Topic04 Solutions - AF3110 Intermediate Accounting 1...

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1 AF3110 Intermediate Accounting 1 2009/10 Semester 2 Topic 4 Suggested Solutions Question 1 (Chapter 8 Q7) (i) This is not a genuine sales transaction and the risks and rewards associated with the goods have not been transferred to the buyer. Instead, Jensen should account for it as a secured loan. That is, the inventory involved should continue to be reported on balance sheet, while the receipt from Wholesaler should be recorded as a loan, not revenue. Finance costs of $3,500 ($35,000 x 12% x 10/12) should also be charged to the income statement. (ii) Assume that the initial fee is non-refundable. The fair amount of revenue to be recognised each year from year 2 to 5 is $10,000 ($8,000 x 100/80) and Jensen will receive $5,000 each year from the franchisee in the same period. So, the portion of unearned revenue in the initial fee is $20,000 [($10,000 - $5,000) x 4] . This would leave $30,000 of the initial fee to be recognised as revenue in the first year. If the initial fee is refundable, the accounting treatment would depend on the refund provision in the franchise contract. (iii) The cost of the first six month s publication is $48,000 ($192,000 / 24 x 6) . On an accrual basis, income of $60,000 ($240,000 / 24 x 6) should be recognised. This would leave an unearned revenue of $180,000 ($240,000 - $60,000) on Jensen s balance sheet, of which $120,000 ($180,000 x 12/18) should be classified as current liability and the remaining, non-current liability.
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2 Question 2 (Chapter 8 Q9) (a) According to HKAS18, revenue can be recognised only when the amount concerned can be reliably measured and when it is probably
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Topic04 Solutions - AF3110 Intermediate Accounting 1...

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