Part A: This part of the assignment is worth a total of 12 marks (details are provided below). It requires you to provide a written response to the questions listed below.
When answering the provided questions you must ensure that your answers address the questions, that your answers have a Australian accounting/financial reporting focus, that your answers are internally consistent, and that the individual components of your answers provide a well-rounded argument that is easy to follow.
The Chief Financial Officer (CFO) of Large Mart has been unable to find answers for two accounting problems. He has asked you to investigate the following questions and to write a report (including relevant references to source materials and accounting standards) that will provide him with a sufficient understanding of these issues to allow a well-supported decision to be made. To achieve this, the CFO seeks you to answer specific questions, but also to outline the development of your answers sufficiently to allow a reader to understand why you have developed your answers.
Question 1) (5 marks)
The Chief Executive Officer (CEO) of Large Mart has asked the CFO if it is possible to change the cost flow assumption that is used to value Large Mart’s inventory. At the moment, Large Mart is using the First-In-First-Out (FIFO) cost flow assumption (in a perpetual inventory accounting system) and although the CEO would like to retain a perpetual inventory accounting system, she would prefer the application of a different cost flow assumption. The CEO would like to make this change because she believes that this could potentially improve Large Mart’s financial position in the balance sheet.
The CFO asks you to investigate, and write a report about, the following questions:
a) What are the legal requirements in relation to changes in inventory cost flow assumptions for reporting entities in Australia? In your answer, you should discuss (1) whether or not changes to cost flow assumptions are permissible in principle and why, and (2) what valuation options (other than FIFO) may be available to Large Mart.
b) What are the legal limitations to changes in cost flow assumptions for reporting entities in Australia? In your answer, you should discuss (1) what legal restrictions would limit Large Mart’s ability to make changes to their inventory cost flow assumptions, and (2) whether or not the reason why the CEO would like to make this change may have any impact on Large Mart’s ability to make such a change.
Question 2) (5 marks)
Large Mart has recently finished building a new factory for computers in Armidale. Large Mart was using its own staff and several items of its own machinery/equipment that were specifically acquired to undertake parts of the building works. The overall construction work took a total of 15 month, with Large Mart staff working on the project throughout this time.
The Large Mart Finance Department has calculated that during the15 month construction time, the following expenditures occurred (please note that not all expenditures of the construction project are listed).
- Total depreciation of the “Machinery/Equipment” account of $30,000. With $20,000 of this amount being for the depreciation of machinery/equipment that was specifically acquired for the project and that was not used in any other Large Mart activities;
- Total interest payments made by Large Mart during the construction of the factory of $100,000. Of this amount $16,000 relate to a loan (with an overall loan value of $300,000 and a repayment duration of 5 years) that Large Mart took out to finance components used in the factory’s production line. The remaining interest payments during this time related to a different loan that was used to purchase an office building in a previous year.
The CFO is not sure how to treat these expenditures in the books of Large Mart, and has asked you to investigate, and write a report about, the following questions:
a) What are the accounting requirements for reporting entities in Australia regarding the
accounting treatment(s)
of the depreciation that was calculated by the Finance Department (your report should NOT discuss different methods to calculate depreciation!!!)? In your answer you should discuss (1) what relevant requirements exist in relation to the accounting treatment(s) of all components of the depreciation calculated by the Finance Department, and (2) how Large Mart should apply these requirements in the given situation.
b) What are the accounting requirements for reporting entities in Australia regarding the
accounting treatment(s)
of all components of the interest expenditures calculated by the finance department? In your answer, you should discuss (1) what relevant requirements exist in relation to the accounting treatment(s) of all components of the interest calculated by the Finance Department, and (2) why the accounting treatment(s) you have identifiedare required in the given situation.
Please write the report requested by the CFO. Your report should be approximately
500 words (+/- 10%) in length for question 1a & b,
and
500 words (+/- 10%) in length for question 2a & b.
You can receive a maximum of five (5) marks for each question.
The appropriate acknowledgement (referencing) of source material used to develop your report will attract one (1) mark. An additional one (1) mark will be given for the number of sources other than the textbook that were used to develop the arguments in Part A of your assignment.
The use of a MINIMUM of three (3) appropriate sources other than the textbook is required (see below for details).
However, in order to receive full marks for your use of resources, you will need to show that you have used
substantially more
than three appropriate (3) resources.
In Part A of this assignment, you are expected to provide in text references as well as a list of references in accordance with UNE’s referencing guidelines.
The submission of assignments without in-text references and/or a reference list will be considered inappropriate conduct (plagiarism) under UNE’s plagiarism rules!
Furthermore, you are expected to use a MINIMUM of three (3) appropriate sources other than the textbook assigned to this unit when answering part A of this assignment. This means that although the prescribed textbook is an appropriate reference, there should be evidence (in the form of in-text references AND entries in your reference list) that you have used
at least three other resources
that are useful in developing the arguments in your report. Appropriate sources of information include, but are not limited to, journal articles, books, selected online resources (i.e. journal databases, newspaper articles, working paper databases, conference websites, official pronouncements of accounting bodies, standards setters, government agencies, public bodies, universities, or accounting firms).
Inappropriate online resources which should NOT be used include Wikipedia, blogs, twitter and websites from “non-official” sources.
Part B: This part of the assignment is worth a total of three (3) marks (details about the allocation of marks in part b are provided below).
The Research & Development Department of Large Mart is currently working on the development of a “study pillow” that allows students to upload study material into their brain whilst sleeping. In order to complete this project, Large Mart has purchased the following items:
• A minibus (which is used to transport students participating in a trial of the study pillow to the laboratory)
• A video camera (which is used to record the feedback of students participating in the trial)
The minibus was purchased on credit on 10th April 201x. The
list price
of the minibus was $90,000, but Large Mart received a 10% loyalty discount because the company purchases all of its motor vehicles from this car dealer. The car dealer also charged $2,000 to deliver the minibus to the Large Mart Research & Development Department.
Large Mart received the minibus on 12th April, and Large Mart started to use the minibus on that day. The invoice (for the purchase price as well as the delivery charges) from the car dealer was paid on 1st May 201x and Large Mart received an early payment discount of 5% when the payment was made.
Large Mart expects to use the minibus for a period of 5 years. At the end of its useful life, theminibus is expected to have a residual value of $8,000. The depreciation method used for the minibus is identical to the method that Large Mart is using for other motor vehicles (straight-line depreciation).
On 1st July 201x, the accounting department of Large Mart decides to revalue the minibus to its fair value at that time of $75,000.
The video camera was purchased in a cash transaction on 1st May 201x. Large Mart paid a total of $3,000 for the camera. After unpacking the camera on 2nd May 201x, Large Mart noticed that the camera was broken. Large Mart returned the camera to the supplier and the supplier has promised to return the funds that were originally paid by Large Mart to Large Mart’s bank account on the following day.
Required:
1) (0.5 marks)
– Provide all journal entries that are necessary in the books of Large Mart to account for the purchase of the video camera on 1st May 201x as well as the return of the camera to the supplier on 2nd May 201x.
2) (1 mark)
– Provide all journal entries that are necessary in the books of Large Mart to account for the purchase of the minibus as well as its payment.
3) (1.5 marks)
– Provide all journal entries that are necessary in the books of Large Mart to account for the revaluation of the minibus on 1st July 201x.