Tutorial Week 2 Homework

Chapter 3: Company Operations

CASE STUDIES
Case Study 4:
CLEARSAILING LTD
A.

Currently, there is no Australian accounting standard to provide accounting

policies or guidance to deal with accounting for advertising expenditure of this
kind.
Two potential accounting policies are:
(a)
expense all advertising expenditure as incurred, or
(b)
capitalise all advertising expenditure (i.e. treat the costs as an asset).

B.

AASB 108, paragraph 10 states that, in the absence of an Australian accounting

standard, management shall use its judgement in developing and applying an
accounting policy that results in information that is both relevant to the
economic decision making needs of users and is reliable, i.e. provides a faithful
representation of the entitys financial position and performance, as well as
being free from bias and complete. Paragraph 11 requires management to refer
to the accounting standards of other bodies dealing with similar and related
issues and the definitions, recognition criteria and measurement concepts
contained in the conceptual framework when choosing between competing
accounting policies.

D.

Students could select either policy the key issue is whether or not such
expenditure results in the creation of an asset as per the Conceptual
Frameworks definition. If so, the expenditure should be capitalised. If not, the
expenditure should be expensed. Students should provide valid arguments to
support their choice of accounting policy. In this case, we would argue against
capitalisation as the main purpose of the board is to show a higher profit in the
current year, i.e. this is not a faithful representation of the entitys financial
position or performance.

Jeffreys View (sometimes accountants disagree with each other)

Advertising that is prepaid e.g. 3 months of television commercials, may well be
recognised as an asset. But advertising costs should not otherwise be recognised as an
asset. Subsequent expenditure on brands (i.e., advertising) should always be
recognised in profit or loss as incurred. This is because such expenditure cannot be
distinguished from expenditure to develop the business as a whole. (reference AASB
138 para 20)

Tutorial Week 2 Homework

PRACTICE QUESTIONS
RACTICE QUEST
IONS
QUESTION 3.11
PANSY LTD

A.
Statement of Profit or Loss and Other Comprehensive Income
For year ended 30 June 2014
Income:
Sales
Less sales returns
Interest revenue
Total revenues
Expenses:
Selling expenses
Cost of sales
Other selling expenses
Salaries and wages
Total selling expenses
Administrative expenses
Financial expenses
Interest expense
Total expenses
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for the year

$1 600 000
65 000

$1 535 000
20 000
1 555 000

850 000
125 000
150 000
1 125 000
262 000
56 500
1443 500
111 500
65 000
$46 500
0
$46 500

Tutorial Week 2 Homework

B.

-/-/14
30/6/14
30/6/14
30/6/14

Interim div paid

Final div declared
Transfer to general
reserve
Balance c/d

Retained Earnings
100 000 1/7/13
Balance
150 000 30/6/14
P or L Summary
25 000 30/6/14
Transfer from
revaluation surplus
85 000
360 000
1/7/14
Balance b/d

263 500
46 500
50 000

360 000
85 000

Opening balance of retained earnings = $38 500 add back dividends paid and declared
during the year i.e. $100 000 + 150 000 (which have been deducted from the retained
earnings) less $50 000 transfer from revaluation surplus (which is included in the $38
500) and plus $25 000 transfer to general reserve (which is included in the $38 500) =
$263 500

PANSY LTD
Statement of Changes in Equity
for the year ended 30 June 2014
Total comprehensive income for the year

$46 500

Retained earnings:
Balance at 1 July 2013
Profit for the period
Transfer from revaluation surplus
Interim dividend paid
Final dividend declared
Transfer to general reserve
Balance at 30 June 2014

$263 500
46 500
50 000
(100 000)
(150 000)
(25 000)
$85 000

Share capital:
Balance at 1 July 2013
Balance at 30 June 2014

$200 000
$200 000

Other reserves:
Revaluation surplus
Balance at 1 July 2013
Transfer to retained earnings
Balance at 30 June 2014
General reserve
Balance at 1 July 2013
Transfer from retained earnings
Balance at 30 June 2014

70 000
(50 000)
20 000
$0
25 000
$25 000

Tutorial Week 2 Homework

C.
PANSY LTD
Statement of Financial Position
as at 30 June 2014
Current assets
Cash
Inventory
Accounts receivable
Total current assets
Non-current assets
Land
Plant and equipment
Accumulated depreciation
Total non-current assets
Total assets
Current liabilities
Accounts payable
Dividend payable
Mortgage loan
Current tax liability
Total current liabilities
Non-current Liabilities
Mortgage loan
Total non-current liabilities
Total liabilities
Net assets

$117 000
85 000
180 000
382 000
200 000
250 000
(37 000)

213 000
413 000
795 000
50 000
150 000
50 000
65 000
315 000
150 000
150 000
465 000
$330 000

Equity
Share capital
Revaluation surplus
General reserve
Retained earnings
Total equity

$200 000
20 000
25 000
85 000
$330 000