Reference no: EM133775298 , Length: word count:2000

Advanced Financial Accounting

Background Information
You are a graduate accountant and now working for Kaplan Partners, an independent consulting & accounting firm located at 63 Elizabeth Street, Sydney, NSW 2000.

The Senior Partner, Ms. Kiran Shrestha, has called you into her office and handed you a letter from a client requesting advice on transactions recently taken place. See letter below.

Kiran has asked you to draft a letter or Statement of Advice (SOA) for her to review by COB.

Task Requirements

Prepare a Statement of Advice (SoA) addressing the accounting issues raised by the client. The maximum length for the SoA is 2,000 words (+/- 10%).

Analysis and Recommendations: Review the client's letter to identify the correct accounting treatment for the transactions mentioned. Justify your recommendations by citing specific paragraphs from the relevant Accounting Standards.

Communication and Presentation: Clearly outline the identified issues and your recommendations. A professional format and presentation of the Statement of Advice is critical.

The items we seek guidance on are as follows:

Item 1

Please create a statement of cash flow statement for us. The financial statements are in Appendix 1.

Other relevant information are as follows:

For the purposes of the statement of cash flows, we define cash and cash equivalents to include cash at bank and short-term deposits at call, net of outstanding bank overdrafts.

During the reporting period, we made two issues of ordinary shares details as follows:
the convertible notes outstanding as at 30 June 2024 were converted to 150 000 ordinary shares issued at a conversion price of $2.00 per share; and
200 000 shares were issued at $2.00 per share for cash.

During the year ended 30 June 2024, plant and equipment costing $60 000 and having a book value of $30 000 was sold and we made a loss of $10 000.

The company had access to bank overdraft facilities of up to a maximum of $150 000. The bank overdraft are payable on demand and are subject to annual review.

The accounting policy states to disclose interest received and dividends received as investing activities.

Specifically, please prepare a statement of cash flows using the direct method.

Additionally, please include:
a note for cash and cash equivalents and
provide a reconciliation of profit to net cash flows from operating activities.

Item 2

As at the beginning of the financial year 2024, we had two provision accounts with the following balances:
Provision for lawsuit claims $16m, and
Provision for warranty $31m.

During the year and for the period ended 30 June 2024, lawsuit claims were settled for $18m and warranty costs of $34m were paid. We would like to increase the warranty provision to
$41m at year end.

Please provide the relevant journal entries that we should make for 30 June 2024 to prepare our annual report. Please show us all your workings as well (i.e. settlement of the lawsuit claims and increase of warranty provision).

Item 3

Our company is the primary contractor responsible for constructing a power plant for Top Energy Ltd. During the course of construction, defects in the construction of the power plant were brought to Management's attention. The estimated cost to fix these defects is $120m. We had previously recognised a provision for warranty of $60m on the project as part of project costs.

We believe, however, that we can recover a substantial part of the costs from the subcontractors who performed some of the construction work. Negotiations with these subcontractors are ongoing, and to date, only two subcontractors have accepted liability. The amount of reimbursement that is considered virtually certain, therefore, is estimated to be
$30m.

Please advise what is the correct way to treat this transaction with explanations and appropriate journal entries.

Item 4

Our biscuit factory, located in Vietnam, has been incurring losses for the past 2 years. Management is considering the option of either restructuring the plant or selling it to an external party. Management believes that losses will continue for another 2 years at about
$4m per annum before the business operation could turnaround.

At year end, neither the restructuring plan nor the plan to sell was finalised. The carrying amount of the net assets of the plant, at year end, was $45m. Based on its current condition, the recoverable amount of the plant was estimated to be at $40m.
Please advise what is the correct way to treat this transaction with explanations?

Item 5

On 18 April 2024, the Board of Directors of the company decided to close down the confectionary making products plant. On 25 June 2024, a detailed plan for closing the plant was agreed by the Board and letters were sent to customers advising them to seek an alternative source of supply.

As a result of the plant closing, redundancy notices were sent to staff of the plant. Furthermore, a binding agreement was made to sell the assets and the carrying amount of the net assets of the plant was $20m with the expected net proceeds from selling the individual assets (and settling the liabilities) to be $12m.

Other costs expected to be incurred are as follows.
termination costs of $2m (changes in management structure costs),
costs to sell a line of business $3m,
staff relocation costs $1.2m,
staff retraining costs $1.4m and
expected additional operating costs for the first quarter of 2025 financial year $8m.

The closure of the plant was completed by 25 August 2024. The company's year end is 30 June.

Please explain whether the closure of the plant should be reported in the financial statements of 2024. Also, please provide what amounts (if any) should be recognised in the financial statements.