Please complete q 5 only ASAP
Deakin's Bachelor of Commerce and MBA are internationally EPAS accredited. Deakin Business School is accredited by AACSB. MAA261 FINANCIAL ACCOUNTING T1 2018 CASE DATA FOR DREAM FURNITURE PTY LTD Dream Furniture Pty Ltd is a business that manufactures and sells furniture to suppliers across Australia. The business was established in 2013 and is a large proprietary company with two directors, James Tetra and Jess Victoria. The business operates in Geelong and is registered for Goods and Services Tax (GST). The business has a financial year ending 30 June. When commencing the business on 1 January 2013, Dream Furniture Pty Ltd purchased the following assets for $1,200,000 (plus GST): Fair value of assets Land $810,000 Building $480,000 Machinery $150,000 $1,440,000 The purchase of the assets comprised $400,000 cash and a loan for the remaining amount. Dream Furniture Pty Ltd also had additional costs/discounts relating to the purchase: Land: Legal fees $3,000 (plus GST) Building: Administration costs of $1,000 (plus GST) Renovation costs to make the building suitable for intended use $13,000 (plus GST) https://www.efmd.org/index.php/accreditation-main/epas http://www.aacsb.edu/ Page 2 of 4 One year general insurance for the building $10,000 (plus GST) Trade discount of 15% of the GST inclusive amount for the building. Machinery: Installation costs of the machinery $4,500 (plus GST) Shipping of the machinery $1,500 (plus GST) The building is expected to have a useful life of eight years and an estimated residual value of $93,000. Dream Furniture Pty Ltd adopted the straight-line depreciation method for the building and diminishing balance method (30%) for the machine. Dream Furniture Pty Ltd adopted the revaluation model for both the land and building, and the cost model for the machinery. On 30 June 2014, James and Jess were discussing on whether they should change the depreciation method for the machinery to the units of production method. It was decided that the depreciation method remained the same. On 30 June 2016, James and Jess obtained an independent valuation of the land and buildings as suggested by their accountants. The independent valuation indicated that the land’s fair value was $900,000 and the building’s fair value was $400,000. The valuation report stated that the residual value of the building has been revised to $100,000. Also, the remaining useful life has been revised to 8 years. Page 3 of 4 On 30 June 2018, there was a very bad storm that has damaged both the building and machinery. The new valuation report stated the following: Building: Fair value of $200,000 Selling costs of $5,000 Value in use of $210,000 Machinery: Fair value of $8,570 Selling costs of $525 Value in use $9,500 Dream Furniture Pty Ltd offers annual membership to members under the following terms and conditions: The members will receive exclusive invitations for new models and special discounts on selected items. A once-off non-refundable joining fee of $1,000 (plus GST) when the member initially signs a new contract. The joining fee is used to cover the administrative costs of enrolling a new member. A monthly membership fee of $100 (plus GST) a month which is payable in advance. A maximum membership period of 24 months, after which anyone who wants to continue their membership needs to roll-over their membership and sign new contract with Dream Furniture Pty Ltd. The non-refundable joining fee is waivered for customers who have been previous members of the business. Page 4 of 4 On 1 June 2019, 30 new members sign a contract with Dream Furniture Pty Ltd for the membership. James and Jess have notified the consultants that they were unsure whether their treatment of non- current assets and revenue were correct. They would like guidance from the professionals to ensure that they have complied with the accounting standards. Financial Accounting assignment 2 MAA261 Group 26 Assignment 2 Introduction This formal business report aims to assist Dream Furniture in their recording, expensing and reporting of non-current assets in conjunction with revenue recognition. Such an outcome will also involve analysing how Dream Furniture has recorded both assets and revenue in previous financial years. The report will also refer to and reference AASB 116, 15 and 136 as these are the accounting standards that are directly applicable to the current situation. This body of work looks to outline the mathematical calculations in a simple and straightforward manner to ensure the management team are able to fully comprehend the recommendations made and continue to achieve prosperity as a business. Acquisition of Non-Current Assets Asset Estimated Fair Value % Allocated Cost Land $810000 56.25% $675,000.00 Building $480000 33.33% $400,000.00 Machinery $150000 10.42% $125,000.00 Total $1440000 100% $1200000 Cost of Land, Machinery and Building The below tables outline how the costs of the varies non-current assets were calculated. Some costs were included while others were not, in accordance with AASB 116. List Price of Land 675,000 Legal Fees 3,000 Cost of Land 678,000 The cost of land included legal fees as these were essential for the business to be able to purchase and use the land for its purpose. In addition, professional fees such as legal fees are seen as directly attributable costs (para 17, AASB 116). List Price of Machinery 125,000 Installation Costs 3,000 Shipping of Machinery 678,000 Cost of Machinery 131,000 The cost of machinery included both installation costs and shipping of machinery. The shipping of machinery was included as it is directly attributable with bringing the asset to the location in which it is intended to be used (para 16, AASB 116). Instillation costs were also included as they would be required to ensure the machinery can be used in the way management intended (para 17. AASB 116). List Price of Building $400,000 NOT Included: Administration Costs $1,000 NOT Included: One-year Insurance $10,000 Trade discount 15% GST $40,000 Cost (GST Inclusive) $440,000 Discount amount $66,000 Less discount $374,000 Less GST amount $340,000 Plus: Renovation $13,000 Cost of Building $353,000 Administration costs were not included as they are not directly related to the building being fully operational for the business (para 19, AASB 116). Insurance for the building was also not included as it was seen to be a general expense, not directly related to the cost of the building (para 16, AASB 116). The trade discount was included as it alters the amount of money the company will pay (para 16 AASB). The renovations were included in the cost as they were required to ensure the business was fit for its intended purpose (para 16 AASB). Account Dr Cr Land $678,000 Machinery $131,000 Building $353,000 GST clearing $116,200 Cash at Bank $400,000 Loan Payable $878,200 Calculation of Depreciation Depreciation 1 Jan 2013 – 30 June 2013 30 June 2013 - 2014 30 June 2014 - 2015 30 June 2015 -2016 Building Depreciation expense $16250 $32,500 $32,500 $32,500 Accumulated Depreciation $16250 $48750 $81,250 $113,750 Carrying Amount $336,750 $304250 $271750 $239,250 Machinery Depreciation Expense $19,650 $33,405 $23,383.50 $16,368.45 Accumulated Depreciation $19,650 $53,055 $76,438.5 $92,806.95 Carrying amount $111,350 $77,945 $54,561.50 $38,193.05 Changing of Depreciation Methods for Machinery Dream Furniture are permitted to change depreciation methods for machinery if they feel there has been a change in the expected schedule of consumption. For instance, if they felt on the 30 June 2014 that the machines economic benefit would be reduced at a rate differing to what they initially calculated they may wish to change depreciation methods (para 61, AASB 116). The firm is currently using the diminishing value depreciation method, which means it is depreciating more in its earlier years. However, Dream furniture may believe that the machinery will depreciate at a rate directly correlated to the units that the machinery produces. Therefore, they would be advised to use the units of production method, where the machine depreciates based on the level of units it produces. Revaluation Revaluation increment under the revaluation model An item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount (Para 31, AASB 116). Therefor Dream furniture has carried out a revaluation on the 30 June 2016 on their land and buildings which were valued at $900,000 and $400,000 respectively. The land had a carrying amount of $678,000 and the buildings carrying amount at the time was $353,000, there for both the building and the lands fair value had an increase on their carrying amounts. As para 39 AASB 116 states that “if an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus”. Therefore, the gain on both the land and building was recorded in the other comprehensive income account and transferred to the revaluation surplus account. Account Dr Cr 30/6/2016 Land 222,000 Gain on revaluation Land 222,000 (Re-evaluation increase on land) Accumulated depreciation-Building 113,750 Building 113,750 (Write back acc. Depreciation) Building $160,750 Gain on revaluation – building $160,750 Gain on Revaluation - Land $222,000 Gain on Revaluation – Building $160,750 Other Comprehensive Income Summary $382,750 (Transfer to OCI gains) Other Comprehensive Income Summary $382,750 Revaluation surplus $382,750 Calculation of Annual Depreciation – Building Depreciable amount/Useful life= Annual Depreciation (353