MAA261 – Financial Accounting Assessment

Description

The objective of this assignment is to develop your skills in applying the Conceptual Framework for Financial Reporting and Australian accounting standards to critically evaluate, problem solve and account for financial reporting items.

You are required to form a group for this assignment. Once you have formed your group, your group can meet online using Skype, Zoom, FaceTime, or any other method of your choice to plan and work on the assignment. It is advised that the group keeps a record of the discussion of the meeting. An Action Plan Template is provided in the assessment folder for Assessment Task 3 Part A. You are required to use this template to record meeting details for each group meeting. If there is any disagreement within the group, you can refer to the template for conflict resolution and task clarification.

When working in a group, effective communication is essential. Students are encouraged to use tools that allow them to share information and create documents collaboratively. Examples of these include Google Docs, Microsoft Teams, or OneDrive.

Specific requirements

1. 1. This is a group assignment. Students must work in a group formed on the unit site.
2. Any questions related to this assignment should be placed on CloudDeakin. Please try to avoid emailing the unit chair, lecturer or your seminar leader directly. This ensures all students will have access to the same information.
3. Read the instructions below to complete the group assignment.
4. Include the names of your team members and group number on the title page of your report.

Your team has recently been employed to work for eStar Pty Ltd. You will be working as a team of graduate accountants supporting the Chief Financial Officer (CFO) of the firm. The CFO would like your team to prepare a brief report addressing various financial reporting issues and communicate your findings and recommendations to the owners of eStar Pty Ltd. In preparation, you are provided with some background information regarding the company's operations and specific accounts.

In preparation for this report, your group is required to refer to the Conceptual Framework for Financial Reporting, AASB15 Revenue from Contracts with Customers, AASB 116 Property, Plant and Equipment, AASB 136 Impairment of Assets, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, AASB 138 Intangible Assets, and any other applicable standards. When referring to the accounting standards to justify your response, you are required to reference the exact paragraph/principles within your report. See the following example:

In this scenario, the revaluation increase should be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus (para 39, AASB 116).

The following provides background information on eStar. Your group is required to refer to questions following each section.

eStar Pty Ltd involves in the automotive business that manufactures and sells electrical cars across Australia. The business was established in 2012 and has grown to a large proprietary company with four owners: Mask, Eian, Jenny, and Kelly. The business operates from a large factory in Melbourne and is registered for Goods and Services Tax (GST) with a 30 June financial year-end. When it commenced its operations on 01 March 2012, eStar was not able to purchase a building to manufacture its cars, instead rented a factory. As the business has grown, the owners are considering purchasing the following assets for $1,980,000 (GST Inclusive) on 1 July 2022:

Purchasing these assets would involve additional costs: legal fees of $7,260 (GST Inclusive) to register the land in the business' name; $6,050 (GST Inclusive) to rewire the building; $3,630 (GST Inclusive) for one-year building insurance; and $2,750 (GST Inclusive) to conduct a safety inspection of the equipment.

In addition, the building will include the following necessary (not optional) fixture and fittings costs to ensure that the site is in a workable condition: $13,200 (GST Inclusive) to install solar panels; $10,010 (GST Inclusive) to install a cooling and heating system; and $23,100 (GST Inclusive) to install a centralized and automated operational system. Lastly, eStar will also be spending $16,720 (GST Inclusive) for advertising and promoting the new premise.

The building is expected to have a useful life of 20 years and an estimated residual value of $100,000. The equipment is expected to have a useful life of 5 years, be used for 15,000 hours, and carry an estimated residual value of $25,000. The equipment is expected to be used for 1,960 hours in Year 1; 2,850 hours in Year 2; 3,500 hours in Year 3; 4,200 hours in Year 4; and 2,490 hours in Year 5. eStar adopts the cost model to measure all existing non-current assets.

Given the surge in fuel prices recently, the business has seen a significant increase in the demand for its products. The owners believe existing non-current assets should be valued higher and it would be more appropriate to change to the revaluation model of measuring non-current assets.

Question 1:Determine the amounts to be recorded in the balance sheet if eStar were to acquire land, building and equipment on 1 July 2022. Consider any additional amounts that need to be included in the cost of the land, building, and equipment and justify why or why not they should be included. Show your calculations in a table in the appendix (the appendix is not included for the word count).

Question 2:Calculate the annual depreciation expense over the life of both the building and equipment using all 3 methods of depreciation (where possible), starting with year 1 and ending 30 June 2023. For the building and equipment, select the method of depreciation you would advise the owners to use and justify your selection. To perform the above calculations, you are encouraged to use the “Template for Financial Modelling_PPE” provided in the Week 3(b) learning content folder. You must use formulas in Excel to obtain the answers. Take screenshots of your template that show the answers and Excel formulas that you used and insert them directly in your response to Question 2.

Question 3:Explain why the owners of eStar would like to change the method of measuring non-current assets from the cost model to the revaluation model. Discuss how changing the measurement of non-current assets from the cost model to the revaluation model influences the usefulness of financial information with reference to the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for Financial Reporting. Explain whether the owners of eStar should consider changing the method of measuring non-current assets from the cost model to the revaluation model

Question 4:Given the recent pandemic, some debtors are now having difficulty paying their debts. In the past, the business used the direct write-off method. The CFO has already discussed with the owners the possibility of moving to the allowance method of accounting for doubtful debts. The owners were supportive of the allowance method but debated the merits between the percentage of net credit sales method and the aging method in accounting for doubtful debts.

Propose and justify whether eStar should apply the percentage of net credit sales method or the aging method in accounting for doubtful debts.

Question 5:eStar uses high-quality components in manufacturing of its electric cars. However, some manufacturing defects are unavoidable. For the year ended 30 June 2022, eStar recorded $2,950,000 of net sales. Based on the previous period, around 2% of net sales are claimed as warranties. The owners believe the warranty amount should be expensed in the period when the claims take place which is normally in the period following the sale.

Justify whether you agree with the owners on the recording of warranties as an expense only in the period the claims are made. If not, explain how warranties for the year ended 30 June 2022 should be accounted for with the necessary double-entry.

Question 6:In 2021, eStar decided to introduce a new vehicle known as Model AZ. The new model uses an advanced battery that allows it to last longer in a single charge and significantly reduce the time needed to charge the vehicle. eStar spent $450,000 on searching and understanding different types of raw materials to develop the new battery. If the company makes a significant discovery from their findings, model AZ could be sold at a premium.

In 2022, eStar spent $750,000 to develop a prototype of Model AZ. The company also spent another $115,000 to organize events worldwide to seek feedback on their prototype from their existing customers and reputable automotive reviewers. The responses were very positive and eStar decided to spend $180,000 on legal costs to register a patent for Model AZ. The patent has a life of ten years, after which other car manufacturers may copy the technology.

Given that the prototype has been well-received, eStar spent $1,450,000 on sales and marketing campaigns worldwide. It became apparent that the demand for Model AZ was huge and within 3 months, eStar received orders of $20 million more than targeted.

The CFO worked out the present value of Model AZ and he believed that the new vehicle had a present value of at least $150 million. A major competitor made a legally binding offer to buy the patent at a price of $200 million. The owners are unsure whether the patent should be revalued at $200 million.

Determine how the above transactions and events would be treated for accounting purposes in accordance with AASB138 Intangible Assets. Discuss whether the present value of $150 million should be revalued to $200 million.

Question 7:On 1 July 2022, eStar signed an agreement with its existing customer, Nexgen, an electric car leasing company to sell 10 of its electric cars for a contract price of $682,000 (GST Inclusive) each with a credit term of n/30. The contract price also includes one free car charger and one free maintenance service 6 months from the date of delivery. The standalone price of one car is $62,920 (GST Inclusive), the standalone price of one car charger is $6,435 (GST Inclusive), and the standalone price of servicing one electrical car is $2,145 (GST Inclusive). Purchasing the charger and servicing the car with an external party is possible. Nextgen paid the full contract amount on 30 July 2022. Half of the cars and chargers were delivered on 5 August 2022 and the remaining were delivered one week later.

With reference to AASB15 Revenue from Contracts with Customers, apply the five-step process for revenue recognition for the contract with Nextgen. Discuss critically whether and how revenue can be recognized within each of the five steps and show any calculations. Finally, provide journal entries to record all related transactions.