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Question 1: (Approximately 400 words)
Queenslander Ltd operates a café and gift shop at Montville in the Sunshine Coast
hinterland. You are the accountant for the company and the following items relate to
the year ended 30 June 2016:
(a) Queenslander Ltd is the guarantor for an employee’s bank loan. As the
employee is in serious financial difficulties, you think it likely that he will default
on the loan.
(b) As a gift from a very grateful and generous customer, Queenslander Ltd
receives 500 shares in Walters Ltd which are currently trading at $2 per share.
(c) The company’s directors believe that the panoramic views of the Sunshine
Coast hinterland from the windows of the café attracts a large number of
customers.
Required:
Explain how Queenslander Ltd should account for each of the above items. You
should justify your answer by reference to the AASB conceptual framework’s
definitions and recognition criteria for assets, liabilities, income and/or expenses.
Question 2: (Approximately 350 words)
One of the directors on the board of directors of Manly Ltd has proposed that the
company adopt the revaluation model for the measurement of its machinery. Some of
this machinery is difficult to replace because of its unique nature and certain items of
machinery have increased in value in the current period. The director is arguing that,
as there has been no decline in the machinery’s fair value, no depreciation expense
should be recognised on these items of machinery.
Explain whether the director’s proposal (about not recognising depreciation) should be
adopted by the board.
3
Question 3: (Approximately 400 words)
Sharks Ltd is an Australian mail-order company that sells a variety of homeware
products. Although the online homeware products industry in Australia is growing
slowly, Sharks Ltd has reported significant increases in sales and net profits in
recent years. While sales increased from $50 million in 2009 to $120 million in 2015,
net profit increased from $3 million to $12 million over the same period. The stock
market and analysts believe that the company’s future is very promising. In early
2016, the company had a market capitalisation of $350 million, which was
approximately three times the 2015 sales and around 26 times estimated 2016 profit.
The company’s management and many investors attribute the company’s success to
its marketing flair and expertise. Instead of competing on price, Sharks Ltd prefers to
focus on service and innovation, including:
• free delivery across Australia; and
• a free gift with orders over $200.
As a result of such innovations, the company’s customers are willing to pay prices
that are 60% above those of competitors, and Sharks Ltd maintains a gross profit
margin of around 40%.
Nevertheless, some investors have doubts about the company as they are uneasy
about certain accounting policies the company has adopted. For example, Sharks
Ltd capitalises as a non-current asset the costs of its direct mailings to prospective
customers of catalogues advertising the company’s products ($4.2 million at 30 June
2015) and amortises them on a straight-line basis over 3 years. The mailing lists
have been developed by the company’s in-house marketing staff. This accounting
practice is considered by some investors to be questionable as there is no guarantee
that customers will be obtained and retained from direct mailings.
In addition to the company’s in-house developed direct mailing lists, Sharks Ltd
purchased a customer list from a competitor for $800,000 on 4 July 2016. This list is
also recognised as a non-current asset. Sharks Ltd estimates that this list will
generate sales for at least another 2 years. The company also plans to add names,
obtained from a phone survey conducted in August 2016, to the list. These extra
names are expected to extend the list’s useful life by 1 more year.
Sharks Ltd’s 2015 statement of financial position also reported $7.5 million of
marketing costs as non-current assets. If the company had expensed marketing
costs as incurred, 2015 net profit would have been $10 million instead of the
reported $12 million as $2 million was spent on marketing activities in the 2015
financial year. The concerned investors are uneasy about this capitalisation of
marketing costs, as they believe that Sharks Ltd’s marketing practices are relatively
easy to replicate. However, Sharks Ltd argues that its accounting is appropriate.
Marketing costs are amortised at an accelerated rate (55% in year 1, 29% in year 2,
and 16% in year 3), based on the company’s 25 years’ knowledge and experience of
customer purchasing behaviour.
4
Required:
Explain how Sharks Ltd’s costs (costs of direct mailings, purchased customer list and
marketing costs) should be accounted for under AASB 138/IAS 38 Intangible Assets,
giving reasons for your answers.
Question 4: (Approximately 350 words)
Bird Ltd, a listed company, provides food to function centres that host events such as
weddings and engagement parties. After an engagement party held by one of Bird
Ltd’s customers in June 2017, 100 people became seriously ill, possibly as a result
of food poisoning from products sold by Bird Ltd. Legal proceedings were
commenced by legal representatives of the people seeking damages from Bird Ltd,
which disputed liability by claiming that the function centre was at fault for handling
the food incorrectly. Up to the date of authorisation for issue of the financial
statements for the year to 30 June 2017, Bird Ltd’s lawyers advised that it was
probable that Bird Ltd would not be found liable. However, two weeks after the
financial statements were published and released to shareholders, Bird Ltd’s lawyers
advised that, owing to developments in the case, it was probable that Bird Ltd would
be found liable and the estimated damages would be material to the company’s
reported profits.
Required:
Explain whether Bird Ltd should recognise a liability for legal damages in its financial
statements as at 30 June 2017? How should it deal with the information it receives
two weeks after the financial statements are published? You should refer to relevant
parts of the AASB conceptual framework and AASB accounting standards in your
answer.
Assessment criteria:
The assignment will be marked according to the following assessment criteria:
logical application of concepts to situations, with adequate justification for
choices made
professional presentation, including correct use of spelling, grammar and
Harvard referencing.
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