Questions:

Question 1: Part I

Remy Corp uses revaluation method for a class of land. The company purchased the land on 1 July 2018 for $1,000,000. Remy Corp has the following information related to the land. The fiscal year of the company ends on 30 June. The company sold the land at $1,100,000 on 2 July 2021. Ignore tax effects.

Date	$
1 July 2018	1,000,000
30 June 2019	1,075,000
30 June 2020	925,000
30 June 2021	1,025,000

Required:

(a) AASB 116 “Property, Plant and Equipment” allows business entities to choose either the cost model or the revaluation model after recognition as an asset. Explain the advantages and disadvantages of using the revaluation model compared to the cost model for property, plant and equipment.

(b) Prepare all journal entries related to the land from 1 July 2018 to 2 July 2021.

(c) Determine the amounts to be reported by Remy Corp as at 30 June 2020 and 30 June 2021 for the following items: (i) Land, (ii) Other Comprehensive Income (OCI), (iii) Loss on Revaluation, and (iv) Revaluation Surplus.    

Question 1: Part II 

Robert Jackman had worked as an auditor in a Big 4 audit company in Australia. Being tired of doing the same job for a long time, he decided to change his career. Luckily, he has been hired as a director of taxation by ABC Corp, which is one of the biggest manufacturing companies in Australia. As a first job with ABC, Mr. Jackman reviewed the company’s accounting practices on deferred income taxes. In doing his review, he noted differences in depreciation methods for tax and accounting purposes, which permitted ABC Corp to realise a large amount of deferred tax liability on its statement of financial position. As a result, ABC paid very little income taxes at that time.

Mr. Jackman also discovered that ABC has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed ABC to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS (earnings per share). Mr. Jackman confirmed with the legal department that the policy is legal, but he is still uncomfortable with the ethics of it.  

Required:

(a) What are the ethical implications of ABC’s “deferral” of income taxes?

(b) Identify two different types of business stakeholders that could be affected by ABC’s ability to “defer” income taxes payable for several years despite positive earnings and explain how this case could affect them.

Question 2: Part I                                                                           

Orange Corp enters into a non-cancellable contract with Coles Ltd to supply 200,000 units of goods on an annual basis for $3 per unit for three years. At the beginning of the third year, Orange and Coles agree to renegotiate the contract because the market price for the goods has declined. Under the modified agreement, the parties agree to extend the contract for an additional year (same fixed annual quantity) and reduce the price per unit to $2 for the remaining 400,000 units of goods to be delivered. As part of the contract modification, Orange Corp also agrees to make a non-refundable payment of $20,000 to Coles Ltd to compensate for the changes it needs to make to its shelving to accommodate the goods purchased from Orange Corp. There is no dispute between the parties regarding prior performance, and both parties have performed according to the terms of the contract. Orange determines that the remaining goods are distinct from those previously delivered and concludes that the additional consideration does not reflect standalone selling price.

Required:

Explain how Orange Corp should account for the contract modification in accordance with AASB 15 “Revenue from Contracts with Customers”. Also, calculate how much revenue should be recognised as a result of the contract modification.

Question 2: Part II                                                                          

The directors of Warrnambool Ltd are disappointed by the draft profit for the year ended 30 June 2020, though it is not yet finalized. Brad Pitt, the company’s assistant accountant, has made the following suggestion as he believes the reported profit can be improved.

A major item of plant that cost $40m to purchase and install on 1 July 2017 is being depreciated on a straight-line basis over a five-year period (assuming no residual value). The plant is wearing well and on 1 July 2019 the production manager believed that the plant was likely to last eight years in total from the date of purchase. Brad has calculated that, based on an eight-year life (and no residual value), the accumulated depreciation of the plant as at 30 June 2020 would be $15m (= $40m / 8 years x 3 years). In the financial statements for the year ended 30 June 2019, the accumulated depreciation was $16m (= $40m / 5 years x 2 years). Therefore, by adopting an eight-year life, Warrnambool Ltd can avoid a depreciation charge in the current year and instead credit $1m ($16m – $15m) to profit or loss in the current year to improve the reported profit.

Required:

Explain how the company should treat the accounting changes described above in preparing financial statements in accordance with AASB 108 “Accounting Policies, Changes in Accounting Estimates and Errors”.