Question 1

Daniel Ltd sells one of its properties to a financing company with an attached call option,which allows Daniel Ltd to reacquire the property at a future date for $400,000.The current market value at the time of the sale is $300,000,but the financing company pays $350,000 for it.It is expected that the market value of the property will exceed $400,000 before the option expires.What is the appropriate treatment of this sale?

Accepted Answer

The transaction should be recorded as a financing arrangement, recognizing the cash inflow and a liability, as the call option indicates that control of the property has not been transferred.

Question 2

When goods are sold 'free on board' (f.o.b)shipping point the revenue should be recognised when:

Accepted Answer

Revenue is recognized when the goods are handed over to the common carrier, as the risk and ownership transfer to the buyer at that point.

Question 3

In the situation that a debtor becomes unable to pay and the amount has not been anticipated through an provision for doubtful debts,what is the entry to record the bad debt?

Accepted Answer

Recording the bad debt expense and reducing the Debtors account is the appropriate treatment according to the matching principle. Choice A is incorrect because the provision for doubtful debts is a contra-asset account used to estimate the potential losses from bad debts, but it should not be affected after the debtor defaulted. Choice B is incorrect because it would overestimate the provision for doubtful debts, which has already been made before the debtor defaulted. Choice C is incorrect because the company did not receive any cash from the bad debt. Choice E is incorrect because there is a need to record the bad debt expense despite no provision for doubtful debts being made previously.

Question 4

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). Products such as precious metals,or agricultural products,recognise revenue at which point in the earnings cycle shown above?

Accepted Answer

The answer of The following is a diagram of the...

Question 5

SAC 4 previously outlined tests that may have been useful in determining if it is probable that an inflow of future economic benefits that is capable of measurement has occurred.These tests included.

Accepted Answer

Both A and C are included in D, so D covers all bases. It is important to have received cash and have completed all necessary acts of performance to establish a valid claim against an external party before recognizing revenue. Option B does not cover all cases as it does not consider the collectability of debts, while option A is too narrow as it only considers cash and not the completion of acts of performance. Option E is not a valid answer as it does not provide any useful information.

Question 6

Magazines Galore receives subscription money in advance,and has received $50,000 from customers on 1 February to cover the next ten issues of Wheels Galore.There are ten issues a year - one at the end of each month except for January and December.What are the appropriate accounting entries to record the receipt of the subscription money and (assuming no monthly entries have been made)the adjusting entry at 30 June (after June's issue has been mailed to subscribers)?

Accepted Answer

The answer of Magazines Galore receives subscription money in advance,and...

Question 7

Vettori Ltd has the following information from an aged debtors listing for the current period.  Based on experience in the industry,Vettori Ltd uses the following basis for estimating uncollectible amounts:
 Assuming that the current balance in the provision for doubtful debts is zero,what is the entry to record the provision for this period? What is the entry to record the writing off of a bad debt of $1,000 when a debtor goes bankrupt?

Accepted Answer

The answer of Vettori Ltd has the following information from...

Question 8

The general rule under modified historical-cost accounting is that holding gains on non-current assets should be:

Accepted Answer

Under modified historical-cost accounting, holding gains on non-current assets should be taken to an asset revaluation reserve unless it is the reversal of a previous devaluation that was expensed. In that case, it can be recognised as income to the extent the devaluation was recognized as an expense. This approach allows companies to recognize the impact of changes in the fair value of their non-current assets while still maintaining the reliability of their financial statements.

Question 9

There are various appropriate accounting treatments when a sale is made subject to a right of return.These methods include:

Accepted Answer

This option combines both methods of accounting for returns - recording the sale and accounting for returns as they occur, as well as reducing sales by an estimate of future returns. By doing so, the financial statements will reflect the most accurate representation of revenue and any potential returns. Option A only accounts for returns as they occur and does not consider potential returns. Option B is not a generally accepted accounting principle and is overly conservative. Option C only accounts for potential returns and does not recognize actual returns as they occur. Option E is incorrect as it includes all options, including the overly conservative option B.

Question 10

On 1 July 2003 Bigwell Ltd sells a machine to Archer Ltd in exchange for a promissory note which requires Archer Ltd to make five payments of $8,000,the first to be made on 30 June 2004.The machine cost Bigwell Ltd $20,000 to manufacture.Bigwell Ltd would normally sell this type of machine for $30,326 for cash or short-term credit.The implicit interest rate in the agreement is 10 per cent.What are the appropriate journal entries to record the sale agreement and the first two instalments using the gross method?

Accepted Answer

The answer of On 1 July 2003 Bigwell Ltd sells...

Question 11

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). In the traditional historical-cost accounting model,at what point has revenue been recognised for long-term construction contracts in the building industry?

Accepted Answer

The answer of The following is a diagram of the...

Question 12

The 'percentage of completion' that may be used to account for construction contracts can be justified on the basis that:

Accepted Answer

The answer of The 'percentage of completion' that may be...

Question 13

Revenue recognition under AASB 18 requires that:

Accepted Answer

All of the choices given are requirements for revenue recognition under AASB 18. The entity must have transferred the significant risks and rewards of ownership, must not retain continuing managerial involvement or effective control over the goods, the costs involved must be measurable reliably, and the amount of revenue can be measured reliably.

Question 14

When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement.In order to separate the financing element from the sale,it is necessary to calculate the interest rate inherent in the agreement.What advice does AASB 118 provide about this?

Accepted Answer

AASB 118 provides that the implicit rate of interest is the more clearly determinable of either: (a) the prevailing rate of a similar instrument of an issuer with a similar credit rating; or (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.

Question 15

When the collectability of an amount that has been recorded as revenue becomes uncertain,the appropriate accounting treatment is to:

Accepted Answer

When collectability becomes uncertain, the amount that is no longer probable to be recovered should be recognized as an expense, reflecting the loss in value.

Question 16

On 1 July,2003 Bryson Ltd sells a machine to Adams Ltd in exchange for a promissory note which requires Adams Ltd to make five payments of $8,000,the first to be made on 30 June,2004.The machine cost Bryson Ltd $20,000 to manufacture.Bryson Ltd would normally sell this type of machine for $30,326 for cash or short-term credit.The implicit interest rate in the agreement is 10 per cent.What are the appropriate journal entries to record the sale agreement and the first two instalments using the net-interest method?

Accepted Answer

The answer of On 1 July,2003 Bryson Ltd sells a...

Question 17

Kringle Company has agreed to provide services to North to South Ltd in exchange for a piece of equipment and a cash payment.The equipment is currently recorded in North to South's books at $73,000 but independent assessors have set the fair value at $65,000.The cash payment of $20,000 will be received 12 months after completion of the services.Kringle should record revenue as:

Accepted Answer

Kringle should record revenue as the fair value of the equipment ($65,000) plus the present value of the $20,000 cash payment, as the cash payment is deferred for 12 months and needs to be discounted to present value.

Question 18

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). Because of uncertainty and depending on which measurement model is being applied,revenue recognition will take place at a limited number of points in the earnings cycle.In traditional historical-cost accounting,in most cases,at which point in the cycle above have revenues been recognised?

Accepted Answer

The answer of The following is a diagram of the...

Question 19

In the case of a fixed price contract,AASB 111 specifies four conditions that must all be met in order for the percentage of completion method to be applied.These conditions include:

Accepted Answer

AASB 111 specifies four conditions that must all be met for the percentage of completion method to be applied in a fixed price contract. The conditions are that costs related to the contract can be clearly identified and measured reliably, and it is probable that the economic benefits arising from the contract will flow to the contractor. Option D includes both of these conditions, while the other options either include irrelevant information or incomplete information.

Question 20

Under the AASB Framework income is now subdivided into:

Accepted Answer

Under the AASB Framework, income is subdivided into revenues, which arise in the course of the ordinary activities of the entity, and gains, which may or may not arise in the course of the ordinary activities of the entity. This approach is consistent with the definition of income as an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Quiz 16: Revenue Recognition Issues

When goods are sold 'free on board' (f.o.b) shipping point the revenue should be recognised when:

In the situation that a debtor becomes unable to pay and the amount has not been anticipated through an provision for doubtful debts,what is the entry to record the bad debt?

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982) . Products such as precious metals,or agricultural products,recognise revenue at which point in the earnings cycle shown above?

SAC 4 previously outlined tests that may have been useful in determining if it is probable that an inflow of future economic benefits that is capable of measurement has occurred.These tests included.

The general rule under modified historical-cost accounting is that holding gains on non-current assets should be:

There are various appropriate accounting treatments when a sale is made subject to a right of return.These methods include:

The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982) . In the traditional historical-cost accounting model,at what point has revenue been recognised for long-term construction contracts in the building industry?

The 'percentage of completion' that may be used to account for construction contracts can be justified on the basis that:

Revenue recognition under AASB 18 requires that:

When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement.In order to separate the financing element from the sale,it is necessary to calculate the interest rate inherent in the agreement.What advice does AASB 118 provide about this?

When the collectability of an amount that has been recorded as revenue becomes uncertain,the appropriate accounting treatment is to:

In the case of a fixed price contract,AASB 111 specifies four conditions that must all be met in order for the percentage of completion method to be applied.These conditions include:

Under the AASB Framework income is now subdivided into: