Hines or Ruth D Hines was an Australian Accounting Academics. She is a great author and best known for her paper in 2008 “Financial Accounting in communicating Reality, WE Construct Reality”.
Financial Accounting is a method of processing financial data and presenting in a much easier format that can be understood easily. Financial reports are used by a lot different parties for their decision making. Financial Accounting by simplifying the loads of financial data helps these different parties which uses financial data.
These different parties which use Financial Statement:-
Conceptual Framework defines the scope of Financial Reporting. It identifies and defines the type of information to be displayed in the Financial Statement like Assets, Liabilities, Income, Expenditure, Profit, Loss, and Equity. It also defines the principal and rule of recognition. While defining the Scope of Financial Reporting the different uses and users of the financial report should be kept in mind (Tsalavoutas, et. al., 2012).
The Conceptual Framework will keep a check on the Companies that Financial Statement prepared and presented by them will show the true and fair view of the state of affairs of the company and does show false information that could materially affect the decisions of the user of Financial Statement. Conceptual Framework prevents the fraud companies from taking any action which is prejudicial to the interest of the society. Financial statements prepared under the framework will be prepared according to the applicable accounting standards and will be generally acceptable by the general public as well as other legal authorities (Atwood, et. al., 2011).
Benefits of preparing financial Statement under the conceptual framework:-
In the above case Hines(1991) argue that conceptual framework presume legitimize and reproduce the assumption of an objective world and as such play apart in constituting social world and provide social legitimacy to the accounting profession.
In public sector undertakings there is a large involvement of public funds so these funds should be utilized effectively. In the absence of any framework or guideline there will be severe mis-utilisation of these funds therefore with the presence of Conceptual Framework there will be c check that these funds are utilized by the management of the company for which they are being raised for.
As by working under the guidelines of a legal framework which legally and generally accepted the accounting profession has been acknowledged socially. The reports and statement generated and prepared by the accountant are generally accepted by the general public and widely used by them for fulfilling their objective (Weil, et. al., 2013).
Facts given in the question
Purchase price of Delivery Truck =$65000
Salvage Value of the Delivery Truck = $5000
Life of the Delivery Truck = 6 Years
Expected Kilometers covered = 246000 kilometers
Annual depreciation charge for 6 year using straight line method of depreciation
Straight line Method of Depreciation is the simplest depreciation calculating technique. The depreciable value of asset is equally apportioned over the Useful life of the asset (Jackson, et. al., 2010).
Formula for Calculating Depreciation as per Straight Line Method=
(Purchase price-Salvage Value)/Life of the asset
= ($65000-$5000)/6
|
YEAR |
DEPRICIATION |
|
1 |
$10000 |
|
2 |
$10000 |
|
3 |
$10000 |
|
4 |
$10000 |
|
5 |
$10000 |
|
6 |
$10000 |
|
TOTAL |
$60000 |
Calculation of depreciation for 6 years using sum of digits method:-
Sum of the year’s digit method of depreciation provides higher depreciation in the initial year and will decrease from year to year at the end of useful life of the asset whole depreciable value of the asset is apportioned throughout the year (Noland, 2011). The depreciable value of asset is calculated in this method by subtracting Salvage Value from the Initial Cash outflow.
Formula of Sum of the Year of Digit =n (n+1)/2
N = useful life of the asset
Sum of the year of the digit = 6(6+1)/2
|
Year |
Useful life left |
Calculation |
Depreciation |
|
1 |
6 |
(6/21)*$60000 |
17142.85 |
|
2 |
5 |
(5/21)*$60000 |
14285.71 |
|
3 |
4 |
(4/21)*$60000 |
11428.5 |
|
4 |
3 |
(3/21)*$60000 |
8571.43 |
|
5 |
2 |
(2/21)*$60000 |
5714.29 |
|
6 |
1 |
(1/21)*$60000 |
2857.1 |
Calculating depreciation through Declining balance method:-
Calculating depreciation through Declining Balance method
Declining Balance Method: Declining Balance Method of Depreciation is also known as Written down Value Method. In this method rate of depreciation is charged on the Written down value of the asset. In this method More Depreciation is charger in the beginning of life of asset. The reason for such allocation is because a machine is more productive during its initial period as compared to the later period of its life. Thus the Revenue generation from the asset in the initial year is more therefore depreciation will be charged accordingly (Gravelle, 2011).
Written down Value = Purchase value – Depreciation of that year
The rate of depreciation is not given in the question therefore it will be calculated as follows
Rate of Depreciation =
n = number of years
s = salvage value
c = cost
Rate of depreciation = 35%
|
Year |
WDV at the end of Year |
Depreciation |
|
0 |
65000 |
0 |
|
1 |
42250 |
22750 |
|
2 |
27462.5 |
14787.5 |
|
3 |
17850.625 |
9611.875 |
|
4 |
11602.905 |
6247.72 |
|
5 |
7541.89 |
4061.02 |
|
6 |
4902.22 |
2639.66 |
Calculating Depreciation using the unit of production method using kilometers as the basis of use
GIVEN INFORMATION
|
Year |
Kilometers |
|
2012 |
28 000 |
|
2013 |
34 000 |
|
2014 |
42 000 |
|
2015 |
55 000 |
|
2016 |
68 000 |
|
2017 |
19 000 |
|
246 000 |
Total Kilometers covered by the delivery truck = 246000 km
In this method the depreciable value of asset will divided in the years on the basis of kilometers covered by the Delivery truck during that year. Before calculating depreciation of each year the depreciable value is calculated by subtracting the Salvage Value from the Purchase Cost of the Asset. At the end of the life of the Asset the value of the asset will be 0 as all the depreciable value is divided between the years on the basis of the kilometer covered (Stárová, & ?ermáková, 2010).
Depreciable value of Asset = Purchase Cost – Salvage Value
= $65000 – $5000
= $ 60000
|
Year |
Kilometers covered |
Calculation of depreciation |
Depreciation |
|
1 |
28000 |
(28000/246000)*60000 |
6829.27 |
|
2 |
34000 |
(34000/246000)*60000 |
8292.68 |
|
3 |
42000 |
(42000/246000)*60000 |
10243.9 |
|
4 |
55000 |
(55000/246000)*60000 |
13414.63 |
|
5 |
68000 |
(68000/246000)*60000 |
16585.37 |
|
6 |
19000 |
(19000?246000)*60000 |
4634.15 |
Given Information
Contract Price = $50 million
Expected Cost = $38 million
Every year last day of June:-
|
2016 ($m) |
2017 ($m) |
2018($m) |
|
|
Costs for the year |
10 |
18 |
12 |
|
Costs incurred to date |
10 |
28 |
40 |
|
Estimated costs to complete |
28 |
12 |
– |
|
Progress billings during the year |
12 |
20 |
18 |
|
Cash collected during the year |
11 |
19 |
20 |
Calculation of gross profit recognized each year
Percentage completion method is generally an accountings method used by large construction companies. The main business of these companies is to take construction contracts which are completed in number of years and the division of contract price over the years is also not uniform. Now the problem arises with these companies is the recognition of revenue over the term of contract. The percentage of completion method is used to divide the revenue and the cost of contract over the years in which contract is completed.
Gross profit of the complete contract will be calculated by Subtracting Estimated total cost from Contract price received
Gross profit of the contact = Total Contract Price – Total Estimated Cost
= $50 million – $ 38 million
= $ 12 million
Calculation of percentage of completion of work
Year 1:
Percentage of completion of work = (Total cost incurred / Estimated total cost) * 100
= (10 / 38) * 100
= 26.32%
Gross profit of Year 1 = (26.32 / 100) * $ 12 million
= $ 3158400
Revenue of the Year 1 = (26.32 / 100) * 50 million
= $ 13160000
Income of the Year 1 = $ 13160000 – $ 10000000
= $ 3160000
Year 2:-
Percentage of completion of work = (Total cost incurred / Estimated total cost) * 100
= (28 / 40) * 100
= 70 %
Gross profit at 70% completion = (70 / 100) * $ 10 million
= $ 7000000
Gross profit of year 2 = total gross profit till date – previous year profit
= $ 7000000 – $ 3158400
= $ 3841600
Revenue of the year 2 = ((70 / 100) * $ 50 million) – $ 13160000
= $ 35000000 – $ 13160000
= $ 21840000
Income of year 2 = $ 21840000 – $ 18000000
= $ 3840000
Year 3
Contract is completed in this year
Gross profit of Year 3 = Total gross profit – Gross profit till year 2
= $ 10000000 – $ 7000000
= $ 3000000
|
Year |
Gross profit |
|
1 |
$ 3158400 |
|
2 |
$ 3841600 |
|
3 |
$ 3000000 |
Journal entries for 2016 using percentage of completion method
Year 1
Construction in progress $ 10000000
Accounts Payable $ 10000000
(Cost incurred for the year)
Contract Receivable $12000000
Progress Billing $12000000
(Bills made by company during that year)
Cash $ 11000000
Accounts receivables $ 11000000
(Cash received by the company)
Year 2
Construction in progress $ 18000000
Accounts Payables $18000000
(Cost incurred during year 2)
Contract Receivable $ 20000000
Progress Billing $ 20000000
(Bills made by the company during year 2)
Cash $ 19000000
Accounts Receivable $ 19000000
(Cash collected during that year)
Year 3
Construction in progress $ 12000000
Accounts Payables $ 12000000
(Cost incurred during the year 3)
Contracts Receivable $ 18000000
Progress Billings $ 18000000
(Total billings made for year 3)
Cash $ 20000000
Accounts Receivable $ 20000000
(Cash received during year 3)
Progress Billings $ 50000000
Construction Contract Revenue $ 50000000
(Total Revenue recognized)
Cost of Construction $ 40000000
Construction in progress $ 40000000
(Total construction cost recognized)
Stage of completion cannot be reliably assessed
When the stage of completion cannot reliably assess that profit of year 2016 will be the cash received from the client and the cost incurred on completing that contract.
2016
Construction Expenses $ 10000000
Accounts Payable $ 10000000
(Expenditure of year 2016)
Construction receivable $ 12000000
Progress Billings $ 12000000
(Billings for year 2016)
Cash $ 11000000
Construction Receivable $ 11000000
(Total cash received during the year)
Profit and loss account $ 2000000
Construction account $ 2000000
(Profit transferred)
(a) Research and Development done by the company require a large amount of expenditure and it gives future economical benefit to the company. Research and development is considered to be the intangible asset for the company. The expenditure incurred on the research does not directly relate to future benefit of company and should be written off during that year from the profit and loss account and the development expenditure should be written off from the revenue generated by such development done by the company. However the development expenses can also be carried forward as an intangible asset.
Therefore all of the research expenditure done in the year 2013 will be charged from the profit and loss account of that year.
The expenses incurred on the development of the will be written off from the year from which the project will start generating income. The generation of income start from year 2015 therefore no expenses will be charger in the year 2013 for development.
(b) Research and Development of the project was completed in the Year 2014 but the revenue from the project was started from year 2015 and thus the expenses incurred on development will to be written off from the profit from the respective year. But the expenses incurred on the on the research work of the project will be amortized in the year in the year in which expenses took place which is 2014.
(c) Expenditure to be carried forward in Year 2013 and 2014
Year 2013
Research Expenses to be carried Forward = Nil
Development Expenses to be Carried forward = Expenses incurred in 2013
Year 2014
Research Expenses to be carried Forward = Nil
Development Expenses to be Carried forward = Expenses incurred in 2013 and 2014
(d) Journal entries of amortization of cost in 2015 and 2016 are as follows:-
Year 2015
Deferred cost $ 10 million
Profit & Loss $ 10 million
(Deferred cost amortized)
Year 2016
Deferred cost $ 20 million
Profit & Loss $ 20 million
(Deferred cost Amortized)
Note: – (Since no figure is present in the question therefore Cost of Development of project is taken as $ 100 million)
(e) Journal entries
Revenue from operations $ 20 million
Profit & Loss $ 20 million
(Income recognized)
References
Atwood, T. J., Drake, M. S., Myers, J. N., & Myers, L. A. (2011). Do earnings reported under IFRS tell us more about future earnings and cash flows?. Journal of Accounting and Public Policy.
Georgiou, G. (2010). The IASB standard-setting process: Participation and perceptions of financial statement users. The British Accounting Review.
Gravelle, J. G. (2011). Reducing depreciation allowances to finance a lower corporate tax rate. National Tax Journal.
Gray, G. L., Turner, J. L., Coram, P. J., & Mock, T. J. (2011). Perceptions and misperceptions regarding the unqualified auditor’s report by financial statement preparers, users, and auditors. Accounting Horizons.
Humpherys, S. L., Moffitt, K. C., Burns, M. B., Burgoon, J. K., & Felix, W. F. (2011). Identification of fraudulent financial statements using linguistic credibility analysis. Decision Support Systems.
Jackson, S. B., Rodgers, T. C., & Tuttle, B. (2010). The effect of depreciation method choice on asset selling prices. Accounting, Organizations and Societ.
Noland, T. R. (2011). The sum-of-years’ digits depreciation method: use by SEC filers. Journal of Finance and Accountancy, 5, 1.
Stárová, M., & ?ermáková, H. (2010). Method of Component Depreciation of Fixed Assetsts and Its Comparision with Traditional Methods. AGRIS on-line Papers in Economics and Informatics.
Tsalavoutas, I., André, P., & Evans, L. (2012). The transition to IFRS and the value relevance of financial statements in Greece. The British Accounting Review.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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