TOPIC II

LECTURE II

Tutorial I ACC722

Q1. If an asset is expensed in one financial year because future economic benefits were not deemed
to be ‘probable’, can the same asset be reinstated in future periods if the benefits are
subsequently assessed as probable? In this respect, does the ability to reinstate assets apply to
all assets?

Q2. Should borrowing costs associated with the construction of a building be treated as part of the
cost of the building, or should the borrowing costs be expensed as incurred?

Q3. In accounting for the acquisition of assets, the assets acquired are to be recorded at the ‘cost of
acquisition’. How would you determine the ‘cost of acquisition’

Q4. When should an ‘impairment loss’ be recognised?

Q.5. What is the difference between value-in-use and value in-exchange and of what relevance is
either to the determination of the amount at which an asset is to be disclosed within the
statement of financial position (balance sheet)

Q6. Can an entity include an asset in its statement of financial position that it does not legally own?
Justify your answer.

Q7. Assume that, in a particular year, a reporting entity acquires a patent for a solar-powered
toothbrush, but the probability of future economic benefits being generated by the patent is
considered to be less than 50 per cent. As a result of changed circumstances in a subsequent
year, the outlook is that the benefits are more than 50 per cent probable.

REQUIRED

Explain whether the patent may be recognised as an asset i) when acquired or ii) when the
probability subsequently exceeds 50 per cent probable.

Q8. Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for the following consideration:

Cash $20 000

Land In the books of Tea Tree Bay Ltd the land is recorded at its cost of $100 000. It
has a fair value of $140 000.

Tea Tree Bay Ltd also agrees to assume the liability of Jetsons Ltd’s bank loan of $30 000 as part
of the Gizmo Machine acquisition.

REQUIRED

(a) Calculate the acquisition cost of the Gizmo Machine.

(b) Provide the journal entries that would appear in Tea Tree Bay Ltd’s books to account for the
acquisition of the Gizmo Machine.

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Q9. What are some of the various asset measurement rules currently utilised within accounting
standards?

Q10. What effect will an asset revaluation have on subsequent periods’ profits? Explain your answer

Q11. Explain the difference in the accounting treatment for revaluation increments and revaluation
decrements. Do you consider that this difference is ‘conceptually sound’?

Q12. When should a revaluation increment be included as part of profit or loss?

Q13. For the purposes of AASB 116 or AASB 136, how is ‘recoverable amount’ determined

Q14. When would you determine the recoverable amount for a cash-generating unit rather than for
an individual item of property, plant and equipment?

Q15. If an item of property, plant and equipment is measured at cost, but the recoverable amount of
the asset is determined to be less than cost, what action must be taken?

Q16. If a reporting entity decides to revalue its property, plant and equipment, what basis of
valuation must be adopted?

Q17. If a reporting entity elects to use either cost or fair value as the basis for measuring its property,
plant and equipment, can it elect to switch to the other method at a later time?

Q18. An item of depreciable machinery is acquired on 1 July 2015 for $120 000. It is expected to have
a useful life of 10 years and a zero residual value. On 1 July 2019, it is decided to revalue the
asset to its fair value of $110 000.

REQUIRED: Provide journal entries to account for the revaluation

Q19 What does the ‘impairment of an asset’ mean? How should an impairment of an item of
property, plant and equipment be accounted for?

Q20 How should the reversal of an impairment loss be accounted for?

Q21 An asset having a cost of $100 000 and accumulated depreciation of $20 000 is revalued to $120
000 at the beginning of the year. Depreciation for the year is based on the revalued amount and
the remaining useful life of eight years. Shareholders’ equity, before adjusting for the above
revaluation and subsequent depreciation, is as follows: Share capital 300 000, Revaluation
surplus 45 000, Capital profits reserve 85 000, Retained earnings 70 000.

REQUIRED: Prepare journal entries to reflect the revaluation of the asset and the subsequent
depreciation of the revalued asset. Which of the equity accounts would be affected directly or
indirectly by the revaluation?

Q22. AASB 101 stipulates a number of disclosures that many reporting entities are required to make.
What specific disclosures are required by AASB 101 in relation to assets?

Q23. According to AASB 116, would you expense or capitalise expenditure incurred in repairing an
asset? Explain your answer.

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Q24. Assume that the Geelong Football Club signs up five promising recruits by offering each of them
a five-year player’s contract. As an additional incentive, it also offers each of the players a
substantial sign-on fee. Do you think these players, or the associated economic benefits that
they will generate, are ‘assets’ of the Geelong Football Club? How would you account for the
sign-on fee

Q25. SINU spent $4 million on a swimming pool for its staff. The expenditure was made in an
endeavour to improve their health and wellbeing. The staff will not be charged any money for
using the pool and the expected operating costs of the pool are expected to be $450 000 per
year, meaning that the pool will not be directly generating any positive financial returns. Explain
whether the university should recognise the $4 million cost of the pool as an asset, or treat it all
as an expense.

Q26. For financial accounting purposes, the Australian National Museum placed a $10 million value
on the preserved remains of the legendary Australian racehorse Phar Lap.

What do you think this valuation actually represents

Q.27 On 15 September 2016, Tweed Ltd acquired land on a remote island at a cost of $100 000. The
land was held for future development as a resort when transport to the island was made
available. At each reporting date, Tweed Ltd made the following assessments of the net selling
price of the land and the value of the land to the business if kept for future use:
_____________________________________________________________________
Date Net selling price Value in use
31 December 2016 $110 000 $130 000
30 June 2017 $90 000 $120 000
31 December 2017 $80 000 $90 000
30 June 2018 $120 000 $110 000
____________________________________________________________________
REQUIRED
(a) At what amount should the land be recorded in the statement of financial position (balance sheet) of
Tweed Ltd for each reporting date?
(b) Assume that on 30 September 2018 the government cancelled all plans to provide transport to the
island. There is no prospect of selling the land. The cost to Tweed Ltd of developing transport exceeds
the present value of expected future benefits of operating the resort. How should Tweed Ltd account for
this event?

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Q28. On 1 July 2016 Big Wednesday Ltd acquired land at a cost of $1 000 000. Big Wednesday Ltd
makes the following estimates of the value of the land:
Net selling Value in Fair
Price use value
30 June 2017 $900 000 $1 050 000 $950 000
30 June 2018 $900 000 $960 000 $950 000
30 June 2019 $920 000 $900 000 $970 000

REQUIRED
a) Determine the recoverable amount of the land for each reporting date
b) Assume that Big Wednesday Ltd uses the cost method. For each year calculate the carrying
amount of the land. Prepare the journal entries necessary to effect any adjustments
required by accounting standards.
c) Assume that BIG Wednesday Ltd revalues its land at the end of each year. For each year
calculate the carrying amount of the Land. Prepare the journal entries necessary to effect
any adjustments required by accounting standards.

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