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CHAPTER 1:

DISSCUSSION QUESTIONS
11)
Financial statements are prepared under the assumption that the entity will
continue to operate for the foreseeable future
Implications in accounting, for example:
Justification for use of historical costs for non-current assets and the
systematic allocation of depreciation
Supports inclusion of assets such as goodwill and prepaid expenses, even
if they dont have any sales value

12)
A resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity. Three
characteristics:
1. The resources must contain future economic benefits
2. The entity must have control over the resource in such a way that the
entity has the capacity to benefit economically from the asset in the
pursuit of their objectives.
3. The event or events giving rise to the entitys control over the resource
must have occurred.

13)
A present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.Characteristics include:
1. Not just a legal debt, business policies for equity or fairness.
2. Not sufficient to result in future economic debts, i.e. decide to buy an asset
in the future.
3. Giving up of resources embodying economic benefit.

14)
The measurement of the receipt of the land is important because if it is classified
as a government grant, which in this case seems to be the case, then it can be
defined as income. To record government grants related to assets are to be
debited to assets but cannot be credited directly to income or to equity. Instead,
they must be credited to an account called deferred income.

Exercises:
12)
A)
An asset is something that is expected to bring future economic benefits to the
company. Thus, something that only has sentimental valuethat is, it is
incapable of having value to othersdoes not have economic value.
B)
Due to the legal case not yet being complete (no past transaction has occurred)
there is actually no obligation for the firm to make any payments therefore it
isnt classified as a liability and there is no decrease in an asset or increase in
liability so it is not an expense.
C)
The item is removed from the businesses financial statements as it is now retired
from work therefore it can no longer be referred to as a asset as no future
economic benefits are expected to flow to the entity.
D)
The donation will be recognised as income it is an increase in economic benefits
in the form of an increase of assets and the amount of income can be measured
reliably, thus it is income. It will also be recognised as an asset as it has become a
resource controlled by the business as a result of past events (donation) and
future economic benefits are expected to occur.
The donation will be recorded as:
Cash at bank
Income
$10000
$10000

13)
Glenelg should recognise this event as revenue as it is probable (indeed certain)
that the future benefits of the event will occur, and the amount of income can be
measured reliably.
If the $3600 is paid in advance, then the event will be recorded as a liability
because there is a future sacrifice of economic benefits (the required rendering
of the service) that the entity is presently obliged to make to the customer as a
result of a past event (the payment). It is probable (indeed certain) that the
future sacrifice will be required, and the amount of the liability can be measured
reliably.

14)
Future economic benefits arising from the development expenditure will not
qualify for recognition as an asset because it is not possible, at the date of the
expenditure, to establish that it is probable that future economic benefits will
eventuate.

CHPATER 3

DISCUSSION QUESTIONS
1)
Reserves arise as a result of increases in equity other than from contributions
from equity participants (share capital). They may arise from various actions:
1. earnings of profits [retained earnings]
2. increases in the fair value of assets [asset revaluation surplus].
The difference from the other equity accounts is that the amounts in these
accounts are earned through the course of the businesses activities, e.g. profits or
losses, and not contributed by the shareholders.

9)
Companies are governed by legislation, and there is normally a clear
distinction made between contributed capital and profits retained in the
entity. Separate accounts are required for a number of reasons, one is that
the accounts are funded by different sources.
More than one owner so in profit distribution (dividends) required
distributing
Increased activities, transferring between account increased required to
distinguish between owners capital and others.

10)
Appropriated retained earnings are retained earnings that have been set aside
by action of the board of directors for a specific use. An appropriation of retained
earnings may be for such purposes as:
Acquisitions
Debt reduction
Marketing campaign
New construction
New product development
Research and development
Reserve against expected insurance losses
Restriction imposed by a loan covenant
Stock buyback

EXERCISES:
6)
As a result of the company not having shareholder approval for the divided prior
to the ending of the reporting period, a liability should be recognized only once
the annual general meeting approves the dividends. This is because, before that
date, the entity does not have a present obligation. Therefore the accountant
doesnt need to report anything in relation to the dividend.

11)
DEBIT CREDIT
Transfer to retained earnings
Retained earnings

General reserves
Transfer to retained earnings
$68000


$68000

$68000


$68000
Interim dividend paid
Cash

Retained earnings
Interim dividend paid
$60000


$60000

$60000


$60000
Asset revaluation surplus
Transfer from asset revaluation surplus

Transfer from asset revaluation surplus
General reserves
$104000


$104000

$104000


$104000
General reserve
Share capital
$960000
$960000