Tutorial Solution Week 8 - ACCY200 FINANCIAL ACCOUNTING IIA...

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ACCY200 FINANCIAL ACCOUNTING IIA SPRING 2009 WEEK 8 TUTORIAL SOLUTIONS: LEO Chapter 5 Review Question 2, 6; Case Study 6, 8; Practice question 5.7, 5.9, 5.13. REVIEW QUESTIONS 2. What are the recognition criteria for property, plant and equipment? Para 7 of AASB 116 contains the following recognition criteria: The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. 6. What factors should entities consider in choosing alternative measurement models? Relevance of information provided : generally current information is preferred to past information. Reliability of the information : cost measures are generally more reliable than valuation measures. Cost of providing the information : Adoption of the valuation model entails costs of valuation and audit.
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CASE STUDY QUESTIONS Case study 6 Two key mistakes are being made by management: (i) the depreciation charge relates to the replacement cost of the asset, and (ii) charging depreciation results in the creation of a fund for the replacement of assets. Re (i): depreciation is an allocation of the depreciable amount of an asset. The depreciable amount is the cost or other amount substitute for cost. Under IAS 16, there are two measurement models available namely the cost model and the revaluation model. Under the revaluation model, an asset can be carried at fair value. Neither of these models result in a depreciation charge that measures the replacement cost of the asset. However, note para. 33 of IAS 16: where there is no market-based evidence of fair value, an entity may use, as an estimate of fair value, a depreciated replacement cost approach. IAS 16 does not give any information as to how this method works, for example whether it is based on the replacement cost of a similar asset or the replacement cost of a new asset. Given that replacement cost is used as an estimate of fair value, it is more likely that a replacement cost of used assets would be used. Again, the depreciation charge is not related to the cost of new
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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 Week 8 - ACCY200 FINANCIAL ACCOUNTING IIA...

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