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Background to the case study: Assume that you are a graduate accountant working for Ebony and Associates a public accounting firm situated at 248 Adelaide Street, Brisbane, QLD 4000. Your direct...

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Background to the case study: Assume that you are a graduate accountant working for Ebony and Associates a public accounting firm situated at 248 Adelaide Street, Brisbane, QLD 4000. Your direct manager, Ms. Ellen Lyrial has asked you to draft a letter in response to an email received from a client – Mr. Martin Muller, the Managing Director of Muppets Ltd, raising a number of issues regarding his company – see the copy of the email on the next page. The maximum length of the letter is 1,250 words (excluding any calculations).  Part A: Technical component 15% - This mark covers the technical content of your advice and the explanation on each of the issues, the calculations and the sources used. [7.5% for each issue presented by the client]  Part B: Communication Skills – Letter Writing 10% - This mark covers the generic skills of business letter writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling and punctuation etc. The assignment is designed to test the following skills: 1. Your knowledge and your ability to research the issues and then apply the information appropriately using judgement to correctly identify the relevant standards and legislation that relate to the issues raised by the client. 2. Your written communication skills – business letter writing ACC203/1T2018/ FA2/SK/MR Please note: Any work which has been copied or shared between students will result in a Fail grade for both students concerned. Therefore, please make sure that the answer to this individual assignment is your own work and not copied or bought from any source. In completing this assignment make sure you follow the guidelines for assignments especially those relating to the presentation of written work, late assignment policy and academic integrity. Please check the marking rubric for each part to ensure that you have followed all the guidelines for presenting your work. Re: Accounting Issues: Year Ending 30 June 2018 From: Martin Muller ( XXXXXXXXXX) Sent: 13 March 2018 To: Ellen Lyrial ( XXXXXXXXXX) Dear Ellen Thank you for your phone call this morning, as agreed I am emailing you regarding the accounting issues we briefly discussed. By the way to assist the accounting team in our decision-making process could you please make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant websites. 1. At our recent board meeting, several directors raised concerns about the values of certain assets as they appeared in last year’s financial statements, e.g. Plant and Equipment at cost $450,000 Less Accumulated Depreciation 150,000 $300,000 Directors’ commented that this asset could not be sold for more than $200,000, and therefore the Accumulated Depreciation should be higher. The production manager disagreed by saying that the asset was working as efficiently as ever, and has not depreciated at all. Can you please provide advice regarding the correct accounting, valuation and disclosure of such assets for this financial year? 2. Our company has prepared financial statements according to Australian Accounting Standards, yet every year 30% of the profit calculated differs in amount from the actual income tax paid to the government. The directors are concerned that either the financial statements or tax calculation may be incorrect. Could you please explain the principles that are applied in accounting for income tax that may cause a difference between taxable income and profit? Should these differences be disclosed? How can we explain this situation to shareholders? ACC203/1T2018/ FA2/SK/MR Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you in the near future. Regards Martin Muller Managing Director, Muppets Ltd Level 13, 248 Adelaide Street, Brisbane QLD 4000 Hint: Remember that your firm plans to charge the client for your advice; as a check ask yourself if you would pay for the advice you have drafted!
Answered Same Day May 18, 2020 ACC203

Solution

Pulkit answered on May 20 2020
141 Votes
Martin Muller
Managing Director, Muppets Ltd
Level 13, 248 Adelaide Street,
Brisbane QLD 4000
20th March 2018
Dear Si
This letter is in reference to the email that you have sent on 13th March in which you highlighted the issued that were raised by the directors of your company regarding few figures and amounts in the financial statements. Although the issues happen to be quite basic with respect the Accounting Standards laid down by the AASB that we need to follow while preparing the financial statements of a company. Since we have been your consultants since past many years, I’m really glad to sort these issues for you by giving appropriate references to the relevant laws and regulations.
The first issue which has been raised by your directors is that the Plant and Equipment that costs $450000 and has accumulated depreciation of $150000 has been valued to fetch $200000 only if it is sold today in the market. For this we need to refer Accounting Standard AASB 116 Property, Plant and Equipment. The Para 30 of this standard lays down that a business is required to select the model to value its non-cu
ent assets from the two models suggested in Para 31 and Para 32 of this standard i.e., the Cost model of valuation and the Revaluation model.
The Para 31 of this standard discusses the Cost model which states that the assets should be valued at their cost less any accumulated depreciation and less any accumulated impairment losses on this asset. The company if it opts this method of valuing its non-cu
ent assets then it is not required to revalue its assets as per the prevailing fair value and the assets would continue to be listed on their cost price unless there is some permanent impairment in the value of assets. The tests for Impairment of Assets have been discussed in Accounting Standard AASB 136 Impairment of Assets. Mere decline in the market value of the asset would not qualify for the impairment test and thus it would not lead to revaluation of the assets.
Para 32 of AASB 116 standard discusses the concept of revaluation model of valuing the non-cu
ent assets. In this model the company is required to reliably estimate the fair market value of the assets in a timely manner and then revalue the asset in its books accordingly. This revaluation should be done periodically. But the standard does not lay down the...
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