TDM Ltd is a manufacturing business at Mudjimba on the Sunshine Coast.
You are the
accountant for the company and the following items/issues relate to the financial year
ending 30th June, 2016:
1. Photographs of the company?s founders and original buildings, which are of great
sentimental and historical value only.
2. TDM Ltd is being sued for negligence by Zero Ltd and the legal advice is that it is likely
the company will lose the case in court.
3. TDM Ltd is being sued for negligence by Badger Ltd and the legal advice is that it is
likely the company will win the case in court.
4. Obsolete plant and equipment is now (as at 30 June 2016) retired from use by the
5. TDM Ltd has received a donation of $20,000.
Explain how TDM Ltd should account for each of the above items. You must justify your
answer by reference to the AASB Conceptual Framework?s definitions and recognition
criteria for assets, liabilities, income and/or expenses as applicable. You must also state
which General Ledger accounts are to be debited and credited. 1 Question 2: (Approximately 600 words)
On 1st July, 2016, SC Airlines Ltd acquired a new aeroplane for a total cost of $10 million
dollars. The following breakdown of the costs to build the aeroplane was given by the
Fitting out of aircraft:
Food preparation equipment $3,000,000
$ 250,000 All costs include installation and labour costs associated with the relevant part.
It is expected that the aircraft will be kept for 10 years and then sold. The main value of the
aircraft at that stage will be the body and the engines. The expected selling price is $2.1
million, with the body and engines retaining the existing proportionate value.
Costs in relation to the aircraft over the next 10 years are expected to be as follows:
1) Aircraft body: This requires an inspection every 2 years for cracks and wear and tear,
at a cost of $10,000.
2) Engines: Each engine has an expected life of 4 years before being sold for scrap. It is
expected that the engines will be replaced in 2020 for $4.5 million and again in 2024
for $6 million. These engines are expected to incur annual maintenance costs of
$300,000. The manufacturer has informed SC Airlines that a new prototype engine
with an extra 10% capacity should be on the market in 2022, and that existing
engines could be upgraded at a cost of $1 million.
3) Fittings: Seats are replaced every 3 years. Expected replacement costs are $1.2
million in 2019 and $1.5 million in 2025. The repair of torn seats and faulty
mechanisms is expected to cost $100,000 per annum. Carpets are replaced every 5
years. They will be replaced in 2022 at an expected cost of $65,000, but will not be
replaced again before the aircraft is sold in 2026. Cleaning costs amount to $10,000
per annum. The electrical equipment (such as the TV) for each seat has an annual
repair cost of $15,000. It is expected that, with the improvements in technology, the
equipment will be totally replaced in 2022 by substantially better equipment at a cost
of $350,000. The electrical equipment in the cockpit is tested frequently at an
expected annual cost of $250,000. Major upgrades to the equipment are expected
every 2 years at expected costs of $250,000 (in 2015), $300,000 (in 2017), $345,000
(in 2019), and $410,000 (in 2024). The upgrades will take into effect the expected
changes in technology.
4) Food preparation equipment: This incurs annual costs for repair and maintenance of
$20,000. The equipment is expected to be totally replaced in 2022. 2 Required:
1) Start by establish the issues for your analysis by addressing the following:
a. the advantages of a components approach versus a simple depreciation of the $10
million dollars over the 10-year period.
b. Since AASB 116 requires initial recognition at cost and then provides a choice
between either the cost model (impairment) or the revaluation model (increment
and/or decrement) ? discuss the advantages and/or disadvantages in applying either
model to the aeroplane as a whole ? indicating which would be the most appropriate
as a result or if treated as components then which would be most applicable to the
components you have identified.
c. Basis for selecting the method of depreciation according to AASB 116. 2) Discuss how the costs relating to the aircraft should be accounted for (treated) with
a. Aircraft body;
d. Food preparation equipment.
e. Where relevant consider/discuss issues such as:
i. the treatment of the upgrades of cockpit equipment.
ii. accounting for inspections. 3) Determine the expenses to be recognised for the financial year 1st July 2016 to 30th
a. Aircraft body;
d. Food preparation equipment;
e. Total Expenses. 3 Question 3: (Approximately 200 words)
In the discussion by Upton (2001, 71) regarding the lives of intangible assets it is noted that
the formula for Coca-Cola has grown more valuable over time, not less, and that Sir David
Tweedie, former chairman of the IASB, jokes that the brand name of his favourite Scotch
whisky is older than the United States of America ? and, in Sir David?s view, the formula for
Scotch whisky has contributed more to the sum of human happiness.
Outline the accounting treatment for brands under AASB 138/IAS 38, and discuss the
difficulties for standard setters in allowing the recognition of all brands and formulas on
statements of financial position. Question 4: (Approximately 300 words)
Provisions are recognised as a liability in the statement of financial position whereas
contingent liabilities are not recognised in the financial statements but disclosed in the notes
to financial statements. Paragraph 12 of AASB 137/IAS 37 Provisions, Contingent Liabilities
and Contingent Assets states that ?in a general sense, all provisions are contingent because
they are uncertain in timing or amount?.
1. Discuss possible reasons as to why provisions are recognised in the financial
statements whilst contingent liabilities are not.
2. Determine whether the following items would be classified and recoded as liabilities
or not (provide a brief explanation for your decision):
a. Provision for long-service-leave;
b. Dividends payable;
c. Preference shares. 4
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