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Dear all, thank you first of all. I am self-learning F7, and have encountered several questions
1.one question reads” one factory has its roof replaced as the old roof is leaking. The new roof’s total cost is $100,000. the new roof is made of special materials which are expected to reduce energy cost significantly. the cost of the energy saving feature is $30,000.
so in this question, is this new roof a “safety and environmental equipment” which should be classified as an asset?
Should the cost be fully capitalized or partially recognized, i.e $30,000 as an asset, the remaining is expense?2.when the exchange of asset is with commercial substance, the value of the asset given up should be the fair value at the date of exchange or the carrying amount (historical cost minus accumulated depreciation)? How can we find out the gain or loss? is it the difference between the fair value of asset given up and asset received?
3.Should the dividend proposed after the reporting date be recognized in the statement of change in equity? or just in a note?
4.if the Firm A is being sued by other for $2 million for breach of contract, and there is a 20% chance that Firm A will lose the case. then should Firm A charge a $400,000 ($ 2 million*20%) as an expense? what if the chance for Firm A to fail be 60%? will the treatments differ as the probability changes?
5. Revenue recognition
“Jenson owns the rights to fast food franchise. On 1 April 20×3, it sold the right to open a new outlet to Mr.Cody. The franchise is for 5 years. Jenson received an initial fee of %50,000 for the first year and will receive $5,000 per annum thereafter. Jenson has continuing service obligations on its franchise for advertising and product development that amount t o approximately $8,000 per annum per franchise outlet. A reasonable profit margin on the provision of the continuing services is deemed to be 20% of revenue received.
How to recognize the revenue for the following 5 years?thank you again if you can help.
Hi, you need to re-write questions 1 and 5 again is I can properly understand them 🙁
Number 2? Carrying value, and recognize gain or loss on transfer of asset.
Number 3? Just in a note – it is not (at the year end) “an obligation arising from some past event”
Number 4? $2,000,000 shown as a contingent liability. If probability rises to 60%, then $2,000,000 shown as a provision
Let me have numbers 1 and 4 again
Thank you for your answer. And sorry for the late reply as I have to read the book during the daytime.
the question one is quoted from one of my exams. I am sorry that I cannot understand what it means either. I guess they are saying that a firm has its roof replaced, costing $100,000, and among the total cost, $30,000 is spent on the special materials(which can save the cost so that future benefit may flow to the entity) so that $30,000 should be capital expense and the remaining $70,000 should be charged as revenue expense. But i am not sure whether it is possible to separate the cost in this way or not?For the question four, it is a word-to-word quotation from F7 textbook (BPP version). the question 20 Jenson in the question bank (page 390-391 question C(ii) ). this question is quite confusing too.
“Jenson owns the rights to fast food franchise. On 1 April 2003, it sold the right to open a new outlet to Mr.Cody. The franchise is for 5 years. Jenson received an initial fee of $50,000 for the first year and will receive $5,000 per annum thereafter. Jenson has continuing service obligations on its franchise for advertising and product development that amount t o approximately $8,000 per year per franchise outlet. A reasonable profit margin on the provision of the continuing services is deemed to be 20% of revenue received.”
question asks “how to recognize the revenue and cost for Jenson in term of the franchise in each of the following five years”The answer is “the initial fee of $50,000 should be spread evenly over the term of the franchise. This will give revenue of $10,000 in year 1 and $15,000 thereafter. the profit will therefore be 20% for year 1 and approximately 46% for year 2-5. ”
I am confusing because what is the point of the advertisement provision? and why should the initial fee be spread evenly in the five years?Thank you for your patience. And may ask a few more questions because I do my reading and practicing myself everyday. I really need someone like you can offer a helping hand. thx
question one(30 June 2013):
as we known, employee cannot be recognized as an asset. However, I met a question saying:
A firm pay $300,000 to hire an expert for 3 years, the $300,000 is paid when contract is signed under a condition that if the expert leave in advance, he should pay back the unfinished obligation to the contract ( say, if the expert leave at the end of the second year, he will pay back one year obligation, i.e $100,000)
so should the entity recognize that condition as a kind of intangible asset ? How to recognize it?question two.
An equity instrument is carried at FVTOCI, the initial cost to acquire it is $50,000 plus $20,000 transaction cost. At the year end, the fair value of the equity instrument is $100,000.
What amount should revaluation surplus be? $50,000 or $30,000.
what amount should be the equity instrument be? $100,000 or $120,000. and why?question three
Should the impairment of ending inventory be charged as an impairment loss or be included as part of Cost of Sales?
Should cost of sales include the loss on disposal of non-current asset?thanks with sincere gratitude
Draft a schedule showing the amounts that have to be transferred to the income statement for
the year ended 30 June, 2020 in respect of all three contracts if the percentage of completion
method is used. The stage of completion is calculated as the proportion of the cost to date to
the estimated total cost.
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