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Deakin's Bachelor of Commerce and MBA are internationally EPAS accredited. Deakin Business School is accredited by AACSB. MAA261 FINANCIAL ACCOUNTING T1 2018 CASE DATA FOR DREAM FURNITURE PTY LTD...

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Deakin's Bachelor of Commerce and MBA are internationally EPAS accredited.
Deakin Business School is accredited by AACSB.
MAA261 FINANCIAL ACCOUNTING
T1 2018
CASE DATA FOR DREAM FURNITURE
PTY LTD
Dream Furniture Pty Ltd is a business that manufactures and sells furniture to suppliers across
Australia. The business was established in 2013 and is a large proprietary company with two
directors, James Tetra and Jess Victoria. The business operates in Geelong and is registered for
Goods and Services Tax (GST). The business has a financial year ending 30 June. When commencing
the business on 1 January 2013, Dream Furniture Pty Ltd purchased the following assets for
$1,200,000 (plus GST):
Fair value of
assets
Land $810,000
Building $480,000
Machinery $150,000
$1,440,000
The purchase of the assets comprised $400,000 cash and a loan for the remaining amount. Dream
Furniture Pty Ltd also had additional costs/discounts relating to the purchase:
Land:
 Legal fees $3,000 (plus GST)
Building:
 Administration costs of $1,000 (plus GST)
 Renovation costs to make the building suitable for intended use $13,000 (plus GST)
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Page 2 of 4


 One year general insurance for the building $10,000 (plus GST)
 Trade discount of 15% of the GST inclusive amount for the building.
Machinery:
 Installation costs of the machinery $4,500 (plus GST)
 Shipping of the machinery $1,500 (plus GST)
The building is expected to have a useful life of eight years and an estimated residual value of
$93,000. Dream Furniture Pty Ltd adopted the straight-line depreciation method for the building
and diminishing balance method (30%) for the machine.
Dream Furniture Pty Ltd adopted the revaluation model for both the land and building, and the cost
model for the machinery.
On 30 June 2014, James and Jess were discussing on whether they should change the depreciation
method for the machinery to the units of production method. It was decided that the depreciation
method remained the same.
On 30 June 2016, James and Jess obtained an independent valuation of the land and buildings as
suggested by their accountants. The independent valuation indicated that the land’s fair value was
$900,000 and the building’s fair value was $400,000. The valuation report stated that the residual
value of the building has been revised to $100,000. Also, the remaining useful life has been revised
to 8 years.
Page 3 of 4


On 30 June 2018, there was a very bad storm that has damaged both the building and machinery.
The new valuation report stated the following:
Building:
 Fair value of $200,000
 Selling costs of $5,000
 Value in use of $210,000
Machinery:
 Fair value of $8,570
 Selling costs of $525
 Value in use $9,500
Dream Furniture Pty Ltd offers annual membership to members under the following terms and
conditions:
 The members will receive exclusive invitations for new models and special discounts on
selected items.
 A once-off non-refundable joining fee of $1,000 (plus GST) when the member initially signs a
new contract. The joining fee is used to cover the administrative costs of enrolling a new
member.
 A monthly membership fee of $100 (plus GST) a month which is payable in advance.
 A maximum membership period of 24 months, after which anyone who wants to continue
their membership needs to roll-over their membership and sign new contract with Dream
Furniture Pty Ltd. The non-refundable joining fee is waivered for customers who have been
previous members of the business.
Page 4 of 4


On 1 June 2019, 30 new members sign a contract with Dream Furniture Pty Ltd for the membership.
James and Jess have notified the consultants that they were unsure whether their treatment of non-
cu
ent assets and revenue were co
ect. They would like guidance from the professionals to ensure
that they have complied with the accounting standards.

Financial Accounting assignment 2
MAA261 Group 26
Assignment 2
Introduction
This formal business report aims to assist Dream Furniture in their recording, expensing and reporting of non-cu
ent assets in conjunction with revenue recognition. Such an outcome will also involve analysing how Dream Furniture has recorded both assets and revenue in previous financial years. The report will also refer to and reference AASB 116, 15 and 136 as these are the accounting standards that are directly applicable to the cu
ent situation. This body of work looks to outline the mathematical calculations in a simple and straightforward manner to ensure the management team are able to fully comprehend the recommendations made and continue to achieve prosperity as a business.
Acquisition of Non-Cu
ent Assets
    Asset
    Estimated Fair Value
    %
    Allocated Cost
    Land
    $810000
    56.25%
    $675,000.00
    Building
    $480000
    33.33%
    $400,000.00
    Machinery
    $150000
    10.42%
    $125,000.00
    Total
    $1440000
    100%
    $1200000
Cost of Land, Machinery and Building
The below tables outline how the costs of the varies non-cu
ent assets were calculated. Some costs were included while others were not, in accordance with AASB 116.
    List Price of Land
    675,000
    Legal Fees
    3,000
    Cost of Land
    678,000
The cost of land included legal fees as these were essential for the business to be able to purchase and use the land for its purpose. In addition, professional fees such as legal fees are seen as directly attributable costs (para 17, AASB 116).
    List Price of Machinery
    125,000
    Installation Costs
    3,000
    Shipping of Machinery
    678,000
    Cost of Machinery
    131,000
The cost of machinery included both installation costs and shipping of machinery. The shipping of machinery was included as it is directly attributable with
inging the asset to the location in which it is intended to be used (para 16, AASB 116). Instillation costs were also included as they would be required to ensure the machinery can be used in the way management intended (para 17. AASB 116).
    List Price of Building
    $400,000
    NOT Included: Administration Costs
    $1,000
    NOT Included: One-year Insurance
    $10,000
    Trade discount
    15%
    GST
    $40,000
    Cost (GST Inclusive)
    $440,000
    Discount amount
    $66,000
    Less discount
    $374,000
    Less GST amount
    $340,000
    Plus: Renovation
    $13,000
    Cost of Building
    $353,000
Administration costs were not included as they are not directly related to the building being fully operational for the business (para 19, AASB 116). Insurance for the building was also not included as it was seen to be a general expense, not directly related to the cost of the building (para 16, AASB 116). The trade discount was included as it alters the amount of money the company will pay (para 16 AASB). The renovations were included in the cost as they were required to ensure the business was fit for its intended purpose (para 16 AASB).
    Account
    D
    C
    Land
    $678,000
    
    Machinery
    $131,000
    
    Building
    $353,000
    
    GST clearing
    $116,200
    
     Cash at Bank
    
    $400,000
     Loan Payable
    
    $878,200
Calculation of Depreciation
    Depreciation
    
    1 Jan 2013 – 30 June 2013
    30 June XXXXXXXXXX
    30 June XXXXXXXXXX
    30 June XXXXXXXXXX
    Building
    Depreciation expense
    $16250
    $32,500
    $32,500
    $32,500
    Accumulated
Depreciation
    $16250
    $48750
    $81,250
    $113,750
    Ca
ying Amount
    $336,750
    $304250
    $271750
    $239,250
    Machinery
    Depreciation Expense
    $19,650
    $33,405
    $23,383.50
    $16,368.45
    Accumulated Depreciation
    $19,650
    $53,055
    $76,438.5
    $92,806.95
    Ca
ying amount
    $111,350
    $77,945
    $54,561.50
    $38,193.05
Changing of Depreciation Methods for Machinery
Dream Furniture are permitted to change depreciation methods for machinery if they feel XXXXXXXXXXthere has been a change in the expected schedule of consumption. For instance, if they felt on the 30 June 2014 that the machines economic benefit would be reduced at a rate differing to what they initially calculated they may wish to change depreciation methods (para 61, AASB 116). The firm is cu
ently using the diminishing value depreciation method, which means it is depreciating more in its earlier years. However, Dream furniture may believe that the machinery will depreciate at a rate directly co
elated to the units that the machinery produces. Therefore, they would be advised to use the units of production method, where the machine depreciates based on the level of units it produces.
Revaluation
Revaluation increment under the revaluation model
An item of property, plant and equipment whose fair value can be measured reliably shall be ca
ied at a revalued amount (Para 31, AASB 116). Therefor Dream furniture has ca
ied out a revaluation on the 30 June 2016 on their land and buildings which were valued at $900,000 and $400,000 respectively. The land had a ca
ying amount of $678,000 and the buildings ca
ying amount at the time was $353,000, there for both the building and the lands fair value had an increase on their ca
ying amounts. As para 39 AASB 116 states that “if an asset’s ca
ying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus”. Therefore, the gain on both the land and building was recorded in the other comprehensive income account and transfe
ed to the revaluation surplus account.
    
    Account
    D
    C
    30/6/2016
    
    
    
    
    Land
    222,000
    
    
     Gain on revaluation Land
    
    222,000
    
    (Re-evaluation increase on land)
    
    
    
    
    
    
    
    Accumulated depreciation-Building
    113,750
    
    
     Building
    
    113,750
    
    (Write back acc. Depreciation)
    
    
    
    
    
    
    
    Building
    $160,750
    
    
     Gain on revaluation – building
    
    $160,750
    
    
    
    
    
    Gain on Revaluation - Land
    $222,000
    
    
    Gain on Revaluation – Building
    $160,750
    
    
     Other Comprehensive Income Summary
    
    $382,750
    
    (Transfer to OCI gains)
    
    
    
    
    
    
    
    Other Comprehensive Income Summary
    $382,750
    
    
     Revaluation surplus
    
    $382,750
    
    
    
    
Calculation of Annual Depreciation – Building
Depreciable amount/Useful life= Annual Depreciation
(353
Answered Same Day May 09, 2020 MAA261 Deakin University

Solution

Pulkit answered on May 09 2020
154 Votes
The entities in general would not be very much willing to revalue its assets when the value of assets has declined. This is because the company while revaluing would record loss and the value of capital invested in the company would lower down. This would depict a poor financial position of the company and thus the entities would like to avoid this case scenario.

The AASB 1041 Revaluation of Non-Cu
ent Assets allows an entity to choose either to record its assets of cost basis or on fair value (revaluation basis), further Para 6 of the said standard deals with “Changing the Measurement Basis for a Class of Non-Cu
ent Assets”. Para 6.1 of the standard states that the entity can discontinue to revalue its non-cu
ent assets when and only when it meets the criteria for...
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