Company Accounting PG Assignment s2 2016
The following questions require you to deal with AASB 15 Revenue from Contracts with Customers, and other relevant documents. You can assume that your company adopted this rule. Reponses based on irrelevant accounting standards, such as AASB 118, or material taught in previous units will incur a 100% penalty.
Each group will nominate a member to submit a single word file with the group�s response to the questions. (I do not want separate files for each question.)
Submission date and details � as per the unit outline.
Question 1 (40 marks)
You work for a start-up consulting company in a very competitive area. Your firm provides expertise to entities who wish to reduce their carbon footprint. The firm will typically send a team to a client�s workplace to understand their business processes and identify where improvements can be made. After this, the firm produces a detailed report for the client. In order to build business, the firm gets clients to pay 20 percent of the contract price up front and the remaining 80 percent will be paid on receipt of the report. If the client defaults, the firm can keep the 20 percent received. The firm has decided it will not pursue these claims in court, as the legal costs are likely to exceed the benefits.
The managing director of the firm is not wildly delighted with these terms, but has approved them, due to the cutthroat nature of this industry. He expects to manage this risk by selecting clients (such as government agencies, and other entities who can use this sort of report in their marketing) who are unlikely to play nasty games, such as paying their bills.
Assume that your firm�s financial year ends on the 30th of June 2019. On the 1st of April 2019, the firm received $200,000 from a client for a report that is expected to be delivered to the client at the end of July 2019. The total contracted price is $1,000,000. Internal budgeting shows that your company expects to pay $550,000 to internal staff and $150,000 to external experts to produce the report. These costs are expected to be incurred evenly over the period.
An argument has broken out in the accounting team how these contracts should be accounted for. Kelly states that the company should recognise the $200,000 immediately and the remaining amount when the report is presented. On the other hand, Lee states that the company should recognise all of the $200,000 and some of the $800,000 in the current year, as the company�s profits are not expected to be very strong this year. To further complicate things, Ngoc stated that no income at all should be recognised until the report is completed and given to the client.
Your manager bumped into you at the end of financial year party. He wants you to clarify this. That is, work out how much income should be reported this year and next year. Just after his 4th glass of red wine and before he fell out of his chair, he mumbled something about working out how many performance obligations there are in this contract. He is expected out of hospital in a couple of weeks.
Research AASB 15 and associated relevant documents to determine when your company should recognise the income from the client described above. You need to specify the treatment of the $200,000 and the $800,000. You must identify and state any assumptions you make. These assumptions must be based on authoritative sources, and you must present specific references. (In this case � para XXX of YYY is fine.)
Please place your answers here. Add extra lines as necessary.
Marking guide Question 1 Possible marks Marks achieved
Number of performance obligations 5
When is/are the performance obligation(s) satisfied? 10
How to account for the $200,000 15
How to account for the $800,000 10
Question 2 (60 marks)
You work for a company that buys products from suppliers and then sells them on TV, via direct marketing channels. The company has a policy of allowing customers to have a full refund if they return products within 30 days of purchase. This refund only applies if the goods are undamaged and can be resold to other customers. The proportion of units that are refunded varies a lot, depending on the characteristics of each product. The best products have a refund rate of 3%. The worst products have a refund rate of around 30%. (That is, 30% of units of those products were returned by customers within the 30 day window).
The company uses the perpetual inventory system. You can assume that all sales are made via credit cards and these are classified as credit sales.
The manager of the company is a good friend of the CFO. You have been told that the manager�s quarterly bonus requires him to show an increase in profits in each quarter. The gossip around the office is that sales have been too low this quarter (ending on March 31) and the manager�s target is unlikely to be met.
On the 28th of March 2019 your company started selling a new, revolutionary range of wigs, made from the hides of a special breed of long haired rat. (Don�t worry, the rat is not an endangered species.) The wig is revolutionary, due to its raw materials and because it is stapled onto the head of the customer, preventing it from flying away in strong winds. This is considered a great advantage by the manufacturer. However, there is a concern that these wigs may attract cats. Oddly enough, your company does not have experience dealing with this product, so it is unsure of the percentage of wigs that will be returned in less than 30 days. Each wig costs $40 and is sold for $120. You can ignore mailing costs. On the 28th of March 2019, the company sold 50 of these wigs.
The CFO told you he is concerned there is a lot of uncertainty relating to the number of new wigs that will be returned. He suggests it would be better if no revenue was recorded for March. He went on to say that this should be recorded in April, once a clearer picture had emerged of the proportion of wigs returned. The marketing people seem to believe that sales of the new product will grow very quickly, and will stabilise at about 700 per day within a couple of months.
The company has also been selling wigs made from synthetic materials for a number of years. These cost the company $10 each and sell for $85 each. Over this time the company has noticed that on average, 5 percent of these wigs are returned within 30 days of sale. On the 28th of June, the company sold 900 of these wigs.
Part A Answer each sub-part.
1) Prepare journal entries that the CFO wants in relation to the sales of the new wigs made on the 28th of March 2019. (5 marks)
2) Prepare the journal entries to show how the company should account for the sales of the synthetic wigs, according to AASB 15. (10 marks)
3) Prepare the journal entries to show how the company should account for the sales of the new wigs, according to AASB 15. If you think the CFO�s suggestion is correct, simply say �As per the CFO�s suggestion�. Justify your position with reference to the standard, associated documentation, and the current Exposure Draft of the Conceptual Framework. (Hint, have a look at the material relating to qualitative characteristics.) (20 marks)
Assume that on April 27 (30 days after the date of sale), 7 of the new wigs were returned and refunds were paid. In addition, 43 of the old wigs were returned. All returned wigs were undamaged and were returned to inventory. Prepare relevant journal entries. (15 marks)
Discuss whether the CFO�s proposal would assist or hinder the manager to obtain a bonus. (10 marks)
Please place your answers here. Add extra lines as necessary.
1) Prepare journal entries that the CFO wants in relation to the sales of the new wigs made on the 28th of March 2019.
2) Prepare the journal entries to show how the company should account for the sales of the synthetic wigs, according to AASB 15.
3) Prepare the journal entries to show how the company should account for the sales of the new wigs, according to AASB 15. If you think the CFO�s suggestion is correct, simply say �As per the CFO�s suggestion�. Justify your position with reference to the standard, associated documentation, and the current Exposure Draft of the Conceptual Framework. (Hint, have a look at the material relating to qualitative characteristics.)
Part B � 30 days after the sale
I have received a couple of requests to clarify the word count for the assignment questions. I tend to avoid setting these for technical questions, but here are my suggestions. Please note, the material below is guidance only. It is not mandatory. The critical issue is that you submit an answer to each question which addresses that question and is correct, according to the relevant rule(s). If there is reasonable room for multiple interpretations of the facts or the rules, I have no problem if you wish to explore that, as long as the discussion is focused and relevant.
I will penalise ‘spam’ responses. You need to be critical of your work, to ensure you submit a good response. Remember, you are trying to explain something to the reader. You can assume the reader is a trained accountant. Please do not copy and paste large amounts of the rules which are not directly relevant to the questions.
Q1 I suggest this could be easily answered in less than 1,000 words.
Q2 I suggest this could be easily answered in 1,000 words.
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