School of Accounting & Commercial Law

ACCY 231 Financial Accounting

Trimester 1 2021
Tutorial 6 Week 9
Questions based on Wiley & Sons Texts
_________________________________________________________________________

QUESTION ONE

List and briefly describe the five steps in the revenue recognition cycle

Solution

The five steps in the revenue recognition process are:

1. Identify the contract with customers.

The first step in the revenue recognition process is the identification of a contract or
contracts with the customer. A contract is an agreement between two or more parties that
creates enforceable rights or obligations. That is, the contract identifies the performance
obligations in a revenue arrangement. Contracts can be written, oral, or implied from
customary business practice. In some cases, there may be multiple contracts related to
the transaction, and accounting for each contract may or may not occur, depending on the
circumstances. These situations often develop when not only a product is provided but
some type of service is performed as well. other party.

2. Identify the separate performance obligations in the contract.

A performance obligation is a promise in a contract to provide a product or service to a
customer. This promise may be explicit, implicit, or possibly based on customary business
practice. To determine whether a performance obligation exists, the company must determine
whether the customer can benefit from the good or service on its own or together with other
readily available resources.

To determine whether the company has to account for multiple performance obligations, a
company must first provide a distinct good or service on its own or together with other
available resources. Once this condition is met, the company next evaluates whether the
product or service is distinct within the contract. In other words, if the performance obligation
is not highly dependent on, or interrelated with, other promises in the contract, then each
performance obligation should be accounted for separately. Conversely if each of these
services is interdependent and interrelated, these services are combined and reported as one
performance obligation.

3. Determine the transaction price.

The amount of consideration to which the entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties [e.g. GST].

The transaction price is the amount of consideration that a company expects to receive from
a customer in exchange for transferring goods and services. The transaction price in a contract
is often easily obtained because the customer agrees to pay a fixed amount to the company

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 over a short period of time. In other contracts, companies must consider the following factors
(1) Variable consideration, (2) constraining estimates of variable consideration, (3) Time
value of money, (4) Non-cash consideration, and (5) Consideration paid or payable to
customer.

4. Allocate the transaction price to the separate performance obligations (based on step 2)

5. Recognize revenue when each performance obligation is satisfied. This may be over time
or at a point in timeIf an entity does not satisfy a performance obligation ‘over time’, it is
satisfied ‘at a point in time’. For example, admission fees to an event would be recognised
when the event is staged. Paragraph 38 of NZ IFRS 15 provides some indicators that suggest
an entity satisfies the performance obligations by transferring control of the completed
services to the customer:

1. The entity has a present right to payment for the asset …

2. The customer has legal title to the asset …
3. The entity has transferred physical possession of the asset …
4. The customer has the significant risks and rewards of ownership of the asset …
5. The customer has accepted the asset …

QUESTION TWO

Surfside Ltd is marketing a ‘surfing bundle’ in which, for $1100, it provides customers
with a surfboard (which retails separately for $850), a wetsuit (which retails separately
for $250) and five lessons (which retail separately for $200). You are required to
determine:

a. Whether separate performance obligations exist, and to explain

why you made this judgement.
b. How much of the transaction price to allocate to each performance
obligation.

Solution

If an entity is performing its responsibilities under a contract to a customer in a manner where

the performance obligations are being satisfied ‘over time’ (rather than at a ‘point in time’),
what are the alternative approaches to measuring the level of progress that depict the transfer
of goods and services to the customer?

(a) In this case there are three performance obligations that need to be accounted for
separately and Surfside Ltd must allocate the total contract price between the
surfboard, wetsuit, and surfing lessons. Each of these separate components could be
supplied individually.

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(b) On the assumption that the discount of $200 relates to the three performance
obligations, then the discount shall be allocated to each performance obligation as
follows:

Good or service Stand-alone price Discount allocation Allocated amount

Surfboard $850 850/1300 x $200 = $131 $719
Wetsuit $250 250/1300 x $200 = $38 $212
Lessons $200 200/1300 x $200 = $31 $169
$1,300 $200 $1100

QUESTION THREE

Alissa Ltd provides a bundled service offering to Customer B. It charges Customer B $35 000
for initial connection to its network and two ongoing services — access to the network for 1
year and ‘on-call troubleshooting’ advice for that year.
Customer B pays the $35 000 upfront, on 1 July 2020. Alissa Ltd determines that, if it were to
charge a separate fee for each service if sold separately, the fee would be:

Connection fee $ 5 000

Access fee 12 000
Troubleshooting 23 000

The end of Alissa Ltd’s reporting period is 30 June.

Required
Prepare the journal entries to record this transaction in accordance with NZ IFRS 15 for the
year ended 30 June 2021, assuming Alissa Ltd applies the relative fair value approach. Show
all workings.
Solution

Fair value of each Allocation of fair value Allocated amount

component if sold to total consideration
separately
Connection fee 5 000 5 000/40 000 x 35 000 4 375
Access fee 12 000 12 000/40 000 x 35 000 10 500
Troubleshooting 23 000 23 000/40 000 x 35 000 20 125
Total 40 000 35 000
Suggested solution
At inception of the agreement (1/7/20):
DR Cash 35 000
CR Revenue – connection fee 4 375
CR Liability – obligation to provide access to network 10 500
CR Liability – obligation to provide troubleshooting advice 20 125

The undelivered elements (i.e. the ongoing access and on-call troubleshooting) will be
recognised when those services are delivered. Because these are available to Customer B
continuously over the period of the agreement the revenue should be recognised in accordance
with paragraph 35 of NZ IFRS 15 (i.e. on a straight-line basis).

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Since this agreement is for1 year Alissa Ltd would record the following over the year ended
30 June 2021:

DR Liability – obligation to provide access to network 10 500

DR Liability – obligation to provide troubleshooting advice 20 125
CR Revenue 30 625

QUESTION FOUR

In each of the following situations, state at which date, if any, revenue will be recognised.

1. A contract for the sale of goods is entered into on 1 May 2022. The goods are delivered on
15 May 2022. The buyer pays for the goods on 30 May 2022. The contract contains a
clause that entitles the buyer to rescind the purchase at any time. This is in addition to
normal warranty conditions.
2. A contract for the sale of goods is entered into on 1 May 2022. The goods are delivered on
15 May 2022. The buyer 7pays for the goods on 30 May 2022. The contract contains a
clause that entitles the buyer to return the goods up until 30 June 2022 if the goods do not
perform according to their specification.
3. A contract for the sale of goods is entered into on 1 May 2022. The goods are delivered on
15 May 2022. The contract contains a clause that states that the buyer shall pay only for
those goods that it sells to a third party for the period ended 31 August 2022. Any goods
not sold to a third party by that date will be returned to the seller.
4. Retail goods are sold with normal provisions allowing the customer to return the goods if
the goods do not perform satisfactorily. The goods are invoiced on 1 May 2022 and the
customer pays cash for them on that date.

Solutions

1. No revenue is recognised because the customer has the right to rescind the purchase at any
time – beyond normal warranty conditions. The cash is recorded on receipt with the credit
being recorded as a borrowing.
2. Revenue is recognised on 30 June 2022. This is the date at which the seller has no further
performance obligations.
3. Revenue is recognised only at the dates the buyer on-sells the goods to a third party.
4. Revenue is recognised on 1 May 2022. The right of return is a normal warranty clause and
is included in determining the measurement of the revenue.

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 School of Accounting & Commercial Law
ACCY 231 Financial Accounting
Trimester 1 2021
Tutorial 7 Week 10
Questions based on Wiley & Sons Texts
_________________________________________________________________________

QUESTION ONE

Exercise 5.18

Revaluation model

On 1 July 2019, Peewee Ltd acquired two assets within the same class of plant and
equipment. Information on these assets is as follows.

The machines are expected to generate benefits evenly over their useful lives. The class
of plant and equipment is measured using fair value.

At 30 June 2020, information about the assets is as follows.

On 1 January 2021, Machine B was sold for $29 000 cash. On the same day, Peewee Ltd
acquired Machine C for $80 000 cash. Machine C has an expected useful life of 4 years.
Peewee Ltd also made a bonus issue of 10 000 shares at $1 per share, using $8000 from
the general reserve and $2000 from the asset revaluation surplus created as a result of
measuring Machine A at fair value.

At 30 June 2021, information on the machines is as follows.

Required
1. Prepare the journal entries in the records of Peewee Ltd to record the events for the year
ended 30 June 2020.

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2. Prepare journal entries to record the events for the year ended 30 June 2021.

Suggested solutions
PEEWEE LTD
1)

1 July 2019

Machine A Dr 100 000

Machine B Dr 60 000
Cash Cr 160 000

30 June 2020

Depreciation expense – Machine A Dr 20 000

Accumulated depreciation – Machine A Cr 20 000
(1/5 x $100 000)

Depreciation expense – Machine B Dr 20 000

Accumulated depreciation – Machine B Cr 20 000
(1/3 x $60 000)

Accumulated depreciation- Machine A Dr 20 000

Machine A Cr 20 000
(Writing down to carrying amount)

Machine A Dr 4 000
Gain on revaluation of Machine A (OCI) Cr 4 000
(Revaluation increment: $80 000 to $84 000)
Gain on revaluation of Machine A (OCI) Dr 4 000
Asset revaluation surplus – Machine A Cr 4 000
(Accumulation of net revaluation gain in equity))

Accumulated depreciation – Machine B Dr 20 000

Machine B Cr 20 000
(Writing down to carrying amount)

Loss on revaluation – Machine B (P&L) Dr 2 000

Machine B Cr 2 000
(Revaluation to fair value at 30/6/20)

2) 1 January 2021

Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of machine C)

Depreciation expense – Machine B Dr 9 500

Accumulated depreciation – Machine B Cr 9 500

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 (1/2 x /1/2 x $38 000)

Cash Dr 29 000
Accumulated depreciation – Machine B Dr 9 500
Machine Cr 38 000
Gain on sale of Machine B Cr 500
(Sale of machine B)

General reserve Dr 8 000

Asset revaluation surplus – Machine A Dr 2 000
Share Capital Cr 10 000
(Issue of bonus share from General reserve and Asset revaluation reserve surplus
Machine A)

30 June 2021

Depreciation expense – Machine A Dr 21 000

Accumulated depreciation – Machine A Cr 21 000
(1/4 x $84 000)

Depreciation expense – Machine C Dr 10 000

Accumulated depreciation – Machine C Cr 10 000
(1/4 x ½ x $80 000)

Accumulated depreciation – Machine A Dr 21 000

Machine A Cr 21 000
(Writing down to carrying amount)

Loss on revaluation of Machine A (OCI) Dr 2 000

Machine A Cr 2 000
(Write down of plant from $63000 to $61000)

Asset revaluation surplus – Machine A Dr 2 000

Loss on revaluation of Machine A (OCI) Cr 2 000
(Accumulation of revaluation loss to equity)

Accumulated depreciation – Machine C Dr 10 000

Machine C Cr 10 000
(Writing down to carrying amount)
Loss on revaluation (P&L) Dr 1 500
Machine C Cr 1 500
(Revaluation to fair value at 30/6/21)

QUESTION TWO

Check the following cases to understand how to apply your knowledge about PPE in the real
world.

Case study 1: Fair value basis for measurement

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The management of Ransom Ltd has decided to use the fair value basis for the
measurement of its equipment. Some of this equipment is very hard to obtain and has in
fact increased in value over the current period. Management is arguing that, as there
has been no decline in fair value, no depreciation should be charged on these pieces of
equipment.

Required
Discuss management’s position.

Depreciation is an allocation of an asset’s depreciable amount over its useful life. Hence,
depreciation is necessary to account for the use of an asset. If management considers that the
fair value of the asset has increased, separate journal entries are required to reflect this
detailing: 1) write off of accumulated depreciation, and 2) revaluation of the asset.

Case study 2: Straight-line vs. diminishing balance depreciation

Silence Ltd uses tractors as part of its operating equipment, and it applies the straight-
line depreciation method to these assets. Silence Ltd has just taken over Lambs Ltd,
which uses similar tractors in its operations. However, Lambs Ltd has been using a
diminishing balance method of depreciation for these tractors. The accountant in
Silence Ltd is arguing that for both entities the same depreciation method should be
used for tractors.

Required
Provide arguments for and against this proposal.

The depreciation method used should reflect the pattern of future economic benefits expected
to be received by the entity. As such, choice is based on which method best reflects the
pattern of benefits expected to be received by the asset given its use in the specific entity
(Lambs Ltd).

While the accountant’s suggestion would make comparability of the two companies’
performance easier, convenience should not be the basis for choosing the appropriate
deprecation method.

Case study 3: Annual depreciation charge

A company is in the movie rental business. Movies are generally rented for 2 years and
then either sold or destroyed. However, management wants to show increased profits,
and believes that the annual depreciation charge can be lowered by keeping the movies
for 3 years.

Required
Discuss management’s position.

Useful life is the period over which an asset is expected to be available for use. Hence, if
movies are typically kept for 2 years based on past business experience, this timeframe
should be used as the useful life. As such, there is no reasonable basis for management’s
suggestion/position.

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Case study 4: Depreciation charges

A new accountant has been appointed to Outlander Ltd and has implemented major
changes in the calculation of depreciation. As a result, some parts of the factory have
much larger depreciation charges. This has angered some operations managers who
believe that, as they take particular care with the maintenance of their machines, their
machines should not attract large depreciation charges that reduce the profitability of
their operations and reflect badly on their management skills. The operations managers
plan to meet the accountant and ask for change.

Required
Explain how the new accountant should respond.

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful
life. It is a necessary expense to reflect the pattern of economic benefit derived from the
asset, and the accountant should make this clear to the mangers. However, if maintenance of
the machines is extending their useful lives, this should be examined by the accountant to
consider if a change to the depreciation calculation is required.

Case study 5: Depreciation charges

The management of Predator Ltd has been analysing the financial reports provided by
the accountant, who has been with the firm for a number of years. Management has
expressed its concern over depreciation charges being made in relation to the
company’s equipment. In particular, they believe that the depreciation charges are not
high enough in relation to the factory machines because new technology applied in that
area is rapidly making the machines obsolete. Management’s concern is that the
machines will have to be replaced in the near future and, with the low depreciation
charges, the funds will not be sufficient to pay for the replacement machines.

Required
Discuss management’s position.

The impact of new technology on existing machines (i.e. making them obsolete) is relevant to
depreciation calculations, as it impacts on their useful life. Hence, if the useful life has not
been updated to reflect this information, such changes are necessary.

The concern regarding low depreciation charges resulting in insufficient funds for
replacement machines is unfounded. Depreciation is not a cash expense, and therefore has no
effect on cash flow. Cash would normally have been spent at the time of
purchase/acquisition.

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 School of Accounting & Commercial Law
ACCY 231 Financial Accounting
Trimester 1 2021
Tutorial 8 Week 12
Questions based on Wiley & Sons Texts
_________________________________________________________________________

QUESTION ONE: Impairment of assets

Crossbow Ltd is an entity that specialises in the manufacture of leather footwear for women.
It has aggressively undertaken a strategy of buying out other companies that had competing
products. These companies were liquidated and the assets and liabilities brought into
Crossbow Ltd.

At 30 June 2022, Crossbow Ltd reported the following assets in its statement of financial
position.

In response to competition from overseas, as customers increasingly buy online rather than
visit Crossbow Ltd’s stores, Crossbow Ltd assessed its impairment position at 30 June 2022.
The indicators suggested that an impairment loss was probable. Crossbow Ltd calculated a
recoverable amount of its company of $2 840 000.

Required
Prepare the journal entry(ies) for any impairment loss occurring at 30 June 2022. (LO5)

Solution

Carrying amount of assets = $3 000 000

Recoverable amount = $2 840 000
Impairment loss = $160 000

The impairment loss is firstly used to write off the goodwill of $80 000.

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The balance of the loss, $80 000, is allocated across the other assets, except for cash and
inventory, assuming the latter is recorded at the lower of cost and net realisable value:

Carrying Proportion Allocation Net carrying

amount of loss amount
$ $ $
Brand 320 000 32/252 10 158 309 842
Factory 1 400 000 140/252 44 444 1 355 556
Machinery 800 000 80/252 25 398 774 602
2 520 000 80 000

The journal entry to record the impairment loss is:

Impairment loss Dr 160 000

Goodwill Cr 80 000
Accum. amortis. and impairment losses – brand Cr 10 158
Accum. deprec. and impairment losses – factory Cr 44 444
Accum. deprec. and impairment losses – machinery Cr 25 398
(Allocation of impairment loss)

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QUESTION TWO: Impairment of assets

The Scenic City Council contracts out the bus routes in Scenic City to various subcontractors
based on a tender arrangement. Some routes, such as the Express to City routes, are
profitable, while others, such as those collecting schoolchildren from remote areas, are
unprofitable. As a result, the council requires tenderers to take a package of routes, some
profitable, some less so.

The Saferide Bus Company has won the contract to operate its buses with a package of five
separate routes, one of which operates at a significant loss. Specific buses are allocated by the
Saferide Bus Company to each route, and cash flows can be isolated to each route because
drivers and takings are specific to each route.

Required
Write a report to the accountant of Saferide Bus Company which includes the following
information.
1. An explanation of why impairment testing may require the use of CGUs, rather than
being based on a single asset.
2. An explanation of the factors that should be considered in determining a CGU for
Saferide Bus Company.
3. Your determination as to the identification of CGUs for Saferide Bus Company.

Solution

A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash
flows that are largely independent of the cash inflows from other assets or groups of assets.

The impairment test requires a comparison of the recoverable amount of an asset with the
higher of the asset’s value in use and fair value less costs of disposal.

Value in use requires:

 An estimate of the future cash flows the entity expects to derive from the asset.
 Expectations about variety in timing of cash flows.
 The price for bearing the uncertainty inherent in the asset.

These cash flows are based upon data such as financial budgets and forecasts.

For some assets, there are no cash flows that are generated independently from those of other
assets. The eventual cash flows come from operating the bus routes. The assets, such as the
buses, could be sold separately, giving a fair value less costs of disposal. However, as
management have decided to operate the bus routes, management’s view, presumably, is that
their value in use is greater than their fair value through sale.

It is possible to determine the profitability of each route as costs and revenues can be isolated
to each route. However, as the council contracts for a package of routes, it is not possible to
stop operating a single route in the package. Hence, the tender for the package is based on the
group of routes as a package.

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The lowest level of identifiable cash flows that are largely independent of the cash flows
from other assets is the cash flows of the package of routes. The cash-generating unit is then
the package of routes.

QUESTION THREE: Intangible assets

Sandy Beach Ltd’s research and development section has come up with an idea for a project
on using cane toad poison for medicinal purposes. The board of directors of Sandy Beach Ltd
believes that the project has promise and could lead to future profits for the firm. The project
is, however, very expensive and needs approval from the board.

The company’s chief financial officer, Mr Stone, has expressed concern that the profits of the
firm have not been strong in recent years and he does not want to see research and
development costs charged as expenses to the profit or loss. Mr Stone has proposed that
Sandy Beach Ltd should hire an outside firm, Shell Ltd, to undertake the work and obtain the
patent. Sandy Beach Ltd could then acquire the patent from Shell Ltd, with no effect on the
profit or loss of Sandy Beach Ltd.

Required
Discuss whether Mr Stone’s proposal is a sound idea, particularly in relation to the effect on
the profit or loss of Sandy Beach Ltd. (LO4)

Solutions
If the project is undertaken internally then all costs of research must be expensed, while
costs of development cannot be capitalised until all the criteria in paragraph 57 of AASB
138/IAS 38 are met.

Mr Stone is correct in his assertion that undertaking this project internally will have an
effect on future profits as the project progresses.

Mr Stone is also correct in relation to the use of outside consultants, Shell Ltd.

Sandy Beach Ltd could acquire in-process research/development from Shell Ltd and
recognise this as an asset. Recognition of any asset needs to meet the recognition
requirements in the Framework, however the expected benefits would have to be
probable. This means that in relation to early research this test may be hard to meet.

It would be better to make large payments at extended intervals, e.g. $x in 1 years ’ time,
rather than monthly payments, as at the first monthly payment it would be harder to meet
the probable expected benefits test.

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1. In general, the differences between the accounting treatment and the income tax treatment of a
particular item if that the accounting treatment is based on:

a. the income tax legislation.

b. cash flows.
c. cash flows adjusted for depreciation charges.
*d. accrual accounting and is subject to the requirements of accounting standards.

2. Current tax consequences of business operations are recognised as:

*a. a current liability for income tax payable.

b. a non-current liability for taxes payable.
c. a contingent liability for taxes payable.
d. a deferred liability for income tax payable.

3. If a company has not yet paid their existing tax payable they will recognise a in the
statement of financial position.

a. current tax asset.

b. non-current asset.
*c. current tax liability.
d. non-current liability.
4. The assumption made for the tax effect method of accounting for a company’s income tax is:

a. income tax expense is equal to income tax payable.

*b. income tax expense is not equal to current tax liability.
c. an accounting balance sheet and a tax balance sheet are the same.
d. a tax balance sheet is prepared according to accounting standards.

5. Omega Limited has an accounting profit before tax of $400 000. All of the following items have
been included in the accounting profit: depreciation of plant $70 000 (tax deductible depreciation is
$50 000); entertainment expenses $10 000 (non-deductible for tax purposes); Long service leave
expense provided $12 000 (no employee took long service leave during the year). The tax rate is
30%. The amount of current tax liability is:

a. $147 600
*b. $132 600
c. $107 400
d. $120 000

6. Amigos Limited has an asset with a carrying value of $60 000. The tax base of this asset is $40 000.
The tax rate is 30%. The deferred tax item to be recognised by Amigos Limited is:

a. Deferred tax liability of $20 000.

b. Deferred tax asset of $20 000.
*c. Deferred tax liability of $6000.
d. Deferred tax asset of $6000.

7. Differences between the carrying amounts of an entity’s net assets determined under accounting
standards and accrual accounting, and the tax bases of those net assets determined under the Income
Tax Assessment Act, are known as:

a. tax losses.
*b. temporary differences.
c. permanent differences.
d. the current income tax liability.

8. A taxable temporary difference leads to the payment of:

a. more tax in the future and gives rise to a deferred tax asset.
b. less tax in the future and gives rise to a deferred tax asset.
c. less tax in the future and gives rise to a deferred tax liability.
*d. more tax in the future and gives rise to a deferred tax liability.
9. A deductible temporary difference leads to the payment of:

*a. less tax in the future and gives rise to a deferred tax asset.
b. more tax in the future and gives rise to a deferred tax asset.
c. more tax in the future and gives rise to a deferred tax liability.
d. less tax in the future and gives rise to a deferred tax liability.

10. Colonial Limited has a machine which cost $300 000 and has been depreciated by $100 000 to date.
The accumulated depreciation for tax purposes is $180 000 and the company tax rate is 30%. The
tax base of this asset is:

a. $54 000
b. $60 000
*c. $120 000
d. $200 000

11. At which time are deferred tax accounting adjustments to be recorded?

a. At balance date.
*b. At the end of each month.
c. When each transaction arises.
d. When the cash flows from each transaction occur.

12. NZIAS 12 Incomes Taxes requires deferred tax assets and liabilities to be measured at the tax rates
that:

a. prevail at the reporting date.

b. applied at the end of the reporting period.
c. applied at the beginning of the reporting period.
*d. are expected to apply when the asset is realised or the liability is settled.

13. Mangrove Limited has a product warranty liability valued at $12 000. The product warranty costs
are not tax deductible until paid out to customers. The company tax rate is 30%. The company has:

*a. a deductible temporary difference of $12 000.

b. a taxable temporary difference of $12 000.
c. a deferred tax asset of $12 000.
d. a future deductible amount of $0.

14. The following information was extracted from the financial records of Pineapple Limited:
Equipment purchased on 1 July 2021 for $200 000 (accounting depreciation 10% straight line; tax
depreciation 15% straight line). If the company tax rate is 30%, the deferred tax item that will be
recorded by Pineapple Limited at 30 June 2022 is:

a. CR Deferred tax asset $3000.

b. DR Deferred tax asset $3000.
*c. CR Deferred tax liability $3000.
d. DR Deferred tax liability $3000.

15. Maleny Limited accrued $40 000 for employees’ long service leave in the year ended 30 June 2021.
This item will not be tax deductible until it is paid in approximately 5 years’ time. Assuming the
company tax rate is 30%, Maleny Limited must record the following tax effect as a balance date
adjustment:

*a. DR Deferred tax asset $12 000.

b. DR Deferred tax liability $12 000.
c. CR Deferred tax asset $12 000.
d. CR Deferred tax liability $12 000.
16. The deferred tax balances of Jensen at reporting date were Deferred tax assets = $32 000 and
Deferred tax liabilities = $55 000. Effective from the first day of the next financial period, the company
rate of income tax was reduced from 40% to 35%. The adjustment to income tax expense to recognise
the impact of the tax rate change is:

a. DR $3 286.
b. CR $3 286.
c. DR $2 875.
*d. CR $2 875.

17. On 1 November 2021, the company rate of income tax was changed from 35% to 30%. At the
previous reporting date (30 June 2021) Montgomery Limited had the Deferred tax assets = $33 500,
and Deferred tax liabilities = $18 000. What is the impact of the tax rate change on income tax
expense?

a. Increase $2 583.
b. Decrease $2 583.
*c. Increase $2 214.
d. Decrease $2 214.
Application and analysis exercises

Exercise 15.1

Definitions

State which of the following meets the definition of ‘revenue’ under AASB 15/IFRS 15 for
Toys2U Ltd, a retailer of toys. Give reasons for your answer.
1. Sales tax collected on behalf of the taxation authority.
2. Gain on the sale of an investment property.
3. Amounts receivable from customers who have purchased toys.
4. Gain on the sale of equity securities held as investments.
5. Revaluation increase on the revaluation of operating properties under AASB 116/IAS 16.
(LO1, LO2 and LO4)

1. No, this is an agency relationship.

2. No, this is not ordinary operations.
3. Yes, this falls within ordinary operations.
4. No, this is outside of the scope of AASB 15/IFRS 15.
5. No, this is not ordinary operations.
Exercise 15.2

Definitions, scope

State whether each of the following is true or false.

1. ‘Income’ means the same as ‘revenue’.”
2. ‘Gains’ are always recognised net under IFRSs.
3. ‘Revenue’ must always be in respect of an entity’s ordinary operations
4. ‘Gains’ must always be outside of an entity’s ordinary operations.
5. Services provided under a construction contract are accounted for under AASB 15/IFRS
15.
(LO1, LO2 and LO3)

1. False
2. False
3. True
4. False
5. True.
Exercise 15.3

Measurement

State whether each of the following is true or false.

1. Revenue is measured at the fair value of the consideration given by the seller.
2. Revenue is measured at the transaction price that is allocated to that performance obligation.
3. If payment for the goods or services is deferred, the fair value of the consideration will be less
than the nominal amount of the cash receivable.
4. A swap or exchange for goods or services of a similar nature and value generates revenue.
5. Collectability of amounts due from customers is a measurement issue, not a recognition issue.
(LO3)

1. False. Revenue is measured at the fair value of the consideration received or receivable by the
seller.
2. True.
3. True.
4. False.
5. True.
Exercise 15.4

Recognition

What is an ‘executory contract’? How does this affect the dates on which revenue is recognised
under the conceptual framework? (LO4)

An executory contract (also known as an agreement equally proportionately unperformed) is one where
neither party to the contract has performed their obligations. In the case of such agreements no asset or
liability exists under the conceptual framework.

Only when the seller performs its obligation under the contract (usually at the delivery date) is it
entitled to receive payment. It has an asset and revenue under the conceptual framework at that date.
Exercise 15.5

Measurement – dates for recognition

SodaPop Ltd sells plastic bottles. Wholesale customers that purchase more than 10 000 bottles
per month are entitled to a discount of 8% on their purchases. On 1 March 2022, Customer P
ordered 20 crates of bottles from SodaPop Ltd. Each crate contains 1000 bottles. The normal
selling price per crate is $450. SodaPop Ltd delivered the 20 crates on 15 March 2022. Customer
P paid for the goods on 15 April 2022. The end of SodaPop Ltd’s reporting period is 30 June.

Required
Prepare the journal entries to record this transaction by SodaPop Ltd for the year ended 30 June
2022. (LO4)

20 crates x $450 per crate = $9 000

Customer P is entitled to the discount because total bottles purchased = 20 000
Discount = $9 000 x 8% = $720

Therefore, the amount net of the discount is $8 280. This is the amount to be recognised as revenue in
accordance with AASB 15/IFRS 15.

1 March 2022
No entry (date of order)

15 March 2022
Receivable Dr 8 280
Revenue Cr 8 280
(To record the receivable and revenue at the date of delivery)

15 April 2022
Cash Dr 8 280
Receivable Cr 8 280
(To record the cash received and recovery of the receivable)
 MCQs: Revenue

1. Which of the following is not an example of an agency arrangement where the selling
entity would recognise revenue on a net basis?

a. A retailer selling goods to a customer for $88 and remitting $8 GST to the government.
b. A travel agent selling a cruise ticket to a customer, charging the customer $2 000 and
remitting $1 800 to the cruise liner company.
c. A licensed hotel selling keno tickets to customers for $5.00 and remitting $4.50 per ticket
to the state gaming authority.
*d. A distributor receiving stock from its supplier on a sale-or-return basis. The sales price
per unit is $100 and the cost per unit is $60.

Answer: d
Learning objective 15.2: explain the definition of ‘income’ under the conceptual framework
and distinguish it from the definition of ‘revenue’.

2. The two categories of income, as specified in the Conceptual Framework, are:

a. income and revenue.

b. income and gains.
*c. revenue and gains.
d. revenue and profits.

Answer: c
Learning objective 15.2: explain the definition of ‘income’ under the conceptual framework
and distinguish it from the definition of ‘revenue’.
3. Which of the following is not a step in the recognition of revenue?

a. Recognise revenue when the entity satisfies a performance obligation.

*b. Allocate the buying price to the goods or services.
c. Identify the performance obligation.
d. Determine the transaction price.

Answer: b
Learning objective 15.3: explain and apply the five steps in recognising revenue.

4. Which of the following are part of the criteria that must be met when accounting for a
contract with a customer?

I. Commercial substance.
II. Approval of contract by all parties.
III. Identification of the payment terms for the goods/services.
IV. The collection of the consideration from the customer is remote.

a. I, III and IV.

b. II and III only.
c. I, II and IV.
*d. I, II and III.

Answer: d
Learning objective 15.3: explain and apply the five steps in recognising revenue.

5. The first step in the recognition of revenue is:

a. determine the transaction price.

b. identify the performance obligation in the contract.
*c. identify the contract or contracts with the customer.
d. allocate the transaction price to the performance obligation.

Answer: c
Learning objective 15.3: explain and apply the five steps in recognising revenue.
6. “The amount of consideration to which the entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties” is the definition of:

a. the contract.
b. the consideration.
c. the performance obligation.
*d. the transaction price.

Answer: d
Learning objective 15.3: explain and apply the five steps in recognising revenue.

7. Natural Designs sells furniture on 12 months’ interest free terms to qualifying customers.
On 30 June 2022, Natural Designs sells $20 000 of furniture to T. Bailey, payable by 30
June 2023. The appropriate interest rate for this transaction is determined to be 6% per
annum. The present value of the $20 000 to be received in one year’s time is $18 868.
The journal entry to be recorded by Natural Designs at 30 June 2022 is:

a. DR Bank $20 000; CR Receivable $20 000.

b. DR Receivable $20 000; CR Sales revenue $20 000.
c. DR Receivable $20 000; CR Sales revenue $18 868; CR Interest revenue $1 132.
*d. DR Receivable $20 000; CR Sales revenue $18 868; CR Deferred interest $1 132.

Answer: d
Learning objective 15.3: explain and apply the five steps in recognising revenue.

8. Which of the following statements relating to the identification of the performance

obligation is incorrect?

*a. The good or service to be transferred to the customer is non-distinct.

b. The entity promises to transfer a distinct, or a series of distinct, goods or services to the
customer.
c. The customer can benefit from the good or service on its own or in conjunction with other
readily available resources.
d. The entity’s promise to transfer the good or service to the customer is separately
identifiable in the contract.

Answer: a
Learning objective 15.3: explain and apply the five steps in recognising revenue.
9. When allocating the transaction price for a contract with a customer, the ‘expected cost
plus a margin approach’ requires the entity to:

a. evaluate the market in which it purchases goods or services and estimate the price that a
customer in that market would be willing to pay for those goods or services.
*b. forecast its expected costs of satisfying a performance obligation and then add an
appropriate margin for that good or service.
c. allocate the price for the goods or services on an ‘in-combination’ basis.
d. evaluate the market in which it sells goods or services and estimate the price that a
customer in that market would be willing to pay for those goods or services.

Answer: b
Learning objective 15.3: explain and apply the five steps in recognising revenue.

10. Which of the following is not a condition to be satisfied when recognising revenue from
the sale of goods or services?

*a. The seller retains control over the goods.

b. Reliable measurement of the transaction costs.
c. The probability of future economic benefits flowing to the seller.
d. Transfer of the significant risks and rewards of ownership of the goods from the seller to
the buyer.

Answer: a
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.

11. Abbott Ltd sells goods to Costello Ltd and issues an invoice on 10 August. On that date,
Costello Ltd requests that Abbott Ltd delay delivery of the goods until the 25 August
when they expect to have finished preparing their site for the goods. The goods can then
be delivered on 26 August. Costello Ltd pays for the goods on 12 August and accepts full
responsibility for the goods from this payment date. Assuming all other revenue
recognition criteria are met, on which date can Abbott Ltd recognise revenue for the sale
of these goods?

a. 25 August.
*b. 10 August.
c. 12 August.
d. 26 August.

Answer: b
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.

12. Lily Ltd sells and delivers goods to Rose Ltd on 13 March. Both parties agree that Rose
Ltd will hold the goods on consignment to be sold to third parties. Rose Ltd is not
 required to pay Lily Ltd for the goods until they are sold to a third party. Which of the
following statements is incorrect?

a. Lily Ltd does not recognise any revenue until Rose Ltd has on-sold goods to a third party.
b. Lily Ltd retains the risks and rewards of ownership of the goods after delivery to Rose Ltd.
*c. Lily Ltd recognises revenue on 13 March for the sale of goods to Rose Ltd.
d. At the time of delivery of the goods to Rose Ltd there is no probability that future
economic benefits will flow to Lily Ltd.

Answer: c
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.

13. Wiseman Ltd is offering the following conditions to customers who purchase goods with
a minimum total of $5 000 in the one transaction:

 Initial deposit of 25% of purchase price.

 Immediate delivery of goods purchased.
 Interest rate of 10% p.a. charged on the outstanding balance.
 Repayment of the balance (including the interest) over 36 equal monthly instalments.
 Wiseman Ltd retains legal title to the goods until the final monthly payment has been
made.

Wiseman Ltd would recognise revenue as follows:

a. recognise the whole amount of revenue at purchase date.

b. recognise all revenue as it is received
c. recognise interest as it is received (monthly) and recognise the revenue on the sale of the
goods at purchase date.
*d. recognise interest as it is received (monthly) and recognise the revenue on the sale of the
goods once the final payment has been received.

Answer: d
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.
14. Which of the following is not a condition that needs to be satisfied prior to recognising
revenue from the rendering of services using the ‘percentage of completion’ method?

*a. The contract is non-cancellable.

b. The amount of revenue can be measured reliably.
c. The stage of completion of the transaction can be measured reliably.
d. The costs of the transaction (including future costs) can be measured reliably.

Answer: a
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.

15. Which of the following is not an example of an entity retaining significant risks and
rewards of ownership?

a. The entity retains an obligation for unsatisfactory performance not covered by normal
warranty provisions.
b. The goods are shipped subject to installation, and the installation is a significant part of the
contract that has not yet been completed by the entity.
*c. The buyer has the right to rescind the purchase for a reason specified in the sales contract.
The entity is confident that this option will not be exercised.
d. The receipt of revenue from a sale is contingent on the buyer reselling the goods.

Answer: c
Learning objective 15.4: explain and apply the recognition criteria for revenue,
distinguishing between the sale of goods and the rendering of services.
Fair value basis for measurement

The management of Rocky Ltd has decided to use the fair value basis for the measurement of its
equipment. Some of this equipment is difficult to obtain and has in fact increased in value over
the current period. Management is arguing that, as there has been no decline in fair value, no
depreciation should be charged on these pieces of equipment.
Required
Discuss management’s position.

Depreciation is an allocation of an asset’s depreciable amount over its useful life. Hence, depreciation
is necessary to account for the use of an asset. If management considers that the fair value of the asset
has increased, separate journal entries are required to reflect this detailing: 1) write off of accumulated
depreciation, and 2) revaluation of the asset.

Case study 5.2

Straight-line vs. diminishing balance depreciation

Ag Ltd uses tractors as part of its operating equipment, and it applies the straight-line
depreciation method to these assets. Ag Ltd has just taken over Spector Ltd, which uses similar
tractors in its operations. However, Spector Ltd has been using a diminishing balance method of
depreciation for these tractors. The accountant in Ag Ltd is arguing that for both entities the
same depreciation method should be used for tractors.
Required
Provide arguments for and against this proposal.

The depreciation method used should reflect the pattern of future economic benefits expected to be
received by the entity. As such, choice is based on which method best reflects the pattern of benefits
expected to be received by the asset given its use in the specific entity. While the accountant’s
suggestion would make comparability of the two companies’ performance easier, convenience should
not be the basis for choosing the appropriate deprecation method.

1
Exercise 5.1

Revaluation adjustments and reversals

On 1 January 2022, Lima Ltd revalued land from $200 000 to $400 000. On 1 January 2023, the
company subsequently revalued the land to $320 000. And on 1 January 2024, the company again
revalued the asset downwards to $160 000.

Required
Prepare the journal entries required to record the revaluation adjustment for the year ended:
1. 30 June 2022.
2. 30 June 2023.
3. 30 June 2024.

1. 30 June 2022
Land Dr 200 000
Gain on revaluation – Land (OCI) Cr 200 000
(Revaluation of Land from $200 000 to $400 000)

Gain on revaluation – Land (OCI) Dr 200 000

Asset revaluation surplus – Land Cr 200 000
(Accumulation of revaluation gain in equity)
(Please see my lecture slide No 49)
2. 30 June 2023
Loss on revaluation – Land (OCI) Dr 80 000
Land Cr 80 000
(Revaluation of land from $400 000 to $320 000, partially reversing a revaluation
increase)

Asset revaluation surplus – Land Dr 80 000

Loss on revaluation – Land (OCI) Cr 80 000
(Accumulation of revaluation loss in equity)

3. 30 June 2024
Loss on revaluation – Land (OCI) Dr 120 000
Loss on revaluation – Land (P&L) Dr 40 000
Land Cr 160 000
(Revaluation of land from $320 000 to $160 000, partially reversing a revaluation
increase, and recognising a further decrease beyond the original accounting value)

Asset revaluation surplus – Land Dr 120 000

Loss on revaluation – Land (OCI) Cr 120 000
(Accumulation of revaluation loss in equity)
(Please see my lecture slide No 53 & 58)

2
Exercise 5.2

Revaluation adjustments and reversals

The following data from Lyre Ltd’s accounts relates to two assets at 30 June 2021.

Asset Value Accumulated depreciation Carrying amount

Land $ 2 400 000 0 $ 2 400 000
Plant and equipment $ 300 000 $ 60 000 $ 240 000

At 30 June 2021 Lyre Ltd decides to adopt the revaluation model for both these assets. On this date
land has a fair value of $2 250 000 and plant and equipment has a fair value of $330 000. On 30 June
2022 Lyre Ltd reviews the value of its assets. The fair value of land is reassessed as $2 325 000. Plant
and equipment has no change in value on that date.

Required
Prepare the journal entries required to revalue the assets for the year ended 30 June 2021 and the 30
June 2022.

30 June 2021

Loss on revaluation – Land (P&L) Dr 150 000

Land Cr 150 000
(Revaluation of land from $2 400 000 to $2 250 000)

Accumulated depreciation – P&E Dr 60 000

Plant and Equipment Cr 60 000
(Writing the plant & equipment down to carrying amount)

Plant and Equipment Dr 90 000

Gain on revaluation – P&E (OCI) Cr 90 000
(Revaluation of plant & equipment from $240 000 to $330 000)

Gain on revaluation – P&E (OCI) Dr 90 000

Asset revaluation surplus – P&E Cr 90 000
(Accumulation of revaluation gain of plant & equipment in equity)

30 June 2022

Land Dr 75 000
Gain on revaluation – Land (P&L) Cr 75 000
(Revaluation of land from $2 250 000 to $2 325 000, partially reversing a previous revaluation
decrease)

3
Depreciation

Sejenis Ltd constructed a building for use by its freight department. The completion date was 1
July 2015, and the construction cost was $840 000. The company expected to remain in the
building for the next 20 years, at which time the building would probably have no real salvage
value.

In December 2021, following some severe weather in the city, the roof of the administration
building was considered to be in poor shape so the company decided to replace it. On 1 July 2022,
a new roof was installed at a cost of $220 000. The new roof was of a different material to the old
roof, which was estimated to have cost only $140 000 in the original construction, although at the
time of construction it was thought that the roof would last for the 20 years that the company
expected to use the building. Because the company had spent the money replacing the roof, it
thought that it would delay construction of a new building, thereby extending the original life of
the building from 20 years to 25 years.

Required
Discuss how you would account for the depreciation of the building and how the replacement of
the roof would affect the depreciation calculations. (LO5 and LO6)

I. If the roof were treated as a separate component of the building:

Roof: depreciation p.a. = $140 000 x 1/20 = $7 000

Rest of building: depreciation p.a. = $700 000 x 1/20 = $35 000

At 1 July 2022, the roof would have been depreciated to $91 000 (being $140 000 less 7 x $7 000).
This would then be written off on replacement of the roof. The new roof would be depreciated at $12
222, being 1/18 x $220 000 p.a.

Further, the rest of the building would have a carrying amount of $455 000, being $700 000 less 7 x
$35 000. Depreciation p.a. for the next 18 years would be $25 278. Total depreciation is then $37 500.

II. If the roof were not treated as a separate component:

Depreciation p.a. = 1/20 x $840 000 = $42 000

At 1 July 2022, the building would have been depreciated to a carrying amount of $546 000, being
$840 000 – 7 x $42 000. On replacement of the roof, the total depreciable cost is $766 000, being $546
000 + $220 000. Depreciation p.a. for the next 18 years is $42 556.

4
Simon’s Turf Farm owned the following items of property, plant and equipment as at 30 June
2022.

Additional information (at 30 June 2022)

 The straight-line method of depreciation is used for all depreciable items of PPE.
Depreciation is charged to the nearest month and all figures are rounded to the nearest
dollar.
 The office building was constructed on 1 April 2018. Its estimated useful life is 20 years and it
has an estimated residual value of $40 000.
 The turf cutter was purchased on 21 January 2019, at which date it had an estimated useful
life of 5 years and an estimated residual value of $3200.
 The water desalinator was purchased and installed on 2 July 2021 at a cost of $200 000. On 30
June 2022, the plant was revalued upwards by $7000 to its fair value on that day.
Additionally, its useful life and residual value were re-estimated to 9 years and $18 000
respectively.

The following transactions occurred during the year ended 30 June 2023. (Note: All payments
are made in cash.)
(i) On 10 August 2022 new irrigation equipment was purchased from Pond Supplies for $37
000. On 16 August 2022, the business paid $500 to have the equipment delivered to the
turf farm. William Wagtail was contracted to install and test the new system. In the
course of installation, pipes worth $800 were damaged and subsequently replaced on 3
September. The irrigation system was fully operational by 19 September and William
Wagtail was paid $9600 for his services. The system has an estimated useful life of 4 years
and a residual value of $0.
(ii) On 1 December 2022, the turf cutter was traded in on a new model worth $80 000. A trade-
in allowance of $19 000 was received and the balance paid in cash. The new machine’s
useful life and residual value were estimated at 6 years and $5000 respectively.
(iii) On 1 January 2023, the turf farm’s owner decided to extend the office building by adding
three new offices and a meeting room. The extension work started on 2 February and was
completed by 28 March at a cost of $49 000. The extension is expected to increase the
useful life of the building by 4 years and increase its residual value by $5000.
(iv) On 30 June 2023, depreciation expense for the year was recorded. The fair value of the
water desalination plant was $165 000.

Required
Prepare general journal entries to record the transactions and events for the reporting period ended 30
June 2023 in relation to the following assets:
(a) Office building
(b) Turf cutters
(c) Water desalinator

5
(d) Irrigation equipment
(LO2, LO3, LO5 and LO6)

10 August 2022
Irrigation equipment Dr 37 000
Cash Cr 37 000

16 August 2022
Irrigation equipment Dr 500
Cash Cr 5000

3 September 2022
Repairs and maintenance expense Dr 800
Cash Cr 800

19 September 2022
Irrigation equipment Dr 9 600
Cash Cr 9 600

1 December 2022
Depreciation expense – Turf cutter Dr 5 150
Accum. deprec. – Turf cutter Cr 5 150
(($65 000 - $3 200) / 5 years x 5/12 = $5 150)

Carrying amount – Turf cutter Dr 17 620

Accum. deprec. – Turf cutter Dr 47 380
Turf cutter Cr 65 000

Turf cutter Dr 80 000

Cash Cr 61 000
Proceeds on sale – Turf cutter Cr 19 000

28 March 2023
Depreciation expense – Office building Dr 4 125
Accum. deprec. – Office building Cr 4 125
(($150 000 - $40 000) / 20 years x 9/12 = $4 125)

Accum. deprec. – Office building Dr 27 500

Office building Cr 27 500
($23 375 + $4 125)

Office building Dr 49 000

Cash Cr 49 000

30 June 2023
Depreciation expense – Turf cutter Dr 7 292
Accum. deprec. – Turf cutter Cr 7 292
(($80 000 - $5 000) / 6 years x 7/12 = $7 292)

6
Depreciation expense – Water desalinator Dr 19 000
Accum. deprec.– Water desalinator Cr 19 000
(($189 000 – $18 000) / 9 years = $19 000)

Depreciation expense – Irrigation eq. Dr 8 831

Accum. deprec. – Irrigation eq. Cr 8 831
(($47 100 - $0) / 4 years x 9/12 = $8 831)

Depreciation expense – Office building Dr 1 665

Accum. deprec. – Office building Cr 1 665
((($150 000 - $27 500 + $49 000) – ($40 000 + $5 000)) / (20 - 5 + 4) years x 3/12 =
$1 665)

Accum. deprec.– Water desalinator Dr 19 000

Water desalinator Cr 19 000
Writing down water desalinator to carrying amount)

Revaluation loss - Water des. (OCI) Dr 5 000

Water desalinator Cr 5 000
(Revaluation decrement from $170 000 carrying amount to $165 000 fair value
reversing a previous increment)

Asset revaluation surplus Dr 5 000

Revaluation loss - Water des.(OCI) Cr 5 000
(Reduction in equity due to revaluation decrement that reverses a previous increment)

7
1. Property, plant and equipment includes items that:

a. have no physical substance.

b. are held for resale.
*c. held for rental to others.
d. are expected to be used up within one year from date of purchase.

2. Property, plant and equipment are assets that:

a. are expected to be used up within twelve months from purchase date.

*b. are physical in nature.
c. are held for resale within the current period.
d. have a remaining productive life of less than one year.

3. The cost of property, plant and equipment is only recognised as an asset if it is probable that the
future economic benefits will flow to the entity and:

a. the asset has been fully paid for in cash.

b. the asset has been sent to the buyer.
c. it is a physical asset.
*d. the cost can be reliably measured.

4. The cost of property, plant and equipment is only recognised if the cost of the asset can be reliably
measured and:

a. the asset has been paid for in cash.

b. the asset has been received by the purchaser.
c. the cost is not directly attributable to the asset.
*d. it is probable that future economic benefits associated with the asset will flow to the entity.

5. For the purposes of recognising property, plant and equipment assets the acquisition date is the
date:

a. the consideration is paid.

*b. on which the acquirer obtains control of the asset.
c. the contract to exchange assets is signed.
d. on which the contract to acquire the asset becomes unconditional.
6. Costs that may be included in the cost of acquisition of property, plant and equipment assets
include:

I II III IV
Site preparation No Yes Yes Yes
Initial delivery and handling costs No Yes Yes No
Installation and assembly costs No No Yes Yes
Testing whether the asset is functioning No No Yes Yes

a. I.
b. II.
*c. III.
d. IV.

7. After an item of property, plant and equipment has been initially recognised at cost it may be
measured using which measurement method?

a. liquidation value.
*b. revaluation.
c. accrual.
d. net realisable value.

Answer: b
Learning objective 5.4: explain the alternative ways in which property, plant and equipment can be
measured subsequent to initial recognition.

8. Subsequent to the initial recognition of an asset an entity has a choice on the measurement basis to
be adopted. The entity can choose either:

*a. cost or revaluation.

b. cash or accrual.
c. tax or accounting.
d. current or non-current.

9. When applying the revaluation measurement model to assets, the model:

a. may only be applied to current assets.

b. is applied permanently and may not be changed.
*c. applies to the entire class of non-current assets.
d. is applied to individual assets within a class of non-current assets.
10. Depreciation is a process that is designed to:

*a. allocate the cost of an asset across its useful life to an entity.
b. reduce the carrying amount of an asset to reflect the diminishing fair value of the asset.
c. spread the cost of an asset across a period no greater than 10 years.
d. reflect the change in value of an asset due to advances in technology.

11. Under NZIAS NZIAS, the depreciation charge for a period reflects:

a. the fall in the re-sell value of the asset across the period.
*b. the consumption of economic benefits over the period.
c. a change in the market value of the asset that has occurred over the period.
d. a reduction in the estimated fair value of the asset across the period.

12. Under the cost model, after initial recognition of a property, plant and equipment asset the item
must be carried at its:

*a. cost less accumulated depreciation and less accumulated impairment losses.
b. historical cost.
c. initial cost.
d. net present value.

Answer: a
Learning objective 5.5: explain the cost model of measurement and understand the nature and
calculation of depreciation.

13. If a residual value is determined to be of a material amount the entity is required to review the
residual value:

a. monthly.
*b. at the end of each reporting period.
c. when completing interim reports.
d. at no time.

14. Which of the following statements regarding depreciation is incorrect?

a. Depreciation is an allocation of the cost of the asset over its useful life.
b. The depreciation method used should best reflect the pattern of usage of the asset over its useful
life.
*c. Depreciation is a measure of the asset’s change in value.
d. Depreciation is a systematic allocation of the cost of the asset over its useful life.
15. A company depreciates an item of machinery using the straight-line method. The asset was
revalued upwards after two years of use. The remaining useful life of four years and the residual
value are determined to remain the same. Which of the following relationships reflects the effect of
the revaluation on the prospective depreciation of the machinery?

a. Depreciation rate = Same; Annual depreciation expense = Same.

b. Depreciation rate = Higher; Annual depreciation expense = Higher.
*c Depreciation rate = Same; Annual depreciation expense = Higher.
d. Depreciation rate = Higher; Annual depreciation expense = Same.

16. NZIAS NZIAS Property, Plant and Equipment requires revaluations to be applied to:

a. all assets on an individual basis.

*b. assets on a class-by-class basis.
c. individual current assets only.
d. individual non-current assets only.

17. Tully Limited had an existing revaluation surplus in respect to an item of plant that has now been
derecognised. The appropriate journal entry to transfer the surplus to retained earnings would
include:

*a. CR Retained earnings.

b. CR Asset revaluation surplus.
c. DR Gain on revaluation — OCI.
d. DR Retained earnings.

18. The resulting gain or loss from the sale of a non-current asset is:

a. recognised in other comprehensive income, normally with separate disclosure of income and the
carrying amount of the asset.
b. recognised in other comprehensive income, normally on a net basis.
*c. recognised in current period profit or loss, normally on a net basis.
d. recognised in current period profit or loss, normally with separate disclosure of income and the
carrying amount of the asset.

19. Which of the following statements is incorrect in relation to disclosure of balances for property,
plant and equipment?

a. An entity must disclose the useful life estimates for each class of assets.
b. A summary of movements in the revaluation surplus is required to be disclosed.
c. The gross carrying amounts of the assets at both the beginning and the end of the financial period
must be disclosed.
*d. Information on assets carried at revalued amounts must be disclosed on an individual asset basis.

20. NZIAS NZIAS requires which of the following disclosures for each class of property, plant and
equipment?
a. The type of deprecation methods used.
b. The useful lives or the depreciation rates used.
c. Whether the class of assets is valued using the cost or revaluation method.
*d. All of the options are correct.
 MCQs with answers: Impairment Test

1. If an entity does not expect to recover the carrying amount of an asset, the entity has incurred a/an:

a. depreciation expense.
b. amortisation cost.
c. loss on disposal.
*d. impairment loss.

2. How often must an impairment test be applied to tangible assets?

a. every two years.

b. at the end of each financial year.
*c. only when there is an indication that the asset may be impaired.
d. at each reporting date including interim reporting dates such as half-year.

3. Which of the following assets need to be tested for impairment every year?

I intangible assets with indefinite useful lives

II intangible assets not yet available for use
III intangible assets accounted for under the revaluation method
IV goodwill acquired in a business combination

a. I, II and III only.

b. II, III and IV only.
c. I, III and IV only.
*d. I, II and IV only.

4. Goodwill acquired under a business combination is subject to an impairment test every:

*a. year.
b. two years.
c. three years.
d. five years.

5. As per AASB 136 Impairment of Assets, the recoverable amount test requires an entity to compare
the fair value of an asset less costs to sell, with:

a. its disposal value.

*b. its value in use.
c. the amount obtainable from the sale of the asset.
d. the costs directly attributable to the liquidation of the asset.

6. Which of the following identifies an impairment of an asset and describes the appropriate
accounting treatment using the cost model as per AASB 136 Impairment of Assets?

Impairment identified when: Appropriate accounting treatment

a. Carrying amount of an asset is less Asset is written up to its recoverable amount
than its recoverable amount
b. Carrying amount of an asset is less No change to the asset value
than its recoverable amount
*c. Carrying amount of an asset is Asset is written down to its recoverable amount
greater than its recoverable amount
d. Carrying amount of an asset is No change to the asset value
greater than its recoverable amount

7. Noble Limited estimated that it would receive future cash flows from the use of equipment as
follows:

End of Year 1 $20 000

End of Year 2 $70 000
End of Year 3 $40 000
End of Year 4 $30 000

The discount rate was determined as 5%. The ‘value in use’ of the equipment is:

*a. $141 774

b. $160 000
c. $142 727
d. unable to determine from the information provided.

8. AASB 136 defines value in use as the:

a. amount obtainable from the disposal of an asset, excluding any selling costs.
b. initial cost of an asset less any expected disposal costs.
c. incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense.
*d. present value of the future cash flows expected to be derived from an asset or cash-generating
unit.

9. Lacey Limited expected future cash flows from the use of plant as follows: End of Year 1 $14 000;
End of Year 2 $15 000; End of Year 3 $12 000. The discount rate was determined as 9%. The value
in use of the plant is:
a. $41 000
*b. $34 735
c. $37 862
d. $Nil.

10. When an asset is measured using the cost model, an impairment loss is:

a. set off against the balance of revenue.

b. recognised directly in equity.
c. accumulated in a separate ‘accumulated impairment losses’ account.
*d. included in the balance of the accumulated depreciation and impairment losses account for that
asset.

11. Under the cost model, an impairment loss would be recorded as:

a. DR Sales, CR Impairment loss.

*b. DR Impairment loss, CR Accumulated depreciation and impairment losses.
c. DR Accumulated impairment losses, CR Impairment loss.
d. DR Accumulated impairment losses, CR Asset revaluation (equity).

12. When an asset is measured using the revaluation model, any impairment loss is treated as:

*a. a revaluation decrement.

b. a revaluation increment.
c. an off-set against depreciation expense.
d. an addition to depreciation expense.

13. Parkes Limited recognised an impairment loss of $20 000 against a cash-generating unit containing
the following assets: buildings $50 000; roads $110 000; equipment $40 000. The net carrying
amount of the roads after allocation of the impairment loss is:

a. $ 90 000
b. $ 45 000
*c. $ 99 000
d. $ 36 000

14. At reporting date Guzzle Limited estimated an impairment loss of $50 000 against its single cash-
generating unit. The company had the following assets: headquarters building $200 000; plant $120
000; equipment $40 000. The net carrying amount of the headquarters building after allocation of
the impairment loss is:

a. $103 333
b. $150 000
c. $160 000
*d. $172 222

15. Berry Pty Ltd has two cash generating units. CGU A had a carrying amount of $1700 and value in
use of $1750. CGU B has a carrying amount of $1900 and a value in use of $1800. The carrying
amount of the head office assets is $1400. CGU A and B utilise the head office services equally.
The impairment loss for CGU A is:

a. $0.
*b. $650.
c. $800.
d. $1350.

16. Compose Limited estimated an impairment loss of $2 500 000 against its single cash-generating
unit. The company had the following assets: headquarters building $3 000 000; plant $1 600 000;
equipment $1 400 000. The net carrying amount of the plant after allocation of the impairment loss
is:

a. $Nil
*b. $933
c. $817
d. $1750
17. In relation to the reversal of an impairment loss of an individual asset, which of the following is
incorrect?

a. When reversing an impairment loss, the carrying amount cannot be increased to an amount in excess
of the carrying amount that would have been determined had no impairment loss been recognised.
*b. Where the recoverable amount is less than the carrying amount of an individual asset, the reversal
of a previous impairment loss requires adjusting the carrying amount of the asset to recoverable
amount.
c. For a depreciable asset, there needs to be a calculation of carrying amount using the depreciation
variables applied before the impairment loss to determine what the carrying amount would have been if
there had been no impairment loss.
d. If the individual asset is recorded under the cost model, then the increase in the carrying amount is
recognised immediately in profit or loss.
18. During 2021, Simpson Limited estimated that the carrying amount of goodwill was impaired by
$20 000. In 2022, the company reassessed goodwill and determined that the goodwill initially
acquired still existed. The appropriate accounting treatment in 2022 is:

a. reverse the previous goodwill impairment loss.

b. recognise the revalued amount of goodwill by an adjustment against the asset revaluation surplus
account.
c. increase goodwill by an adjustment to retained earnings.
*d. ignore the reversal as it is prohibited by AASB 136 Impairment of Assets.

Answer: d
Learning objective 7.6: explain when an impairment loss can be reversed and how to account for it.

19. AASB 136 Impairment of Assets requires which of the following disclosures for each class of
assets:

I The line item(s) of the statement of profit or loss and other comprehensive income in which
impairment losses are included.
II The amount of reversals of impairment losses during the period.
III The amount of impairment losses recognised directly in other comprehensive income.
IV The beginning and ending balances of any accumulated impairment account.

*a. I, II and III only.

b. I, II, III and IV.
c. II and IV only.
d. IV only.

Answer: a
Learning objective 7.7: identify the disclosures required in relation to impairment of assets.
20. Which of the following is required to be disclosed for each class of assets?

I the amount of impairment losses recognised in profit or loss during the period.
II the amount of reversals of impairment losses recognised in profit or loss during the period.
III the amount of impairment losses on revalued assets recognised in other comprehensive income
during the period.
IV the amount of reversals of impairment losses on revalued assets recognised directly in other
comprehensive income during the period.

a. III and IV only.

b. I, II and III only.
*c. I, II, III and IV
d. I and II only.

Answer: c
Learning objective 7.7: i
Impairment under the revaluation model

‘Impairment is only relevant to assets carried under the cost model. For assets carried under the
revaluation model, such as our land and buildings, increases and decreases in fair value dictate
whether carrying amounts are adjusted up or down. We don’t bother testing land and buildings
for impairment.’

Required
Critically evaluate the above statement.

The objective of impairment testing is to ensure that assets are not carried at an amount that exceeds
their recoverable amount.

The revaluation model increases and decreases the carrying amounts of assets in line with changes in
fair value. While there is a link between fair value and recoverable amount, they are different. To
ignore a revalued asset’s recoverable amount exposes the entity to the risk that an asset’s fair value
could exceed its recoverable amount. This could occur whenever an asset’s recoverable amount is its
fair value less costs of disposal. If the asset is revalued to fair value, its carrying amount is overstated
by the amount of the disposal costs.

Another point to consider is that impairment testing is done annually whereas revaluations may be done
less frequently (say, every 3 to 5 years). Ignoring potential impairment losses during the reva luation
cycle increases the risk of potential overstatement.

In summary, impairment is relevant to assets carried under the revaluation model and such assets
should be tested for impairment.

Application and analysis exercises

Application and analysis exercises

Exercise 7.1

Determining recoverable amount and impairment adjustments

Consider the following information relating to five different items of plant and equipment at the
reporting date.

Required
1. Calculate the recoverable amount for each of the five items of plant and equipment.
2. Assuming plant and equipment is carried under the cost model, determine the amount of any
impairment adjustment necessary.
3. Assuming plant and equipment is carried under the revaluation model, determine the
amount of any revaluation adjustment necessary.
(LO3 and LO4)

1. Recoverable amount (RA) = higher of FV less costs of disposal and value in use.
Asset A: $220 000 (higher of $204 000 and $220 000)
Asset B: $96 000 (higher of $88 000 and $96 000)
Asset C: $166 000 (higher of $166 000 and $164 000)
Asset D: $440 000 (higher of $370 000 and $440 000)
Asset E: $234 000 (higher of $234 000 and $230 000)

2. Impairment adjustment is necessary when RA < CA.

Asset A: No impairment (RA of $220 000 > CA of $200 000)
Asset B: Impairment adjustment of $4 000 (RA of $96 000 < CA of $100 000)
Asset C: No impairment (RA of $166 000 > CA of $160 000)
Asset D: No impairment (RA of $440 000 > CA of $400 000)
Asset E: Impairment adjustment of $6 000 (RA of $234 000 < CA of $240 000)

3. Under revaluation model revalue to lower of FV and RA.

Asset A: Revaluation increase of $10 000 (CA $200 000; FV $210 000; RA $220 000)
Asset B: Revaluation decrease of $10 000 (CA $100 000; FV $90 000; RA $96 000)
Asset C: Revaluation increase of $6 000 (CA $160 000; FV $170 000; RA $166 000)
Asset D: Revaluation decrease of $20 000 (CA $400 000; FV $380 000; RA $440 000)
Asset E: Revaluation decrease of $6 000 (CA $240 000; FV $240 000; RA $234 000)

Exercise 7.2

Impairment of an individual asset

On 1 April 2021 the construction of a fixed oil platform is completed and ready for use at a total
cost of $500 million. The useful life of the rig is linked to the 25-year exploration rights granted to
the company. Due to the specific nature of the platform it is deemed to have no realisable value
(other than minimal scrap value) at any stage throughout its life. All impairment tests are
therefore based on value-in-use estimations.
On 30 June 2023 a rapid and significant decline in world oil prices has provided an indication
that the asset may be impaired. On this date, the rig’s value in use is estimated to be $414 million.
On 30 June 2024 a major contract was cancelled after one of the company’s customers was
declared bankrupt. This led directors to believe the value in use of the rig was now $374 million.

Required
Prepare the necessary journal entries to record adjustments for impairment on 30 June 2023 and
30 June 2024. (LO3 and LO4)

30 June 2023
Impairment loss – Oil rig Dr 41 000 000
Accum. deprec. & impairment losses – Oil rig Cr 41 000 000
 [Cost of $500 000 000 with 25 years life; Depreciation of $20 000 000 p.a.; Accum. depreciation
after 2¼ years = $45 000 000; CA = $455 000 000, RA = $414 000 000, so impairment of $41
000 000]

30 June 2024
Impairment loss – Oil rig Dr 21 802 198
Accum. deprec. & impairment losses – Oil rig Cr 21 802 198
[CA at 30/6/2023 of $414 000 000 with 22¾ years life, Depreciation for year of $18 197 802 and
CA of $395 802 198; RA of $374 000 000 so impairment of $21 802 198]
Exercise 7.3

Impairment of an individual asset, calculating value-in-use

Flash Ltd acquired a machine for $125 000 on 1 July 2022. It depreciated the asset at 10% p.a. on
a straight-line basis.

On 30 June 2024, Flash Ltd conducted an impairment test on the asset. It determined that the
asset could be sold to other entities for $77 000 with costs of disposal of $1000.

Management expect to use the machine for the next four years with expected cash flows from use
of the machine being:
2024 $40 000
2025 30 000
2026 25 000
2027 20 000
The rate of return expected by the market on this machine is 8%.

Required
Assess whether the machine is impaired. If necessary, provide the appropriate journal entry to
recognise any impairment loss. (LO3 and LO4)

CA of machine at 30 June 2024 = $100 000 [$125 000 less ($125 000 x 10% x 2 years)]

FV less costs of disposal = $76 000 [$77 000 less $1 000]

Value in use = $97 300 calculated as follows: [($40 000 x 0.9259) + ($30 000 x 0.8573) + ($25 000 x
0.7938) + ($20 000 x 0.7350)]

RA = $97 300 [higher of these two]

RA < CA so asset is impaired by $2 700

Impairment loss Dr 2 700

Accum. deprec. & impairment losses Cr 2 700
Exercise 7.4

Impairment of an individual asset

On 1 July 2023 an item of equipment is acquired at a cost of $3 million. The asset is to be

depreciated using the straight-line method on the basis of an estimated useful life of 15 years and
a negligible residual value.
On 30 June 2026 it is determined that the asset has a value in use of $2 million and a fair value of
$1.8 million before costs of disposal of $50 000. The remaining useful life of the asset is reassessed
to be 8 years.
On 30 June 2028 it is determined that the asset has a value in use of $1.2 million and a fair val ue
of $1.1 million before costs of disposal of $50 000. The remaining useful life of the asset is
reassessed to be 5 years.

Required
Prepare the journal entries for any depreciation and impairment adjustments on the following
dates.
1. 30 June 2026
2. 30 June 2028
3. 30 June 2029
(LO3 and LO4)

1. 30 June 2026
Depreciation expense Dr 200 000
Accum. deprec. & impairment losses Cr 200 000
[$3 000 000 / 15 years]

Impairment loss Dr 400 000

Accum. deprec. & impairment losses Cr 400 000
[CA of $2 400 000 less RA of $2 000 000]

2. 30 June 2028
Depreciation expense Dr 250 000
Accum. deprec. & impairment losses Cr 250 000
[$2 000 000 / 8 years]

Impairment loss Dr 300 000

Accum. deprec. & impairment losses Cr 300 000
[CA of $1 500 000 less RA of $1 200 000]

3. 30 June 2029
Depreciation expense Dr 240 000
Accum. deprec. & impairment losses Cr 240 000
[$1 200 000 / 5 years]
Exercise 7.5

Impairment loss of an individual asset incorporating revaluation model

At 30 June 2023, Harrod Ltd holds a block of land from which it generates revenue by leasing it
to agricultural enterprises. The land has a carrying amount of $2.5 million. An independent
market appraisal has valued the land at $2.36 million but costs to dispose of the land are
estimated at $100 000. The value in use of land is determined to be $2.33 million.

Required
1. Determine the recoverable amount of the land.
2. Prepare the appropriate journal entry to record any impairment loss that should be
recognised.
Suppose now that this same block of land was carried under the revaluation model.
3. Prepare the journal entry to record any necessary adjustment assuming there had been no
prior revaluations.
4. Prepare the journal entry to record any necessary adjustment assuming there had been a
prior revaluation increase of $200 000.
5. Prepare the journal entry to record any necessary adjustment assuming there had been a
prior revaluation increase of $120 000.
(LO3 and LO4)
1. FV less cost of disposal = $2 360 000 less $100 000 = $2 260 000, Value in use = $2 330 000 =>
RA = $2 330 000

2. Impairment loss – Land Dr 170 000

Accum. impairment losses – Land Cr 170 000

3. Loss on revaluation – Land Dr 170 000

Land Cr 170 000

4. Asset revaluation surplus – Land Dr 170 000

Land Cr 170 000

5. Asset revaluation surplus – Land Dr 120 000

Loss on revaluation – Land Dr 50 000
Land Cr 170 000
Exercise 7.6

Impairment of a CGU

Robin Ltd reported the following information in its statement of financial position at 30 June
2022.

At 30 June 2022, Robin Ltd analysed the internal and external sources of information that would
indicate deterioration in the worth of its assets. It determined that there were indications of
impairment.

Robin Ltd calculated the recoverable amount of the assets to be $490 000.

Required
Provide the journal entry for any impairment loss at 30 June 2022. (LO5)
Carrying amount of assets = $615 000
Recoverable amount = $490 000
Impairment loss = $125 000

Assuming the inventory is carried at the lower of cost and net realisable value, the allocation of the
impairment loss will not involve either cash or inventory.

The allocation of the impairment loss is as follows.

Carrying Proportion Allocation Net carrying

amount of loss amount
$ $ $
Plant 250 000 25/50 62 500 187 500
Intangibles 100 000 10/50 25 000 75 000
Land 150 000 15/50 37 500 112 500
500 000 125 000

The journal entry to record the impairment loss is:

Impairment loss Dr 125 000

Land Cr 37 500
Accum. deprec. and impairment – plant Cr 62 500
Accum. amortis. and impairment – intangibles Cr 75 000
(Allocation of impairment loss)
Chapter 6: Intangible assets

Multiple Choice Questions

1. Which of the following assets meets the identifiability criteria for recognition as an
identifiable intangible asset that can be recorded as acquired in a business combination?

*a. Royalty agreements.

b. Customer base.
c. Continuing development programs.
d. Strong and favourable supplier relations.

2. Items such as market knowledge, effective advertising programs, fundraising capabilities

and trained staff are NOT regarded as assets because they:

a. are monetary items.

*b. are not controlled by the entity.
c. cannot be reliably measured.
d. are too difficult to manage.

3. A key characteristic that separates intangible assets from assets such as property, plant
and equipment is:

a. length of useful life.

b. separability.
c. reliability.
*d. lack of physical substance.

4. Which of the following assets is regarded as meeting the identifiability criteria for
recognition as an identifiable intangible asset that may be acquired in a business
combination?

*a. Newspaper mastheads.

b. Customer service capability.
c. Outstanding credit ratings.
d. Presence in geographic locations.

5. The three key characteristics of intangible assets are:

I Expected future economic benefit

II Lack of physical substance
III Identifiable
IV Physical substance
V Non-monetary in nature

a. I, II and III
b. I, III, and IV
c. III, IV, and V
*d. II, III, and V
.

6. AASB 138 Intangibles, requires goodwill to only be recognised as an asset if it:

a. is internally generated.
*b. is acquired as part of a business combination.
c. does not exceed its internally recorded cost.
d. arises as a result of creating new assets within the normal business operations.

7. The recognition criteria that an asset must meet before it may be recognised and presented
in the financial statements includes:

*a. results from a past event.

b. having physical substance.
c. relevant to management decision making.
d. verifiability.

8. AASB 138 Intangibles, defines the ‘research’ phase of the generation of an asset as:

a. the use of research findings to create a substantially improved product.

b. using knowledge to materially improve a manufacturing device.
c. the application of knowledge to a design for new production processes.
*d. original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge or understanding.

9. Jameson Limited was involved in a mining exploration business. It commenced a project

to design more efficient opal detecting equipment. The following expenditures occurred
during the financial year ended 30 June 2022: researcher’s salary $50 000; research
consumables $30 000; re-development of the detecting equipment $40 000; final
adjustments to the detecting equipment $12 500. The amount to be capitalised by this
company as an intangible asset, for the 2022 financial year, is:

a. $80 000
b. $90 000
c. $12 500
*d. $52 500

10. Bankstown Limited was involved in a highly successful plastics manufacturing business.
It commenced a project to design a more efficient extrusion system for its plastic pipes.
The following outlays occurred: September: researcher salaries $30 000; October:
research materials $40 000; November: re-development of the extrusion plant $250 000;
December: final adjustments to the extrusion plant $25 000. The amount to be expensed
by Bankstown Limited at the end of the financial year, 31 December, is:

a. $30 000
*b. $70 000
c. $250 000

© John Wiley and Sons Australia, Ltd 2020 6.1

d. $275 000

11. Paragraph 63 of AASB 138 Intangibles, prohibits the recognition of the following
internally generated identifiable intangibles:

I II III IV
Brands No No Yes No

Mastheads No Yes Yes Yes

Publishing No No Yes Yes
titles
Customer No Yes Yes No
lists

a. I.
b. II.
*c. III.
d. IV.

Answer: c
Learning objective 5.3: explain how to measure property, plant and equipment on initial
recognition.

12. Unless acquired under a business combination, intangible assets must be initially
measured using which of the following measurement approaches?

a. Net present value.

*b. Cost.
c. Diminishing value.
d. Fair value.

Answer: b
Learning objective 5.4: explain the alternative ways in which property, plant and equipment
can be measured subsequent to initial recognition.

13. The measurement of fair value is determined in accordance with AASB 13 Fair Value
Measurement. AASB 13 defines fair value as one that has all of the following conditions:

I II III IV
The price that would be received to sell an asset or paid to Yes Yes No Yes
transfer a liability
Is an orderly transaction between market participants No Yes No Yes
Based on the measurement date. Yes Yes Yes No

a. I.
*b. II.

© John Wiley and Sons Australia, Ltd 2020 6.2

c. III.
d. IV.

14. When an intangible asset is acquired by an exchange of assets, which of the following
measures will need to be considered in the determination of cost?

a. The initial cost of the asset given up.

*b. The fair value of the asset given up.
c. The replacement value of the asset received.
d. The carrying amount of the asset received.

15. Under the revaluation method of measuring an intangible, the asset is carried at fair value
and subject to charges for:

a. interest.
b. inflation.
c. improvements.
*d. amortisation and impairment.

16. AASB 138 Intangibles, requires that an intangible asset with an indefinite life:

a. be amortised across its useful life.

b. be amortised across a period of no greater than 10 years.
c. not be amortised in periods when it has been properly maintained.
*d. not be subject to amortisation charges.

17. Under AASB 138 Intangibles, an intangible asset with an finite useful life is:

a. not able to be recognised by an entity as an asset.

b. not subject to annual amortisation charges.
c. amortised using the straight-line method over a period of no more than 20 years.
*d. amortised systematically over its useful life.

18. AASB 138 Intangibles requires which of the following items to be disclosed in relation to
intangibles?

a. Whether the life of the intangible is finite or indefinite.

b. The amortisation method used for intangibles with a finite life.
c. A reconciliation of the beginning and ending carrying amounts for the reporting period.
*d. All of the options are required disclosures.

© John Wiley and Sons Australia, Ltd 2020 6.3

19. Which of the following statements is correct?

*a. Separate disclosures are required for internally generated intangibles.

b. AASB 138 requires disclosures about an entity’s intangible assets to be made on an
asset by asset basis.
c. Disclosures about the useful lives of intangibles are required with explanations being
required where assets are assessed to have finite useful lives.
d. Where the cost model is used, specific disclosures are required including assumptions
made on estimating fair values.

© John Wiley and Sons Australia, Ltd 2020 6.4

ACCY 231 Financial Accounting
Trimester ONE 2021

Tariq
 Question 1: Intangible Assets
• GeneTech Ltd is a biological research company that is developing
gene technology in the hope of finding a vaccine for skin cancer.
During the last financial year, GeneTech Ltd spent $1.2 million
on research. The scientists involved in the project believe they
may be on the right track with the research, although many other
companies are claiming the same thing and as yet no one has
patented a vaccine.
Required
a. Discuss the options under IAS 38/NZIFRS38 Intangible assets
for the accounting treatment of the 1.2 million.
b. What impact will each of these options have on the company’s
profit?
c. Prepare a one-page letter to the managing director of GeneTech
Ltd advising her of your preferred treatment for the research and
development costs.
 Answer- One
The relevant paragraphs of NZIAS 38 are:
• Para. 8- which defines “research” and “development”.
Research:
• Original and planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge and
understanding.
Development:
• Application of research findings or other knowledge to a plan or
design for the production of new or substantially improved
materials, devices, products, processes, systems or services prior
to the commencement of commercial production or use.
• Typically involves the commercial application of knowledge
generated in earlier research phases.
• For internally generated assets, see paras. 51-71.
3
 Answer- One continued (b)
Development expenditure can be deferred only if the entity can show
all of the following:
• The technical feasibility of completing the intangible asset.
• Its intention to complete the intangible asset, and use or sell it.
• Its ability to use or sell the intangible asset; how the intangible asset
will generate probable future economic benefits, including the
existence of a market for the intangible asset or, where the
intangible asset is to be used internally, its usefulness.
• The availability of adequate technical, financial and other resources
to complete the development.
• The ability to measure reliably expenditure on the intangible asset
during its development.

4
 Answer- One continued (C)

The ultimate position is that the expenditure of $1.2

million must all be charged to expense. (see Para 54).

But you can come to that conclusion after a careful

reading of the standard and discussion.

5
 Question Two :Goodwill
• Richmond Ltd is considering the purchase of Windsor Ltd, which
produces a product that Richmond Ltd uses in its manufacturing
process. Relevant data for Windsor Ltd are:

Fair value of identifiable assets $1, 500, 000

Fair value of identifiable liabilities $400,000
Required:
A. Determine the price Richmond Ltd would pay for goodwill in
acquiring Windsor Ltd if the total cost of the business
combination was $1,600,000 in cash.

B. Prepare entries for Richmond Ltd in general journal form to

record the acquisition of Windsor Ltd for $1, 000, 000 cash.
 Question 2- Answer (A)
Richmond Ltd Goodwill amount

$
Fair value of identifiable assets 1, 500, 000
Fair value of identifiable liabilities (400, 000)
1, 100, 000
Total consideration transferred 1, 600, 000
Goodwill (difference) 500, 000
 Question 2- Answer (B)
$ $
Identifiable Assets 1, 500, 000
Identifiable Liabilities 400, 000
Payable to Windsor Ltd 1, 000, 000
Excess (profit) 100, 000

Payable to Windsor Ltd 1, 000, 000

Cash at Bank 1, 000, 000
Payment to Windsor Ltd

Excess = $1,000,000 - $1,100,000

= $100, 000

Excess is recorded as profit

 Question Three
• XYZ Ltd is a newly established enterprise. It was set up by an
entrepreneur who is generally interested in the business of
providing engineering and operational support services to aircraft
manufacturers. XYZ Ltd, through the contacts of its owner,
received a confirmed order from a well known aircraft
manufacturer to develop new designs for ducting the air
conditioning of their aircraft. For this project, XYZ needed funds
aggregating to $1 million. It was able to obtain funding of $1
million from two venture capitalists.

The expenditures XYZ Ltd incurred in pursuance of its research and development
project follow, in chronological order:
 Question Three Continued
The expenditures XYZ Ltd incurred in pursuance of its research and development
project follow, in chronological order:
• Jan. 15, 2010: Paid $175,000 toward salaries of the technicians (engineers & consultants)
• Mar. 31, 2010: Incurred $250,000 toward cost of developing the duct and producing the
test model
• June 15, 2010: Paid an additional $300,000 for revising the ducting process to ensure that
product could be introduced in the market
• August 15, 2010: Developed, at a cost of $80,000, the first model (prototype) and tested it
with the air conditioners to ensure its compatibility
• October 30, 2010: A focus group of other engineering providers was invited to a
conference for the introduction of this new product. Cost of the conference totalled to
$50,000.
• December 15, 2010: The development phase was completed and a cash flow budget was
prepared.
• Net profit for the year 2010 was $900,000.

Required:
• What is the proper accounting treatment for the various costs incurred during 2010
according to IAS 38?
 Question 3- Answer
• Treatment of various costs incurred during 2010 depends on whether
these costs can be capitalized or expensed as per IAS 38.
• Although IAS 38 is clear that expenses incurred during the research
phase should be expensed, it is important to note that not all
development costs can be capitalized. In order to be able to capitalize
costs, strict criteria established by IAS 38 should be met. Based on the
criteria prescribed by IAS 38, these conclusions can be drawn:

• Therefore, the costs that were incurred before October 2010 should be
expensed. The total costs that should be expensed = $175,000 +
$250,000 + $300,000 + $80,000 = $805,000.
• The costs eligible for capitalization are those incurred after October
2010. However, conference costs of $50,000 would need to be
expensed because they are independent from the development process.
• Thus there are no total costs to be capitalized in terms of IAS 38.
 Question Four

• Entity A, acquired entity B, which operated a TV channel. Entity B

negotiates the sale of air time directly with advertisers who are
mostly big companies. Advertisement contracts are negotiated
annually and the management consider it likely that the
relationships will continue indefinitely.

• Entity A’s management have concluded that the criteria have been
met in order to recognize such customer relationships as intangible
assets separately from goodwill and propose to treat the
relationships as having an indefinite useful life.

Do you consider the management’s proposal appropriate? Explain

why.
 Question 4- Answer
• An indefinite useful life is attributed to an asset when there is no
foreseeable limit to the period over which the asset is expected to
generate cash inflows [IAS 38 para 88].
• It is unlikely that customer relationships have indefinite useful lives,
because ownership of the customers may change, strategies may change
and furthermore competitors may enter entity B’s market.
• Entity A’s management should consider all the relevant factors, such as
historical experience, contracts period, competitors, life cycles etc, to
determine the useful lives of the customer relationships.
• These should be based on reliable assumptions about the period over
which economic benefits are expected to be obtained from the
relationships. Management should be able to determine the length of the
finite useful lives of the customer relationships, considering all relevant
factors as described above.
 Question Five

• An entity has acquired local broadcast rights to the 2015 World

Cup. Management expect World Cup related advertising revenue
to commence from 1 March 2015.

• Management propose that amortization of these rights begins at

the start of the tournament in June 2010.
Do you consider management proposal appropriate? Explain why.
 Question 5- Answer
• The amortisation of an acquired intangible can be delayed only to
the point where the intangible asset becomes available for use. The
receipt of related revenue indicates that the entity has begun to
consume the asset’s economic benefits and this indicates that the
asset is available for use.

• Amortisation should begin at the earliest point at which economic

benefit is received from the broadcast rights, which is 1 March
2010.

• The intangible asset should be tested for impairment annually

during the period between its acquisition and the commencement
of amortisation.
 Question Six
• Costs generally incurred by a newly established entity include:
(a) pre-opening costs of a business facility;
(b) recipes, secret formulas, models and designs, prototype;
(c) training, customer loyalty, and market share;
(d) an in-house-generated accounting software;
(e) the design of a pilot plan;
(f ) licensing, royalty, and stand-still agreements;
(g) operating and broadcast rights;
(h) goodwill purchased in a business combination;
(i) a company-developed patented drug approved for medical use;
(j) a license to manufacture a steroid by means of a government grant;
(k) cost of courses taken by management in quality engineering management;
(l) a television advertisement that will stimulate the sales in the technology
industry.
• Which of the above-mentioned costs are eligible for capitalization according to
IAS 38, and which of them should be expensed as they are incurred?
 Question 6- Answer
• Costs that are eligible for capitalisation include items:
(b)- recipes, secret formulas, models and designs, prototype
(e)- the design of a pilot plan
(f)- licensing, royalty, and stand-still agreements
(g) operating and broadcast rights, and
(h)- goodwill purchased in a business combination
for item (j)- (a license to manufacture a steroid by means of a government
grant) after initial recognition at cost, both the asset and the grant should be
recognised at fair value.
These costs are eligible for capitalisation under IAS 38 because:
• They meet the criteria of “identifiability” (i.e. they are separable or they
arise from contractual rights).
• It is probable that future economic benefits will flow to the entity.
• The costs can be measured reliably.
 Question 6- Answer Cont’d
• Costs that should be expensed because they do not meet the criteria
under IAS 38 include items:
(a)- pre-opening costs of a business facility
(c)- training, customer loyalty, and market share, and
(d)- an in-house-generated accounting software

• Item (i) -(a company-developed patented drug approved for medical

use) is a case of an internally generated intangible asset that can be
capitalised provided it meets the development criterion.
• The main issue with item (k)- (cost of courses taken by management
in quality engineering management) is that the entity does not have
“control” over its workforce and therefore it should be expensed.
• Despite the obvious benefit of item (l)- (a television advertisement
that will stimulate the sales in the technology industry) to the
business, such expenditure for advertisement does not meet the
criterion of “control” so it should be expensed.
 Question Seven

An entity has incurred the following costs prior to commercial production

of a new pollution filter for use on commercial vehicles:
Marketing awareness campaign $ 50,000
Patent royalty payable to inventor of filter $ 12,000
Salaries of staff testing filter prototypes $ 38,500

Which costs should be included in the internally generated intangible

asset?
 Question 7- Answer

• Marketing awareness campaign:

Exclude – such costs cannot be directly attributed or allocated
on a reasonable basis to development activities

• Patent royalty payable to inventor of filter:

Include – expenditure represents a direct cost of a service
consumed in development activities

• Salaries of staff testing filter prototypes:

Include – expenditure on testing pre-production prototype is a
typical development activity.
Week 12 (Friday): Revision class
PPE
Revaluation adjustments and reversals

On 1 January 2022, Lima Ltd revalued land from $200 000 to $400 000. On 1 January 2023,
the company subsequently revalued the land to $320 000. And on 1 January 2024, the
company again revalued the asset downwards to $160 000.

Required
Prepare the journal entries required to record the revaluation adjustment for the year ended:
1. 30 June 2022.
2. 30 June 2023.
3. 30 June 2024.

1. 30 June 2022
Land Dr 200 000
Gain on revaluation – Land (OCI) Cr 200 000
(Revaluation of Land from $200 000 to $400 000)

Gain on revaluation – Land (OCI) Dr 200 000

Asset revaluation surplus – Land Cr 200 000
(Accumulation of revaluation gain in equity)
(Please see my lecture slide No 49)
2. 30 June 2023
Loss on revaluation – Land (OCI) Dr 80 000
Land Cr 80 000
(Revaluation of land from $400 000 to $320 000, partially reversing a revaluation
increase)

Asset revaluation surplus – Land Dr 80 000

Loss on revaluation – Land (OCI) Cr 80 000
(Accumulation of revaluation loss in equity)

3. 30 June 2024
Loss on revaluation – Land (OCI) Dr 120 000
Loss on revaluation – Land (P&L) Dr 40 000
Land Cr 160 000
(Revaluation of land from $320 000 to $160 000, partially reversing a revaluation
increase, and recognising a further decrease beyond the original accounting value)

Asset revaluation surplus – Land Dr 120 000

Loss on revaluation – Land (OCI) Cr 120 000
(Accumulation of revaluation loss in equity)
(Please see my lecture slide No 53 & 58)
Revaluation adjustments and reversals

The following data from Lyre Ltd’s accounts relates to two assets at 30 June 2021.

Asset Value Accumulated depreciation Carrying amount

Land $ 2 400 000 0 $ 2 400 000
Plant and equipment $ 300 000 $ 60 000 $ 240 000

At 30 June 2021 Lyre Ltd decides to adopt the revaluation model for both these assets. On
this date land has a fair value of $2 250 000 and plant and equipment has a fair value of $330
000. On 30 June 2022 Lyre Ltd reviews the value of its assets. The fair value of land is
reassessed as $2 325 000. Plant and equipment has no change in value on that date.

Required
Prepare the journal entries required to revalue the assets for the year ended 30 June 2021 and
the 30 June 2022.

30 June 2021

Loss on revaluation – Land (P&L) Dr 150 000

Land Cr 150 000
(Revaluation of land from $2 400 000 to $2 250 000)

Accumulated depreciation – P&E Dr 60 000

Plant and Equipment Cr 60 000
(Writing the plant & equipment down to carrying amount)

Plant and Equipment Dr 90 000

Gain on revaluation – P&E (OCI) Cr 90 000
(Revaluation of plant & equipment from $240 000 to $330 000)

Gain on revaluation – P&E (OCI) Dr 90 000

Asset revaluation surplus – P&E Cr 90 000
(Accumulation of revaluation gain of plant & equipment in equity)

30 June 2022

Land Dr 75 000
Gain on revaluation – Land (P&L) Cr 75 000
(Revaluation of land from $2 250 000 to $2 325 000, partially reversing a previous
revaluation decrease)
Impairment
Impairment loss of an individual asset incorporating revaluation model

At 30 June 2023, Harrod Ltd holds a block of land from which it generates revenue by
leasing it to agricultural enterprises. The land has a carrying amount of $2.5 million. An
independent market appraisal has valued the land at $2.36 million but costs to dispose of the
land are estimated at $100 000. The value in use of land is determined to be $2.33 million.

Required
1. Determine the recoverable amount of the land.
2. Prepare the appropriate journal entry to record any impairment loss that should be
recognised.
Suppose now that this same block of land was carried under the revaluation model.
3. Prepare the journal entry to record any necessary adjustment assuming there had been no
prior revaluations.
4. Prepare the journal entry to record any necessary adjustment assuming there had been a
prior revaluation increase of $200 000.
5. Prepare the journal entry to record any necessary adjustment assuming there had been a
prior revaluation increase of $120 000.

Solution
1. FV less cost of disposal = $2 360 000 less $100 000 = $2 260 000, Value in use = $2 330
000 => RA = $2 330 000

2. Impairment loss – Land Dr 170 000

Accum. Impairment losses – Land Cr 170 000

3. Loss on revaluation – Land Dr 170 000

Land Cr 170 000

4. Asset revaluation surplus – Land Dr 170 000

Land Cr 170 000

5. Asset revaluation surplus – Land Dr 120 000

Loss on revaluation – Land Dr 50 000

Land Cr 170 000

Impairment of a CGU

Robin Ltd reported the following information in its statement of financial position at 30 June
2022.

At 30 June 2022, Robin Ltd analysed the internal and external sources of information that
would indicate deterioration in the worth of its assets. It determined that there were
indications of impairment.
Robin Ltd calculated the recoverable amount of the assets to be $490 000.

Required
Provide the journal entry for any impairment loss at 30 June 2022.

Solution
Carrying amount of assets = $615 000
Recoverable amount = $490 000
Impairment loss = $125 000

Assuming the inventory is carried at the lower of cost and net realisable value, the allocation
of the impairment loss will not involve either cash or inventory.

The allocation of the impairment loss is as follows.

Carrying Proportion Allocation Net carrying

amount of loss amount
$ $ $
Plant 250 000 25/50 62 500 187 500
Intangibles 100 000 10/50 25 000 75 000
Land 150 000 15/50 37 500 112 500
500 000 125 000
The journal entry to record the impairment loss is:

Impairment loss Dr 125 000

Land Cr 37 500
Accum. deprec. and impairment – plant Cr 62 500
Accum. amortis. and impairment – intangibles Cr 25 000
(Allocation of impairment loss)

What happens if the Fair value less cost of disposal of the land is 122,500?
What happens if the Fair value less cost of disposal of the land is 122,500?

If the fair value less costs of disposal of the land is 122500, then the land cannot be written
down to an amount below that figure. Hence the maximum impairment loss allocable to land
is 150000-122500=27500.

So the extra [(150000-112500=37500); (37500-27500)] =10000 must be allocated to other

assets:

Carrying Proportion Allocation Net carrying

amount of loss amount
$ $ $
Plant 187500 187500/262500 ?? ??
Intangibles 75000 75000/262500 ?? ??
262500 10000

Impairment loss Dr 125000

Land Cr 27500
Accum. deprec. and impairment – plant Cr 62 500+??
Accum. amortis. and impairment – intangibles Cr 25 000+??
Intangible
“See the questions and answers on this topic which
were posted on blackboard”