Tutorial Solution - ACCY200 FINANCIAL ACCOUNTING IIA SPRING 2009 WEEK 4 TUTORIAL SOLUTIONS LEO Chapter 3 Review Questions 5 8 15 Case Study 1 5

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ACCY200 FINANCIAL ACCOUNTING IIA SPRING 2009 WEEK 4 TUTORIAL SOLUTIONS: LEO Chapter 3 Review Questions 5, 8, 15; Case Study 1, 5; Practice Question 3.3, 3.7. REVIEW QUESTIONS 5. As maintenance costs on equipment have been steadily rising every year, Scotch Ltd has been setting aside regularly a provision for plant maintenance at an increasing amount. The provision has been recorded as a liability, and as an expense. Discuss whether Scotch Ltd’s treatment is correct. The current Framework ’s definition of a liability provides that there must be a present obligation. Furthermore, a provision must firstly be a liability for it to exist. See Section 3.1.3 of the chapter. As the recording of future maintenance costs is merely a book entry involving a future self-sacrifice by Scotch Ltd itself, with no present obligation, no liability for maintenance costs exists under the Framework ’s definition of liabilities. Nor can there be an expense as there has been no outflow or depletion of assets or incurrence of a liability in Scotch Ltd. 8. Discuss the nature of income and revenue. When can revenue be recognised? What further restrictions are placed on the recognition of revenue by AASB 118? How is revenue to be measured? Income is defined at paragraph 70 of the current Framework as meaning increases of 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. Income is subclassified into revenue and gains. Revenue is defined in AASB 118 as the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Gains are simply income which arise from activities which are “not from ordinary activities”. Gains are reported on a net basis, unlike revenue. Paragraph 83 of the current Framework states that income should only be recognised when it is probable these inflows or savings in outflows will occur and the amount can be reliably measured. AASB 118 places further restrictions on the recognition of revenue in that it requires a control test and a cost test to be applied. The control test requires the entity to transfer the significant risks and rewards of ownership of the goods, and not to retain continuing management involvement associated with effective control over the goods. The cost test requires that all costs incurred or to be incurred in respect of the sale to be measured reliably. For revenue from services, a stage of completion test is also required.
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This note was uploaded on 12/13/2010 for the course ACCY 201 taught by Professor Kevin during the Three '09 term at University of Wollongong, Australia.

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Tutorial Solution - ACCY200 FINANCIAL ACCOUNTING IIA SPRING 2009 WEEK 4 TUTORIAL SOLUTIONS LEO Chapter 3 Review Questions 5 8 15 Case Study 1 5

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