3101AFE Accounting Theory Assignment-Griffith University Australia.

PART A: GENERAL QUESTIONS
QUESTION 1:QUESTION 1:
When reviewing the financial statements and supporting notes of a reporting entity, is it possible to find out about all of the individual types of expenses and income that the entity has incurred or received? If not, how does management determine which expenses and income should be disclosed?
3101AFE Accounting Theory Assignment-Griffith University Australia.

3101AFE Accounting Theory Assignment-Griffith University Australia.

QUESTION 2:
On 30 June 2023, the end of the current reporting period, Cairns Ltd made a decision,using the information obtained over the past few years, to revise the useful life of an item of plant acquired three years earlier for $3 000 000. The useful life was revised from being a total of eight years to being a total of 12 years. The plant was originally depreciated on the straight-line basis over its useful life and it was expected that the asset would have no
residual value. No depreciation has been provided in the current period and tax implications can be ignored.

REQUIRED
a) Prepare the journal entry to account for the change in accounting estimate.
b) Assuming that the change in accounting estimate had a material effect on financial performance for the period, prepare an appropriate supporting note.

QUESTION 3:
The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on 30 June 2023.

Scenario 1 Rabbit Ltd has, in the past, always depreciated its factory buildings over 25 years. As a result of new information obtained by the company during the current year a decision was made to reduce the expected useful life of the buildings to 18 years.

Scenario 2 During the preparation of the financial statements it was discovered that a flood occurred in the previous financial year that destroyed some raw materials which were stored off-site and that were expected to have a long useful life. The materials were uninsured. No
expense was recorded in the previous year in relation to the flood damage. The material was valued at $75 000 and the expense is considered to be material and will be permitted as a deduction for tax purposes. The tax rate is 30 per cent.

REQUIRED
Identify which of the two scenarios outlined above is a change in accounting estimate and which is a prior period error. Also provide any necessary journal entries.

QUESTION 4:
During 2020, Point Add is Ltd commenced the construction of a wind farm for its own use.During the reporting period ending 30 June 2023, a change in accounting standards means that the directors are required to change the company’s treatment of borrowing costs incurred in the construction of assets for its own use. In previous periods Point Add is Ltd expensed such costs but must now capitalise them as part of the construction cost in line with the requirement of AASB 123. The un adjusted statement of profit or loss and other comprehensive income and statement of changes in equity for the reporting period ended 30 June 2023 are detailed below.

3101AFE Accounting Theory Assignment-Griffith University Australia.

ADDITIONAL INFORMATION

1.In 2023, interest of $4000 relating to the construction of the wind farm was expensed. Interest costs of $3000 were expensed in 2022, $3900 was expensed in 2021 and $2200 was expensed in reporting periods prior to 2021.
2.No depreciation has been charged on the wind farm as it has not yet been
commissioned.
3.The tax rate has remained at 30 per cent for the past three years.

REQUIRED:
Redraft the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position (extract) so as to comply with generally accepted accounting practice and all relevant accounting standards

3101AFE Accounting Theory Assignment-Griffith University Australia.

3101AFE Accounting Theory Assignment-Griffith University Australia.

PART B: ANALYSIS QUESTIONS
QUESTION 5:
Word limit: Between 200 and 500 words.
This question ties together several topics covered so far in this course. Read the following article and answer the questions below.

Freedom Foods accounting scandal worsens, as ASIC begins its investigation

Cereal and snack-maker Freedom Foods is being investigated by the corporate regulator ASIC for a series of “significant” accounting problems.

The beleaguered company also said that its earnings would be hurt by $590 million in write-downs.

In a flurry of announcements made after the ASX had closed on Monday, the company revealed that its past financial results were inaccurate, among other revelations.

Freedom reported, in October last year, that it earned a full-year profit of $11.6 million. But that figure has now been “restated” as a $145.8 million loss.

The cereal business also confessed its losses had since widened to $174.5 million in the last financial year (ending June 30, 2020).

Also, two of Freedom’s board members — chairman Perry Gunner and non-executive director Trevor Allen — will retire in late January, close to its next annual general meeting.

The announcement of their departure comes just five months after former chief executive Rory Macleod, and then-chief financial officer Campbell Nicholas, were forced to quit.

In the wake of their removal, Michael Perich was appointed interim CEO; the Perich family are Australia’s largest dairy farming family, and own 54 per cent of Freedom Foods.

Freedom shares have been suspended from trading since June.

The company’s shares last traded at about $3, having peaked at $7 in September 2018.

Shareholders find news hard to chew
Freedom’s board received a frosty reception from shareholders at a hastily convened webcast on Monday evening, following the news.

Callers questioned company oversight and the scope of the $590 million write-down, of which $372.8 million is linked to asset values being slashed.

It was explained that Freedom has incurred enormous costs building machinery to handle its new product lines, but did not put it down as an “expense” in its books.

The company also wrote down its goodwill and brands by $75.9 million.

It also had to write down $60.1 million due to “out-of-date, unsaleable and obsolete inventory”.

“These accounting treatments contributed to decisions on new products and expansions that were based on unrealistic assessments of market opportunities and margin assumptions that were not realised,” Freedom said in a statement.

“As a result, too many group products were sold at prices that did not fully recover their costs.”

‘Good money after bad’
Mr Perich said it was a deeply disappointing set of results for Freedom Food Group, its people and its shareholders.

“The results reflect the significant costs of past accounting and operational matters — matters we have identified with the assistance of independent experts and are taking steps to remedy,” he said.

To turn around the fix its balance sheet, the company needs to raise an extra $280 million.

Freedom said it was in “exclusive, advanced discussions with a new investor”, but it also planned to give existing shareholders “an opportunity to participate” in the turnaround.

Basically, shareholders were being asked to stump up more cash. The request didn’t go down well during Monday’s webcast.

“Why should I throw good money after bad?” asked one frustrated shareholder.

Mr Gunner said Freedom’s problems were due to its “fast” pace of growth, and the board was keen to address those issues by simplifying the business.

Curiously, the company also decided to publish its updated “Securities Trading Policy” to the public on Monday.

The policy contained a section that bans insider trading, which is already illegal under Australian law.

Under its policy, “Restricted persons” (defined as employees) cannot deal in shares of the company if they have “inside information”.

Nor can they buy or sell shares of Freedom during “closed trading periods”.

Basically, they have to wait for at least one day after the company’s results are announced to the ASX.

Further investigations
Alarm bells rang in March when it was discovered that payments had been made to some employees, including senior management, without permission from the board.

Mr Gunner said the company did not find out until after this had occurred.

“During the year ended 30 June 2020, the board identified matters regarding the operation and administration of the group’s equity incentive plan (EIP),” the company’s external auditor Deloitte wrote in its report.

“The matters included the granting of previously undisclosed employee share options and/or extension of the expiry date of share options by management between September 2014 and September 2019.”

“Certain of these employee share options granted and/or extensions were not authorised … by the board.”

3101AFE Accounting Theory Assignment-Griffith University Australia.

3101AFE Accounting Theory Assignment-Griffith University Australia.

An audit by Deloitte and a forensic accounting investigation by PwC have discovered some”significant” accounting problems for the company, dating back a few years.

In addition to the internal probe, Freedom now has to contend with an external regulator in ASIC, which can wield its power in punitive ways.

Freedom said that ASIC had formally requested documents from the company as part of its investigation, and that it was cooperating with the regulator.

Required:
Do you think that management’s behaviour at Freedom foods is more consistent with the efficiency perspective or the opportunistic perspective of Positive Accounting Theory?
Explain your answer, citing evidence from the article to support your argument.

The answers to this question will be discussed in class during the workshop.

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