity’s financial statements.

Exercise 4: Other comprehensive income An entity purchased land & buildings for $1.5m in 2015. An independent valuation has determined the fair value of these land & buildings is now $2 million. Management is considering whether or not it should adopt the revaluation model for this asset. Discussion •What would be the impact, if any, of revaluing the asset to $2m on each of the following? –Profit in the current period –Profit in future periods...