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MANAGEMENT SCHOOL

Department of Accounting and Finance

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AcF 212: Principles of Financial Accounting

Lent Term 2023

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Coursework 2022-2023

Introduction

Future Toys International plc (FTI) manufactures children’s toys. The company began operations on 1 January 2015 and has a 31 December year-end. FTI is compiling data about fixed assets for its financial statements prepared under International Financial Reporting Standards (IFRS). You are a junior accountant working for FTI, specialising in the area of asset recognition. You have been asked by your manager, Ms. Lee to prepare a report addressing issues relating to accounting for FTI’s assets.

Part 1 considers initial measurement of asset costs and depreciation for the company’s first year of operations. Part 2 analyses events in a subsequent year of operations. Part 3 explores the related area of intangible assets. You must research and reference relevant sources throughout your report, as appropriate, to support your conclusions and recommendations. Relevant sources include IFRS, IASB Conceptual Framework, and other wider reading.  

Part 1: initial year of operations             (max 800 words)

In 2015, FTI purchased land on 1 January for £100,000. When the company purchased the land, there was an existing building on the property. On 3 February, FTI paid £20,000 in demolition costs to remove this old building. On 3 March, FTI paid a £5,000 fee to the local authority for pavements on the land. The company also paid £6,500 on 3 March to install fencing around the property’s perimeter with is expected to last 15 years.  

FTI constructed a new building on the property to house its operations. Construction began 3 March and ended 30 June. FTI moved into the new building and began using it for operations on 1 July. The company incurred the following expenditures for construction of the new building: £125,000 (3 March); £100,000 (1 April); £75,000 (1 May); £100,000 (2 June); and £50,000 (1 July). FTI also purchased the following in 2015: production machinery on 1 January for £80,000; office equipment on 1 May for £7,500; and office furniture on 1 July for £7,000. Both the machinery and the office furniture is expected to be replaced after 7 years and the office equipment has a life of 5 years. The new building has an expected life of 39 years.

Annual 2015 pre-tax income before accounting for any of the above items is £50,000. FTI’s effective tax rate is 40 percent. Events and circumstances do not suggest impairment of any fixed assets as of 31 December, 2015 but FTI does estimate the new building’s salvage value is £20,000. FTI expects zero resale value for all other fixed assets. Based on manufacturers’ specifications and industry reviews for the production machinery, FTI anticipates the machinery will be most productive earlier in its life and that maintenance costs directly correlate with the age of the machinery. However, FTI intends to retain the machinery and use it for as long as possible.  

In your report, address the following:

a) Identify which international accounting standard prescribes how to deal with the type of assets mentioned in the case. Outline the recognition criteria and explain the prescribed valuation model to be used for initial recognition.

b) Identify FTI’s depreciable fixed assets as of 31 December, 2015. For each depreciable asset, present a listing of the following data: asset item, c, cost, salvage value, and useful life.  

c) Compute and present annual depreciation expense for the years 31 December, 2015 to 31 December, 2019 (i.e. for five years) for each depreciable fixed asset using each of the following methods: straight line, 150 percent diminishing balance, and sum-of-the-years’ digits. Discuss the implications of each method of computing depreciation for FTI’s results in 2015, citing relevant sources to support as appropriate.

d) Recommend a depreciation method for financial reporting of each of FTI’s depreciable fixed assets, with logical reasoning and justification for your recommendations. (Note: Methods do not have to be the same for all assets.) What is FTI’s 2015 net income based on your recommendations?  

e) Independent of your recommendations, discuss which method you would choose if you are part of FTI’s upper management. Assume you have a cash bonus based on reported net income and intend to stay with the company for three years. Why would you choose this method? Would your choice change if the bonus had an equity component (shares in FTI) and you intend to stay with the company for twenty years versus three years? Why?

Part 2: subsequent events in 2019            (max 500 words)

FTI implements your recommendations from part 1 (initial year of operations) in 2015 and subsequent years. In 2019, there are two events (detailed below) relating to FTI’s fixed assets. Determine how FTI should account for each event. Note that not all of the required situational information may be explicitly present in the given details, requiring your professional judgment and application of critical thinking skills. In your report, provide detailed explanations of your analysis and your judgments at each necessary step to account for the events, with logical reasoning and justification to support your conclusions, citing relevant sources as necessary. Include any required journal entries to illustrate the proper accounting for each event and any assumptions made.

a) Event 1: On 2 September, FTI install a replacement roof on the building. The old roof (that originally cost £60,000 as part of the building construction in 2015) was in need of significant repairs estimated to cost £40,000. FTI chose to instead replace the entire roof at a cost of £50,000 cash. (Note: Also discuss if and how this affects accounting for the building in future years.)

b) Event 2: On 30 December, FTI evaluates its production machinery. Due to changes in product specifications, one machine (originally purchased for £45,000 on 1 January, 2015) is not going to be used in production after 31 December 2019. The machine’s market value was £25,000 on 31 December, 2018. FTI could sell the machine for £10,000 on 30 December, 2019. However, FTI does not plan to sell or otherwise dispose of the machine. Rather, the company intends to retain the machine in case it has a purpose in the future, even though FTI anticipates the machine will be indefinitely idle. (Note: Also discuss how FTI should account for this machine in future years.) 

Part 3: Accounting for Intangible Assets         (max 700 words) 

During a meeting with Ms. Lee, she also wants you to briefly explain whether the accounting standards permit the recognition of the company’s brand in the financial statements. Please explain your answer.  

This is your chance to shine and perhaps even get a permanent job offer: you must do this well!

Administrative issues 

Maximum length: 2,000 words (excluding tables, diagrams, journal entries, reference list, contents page, title page and CWA declaration sheet)- this limit will be strictly enforced.  A properly referenced reference list should be included. Cut-andpaste the declaration sheet onto the front of your CWA submission.  

Allocation of marks for each section are as follows:

• Part 1 - 30 marks •  Part 2 - 20 marks

• Part 3 - 30 marks

• Structure and Presentation 10 marks

• Referencing 10 marks

The file that you submit should be identified only by your Student (Library) number and nothing else.  

Submission deadline: 12 noon on Friday 17^th March 2023 (Week 19).  Submission is to be via Moodle, i.e., electronic submission, only.  Late submissions will be subject to the deduction of marks in accordance with the University’s late submission regulations.   

Guidance on developing a high-quality report: 

• Ensure you use Harvard Referencing and write a report not an essay. LUMS Learning Development Moodle Page is a great source for more guidance in this area: https://modules.lancaster.ac.uk/course/view.php?id=281#section-7  

• The lecture notes/slides are insufficient – they simply highlight the key places to start looking. Further self-study and self-search for additional resources and of the specific accounting topics is recommended.  

• In practice this approach means you need lots of sources, ideally many different sources, to support your assignment. Good assignments tend to have at least 8 references.  

• The report needs to look like a report, not an essay. This is important as it allows you to be creative in terms of the use of charts, graphics, and so on without that impacting on word count. It also allows you to emphasise key points, and encourages you to write clearly and develop short, neat sentences. The best way to get examples of report styles.   

• In the past, many students have lost marks because of poor English grammar. Please ensure you seek help from Learning Development if you feel you need further support in this area.  

• Make a start as soon as you can to allow you to submit a high-quality piece of work.