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Accounting Theory Test 1 Revision Session 2023

Question 1

Beinow Developments Ltd builds and sells residential units. Customers purchase the units “off the plan”. This means the customers enter into the purchase contract before the building is complete. They pay a deposit equal to 20% of the price when entering into the contract.

When construction of the units has been completed, Beinow Developments Ltd transfers the units to the customer, who pays the remaining 80% of the price.

Beinow Developments Ltd is required by law to offer a three-year warranty over its residential apartments. The warranty can be enforced by the purchaser or a subsequent owner.

Required

Describe an accounting policy to account for the warranty. The policy should be consistent with the requirements of relevant accounting standards. Your description should include the four components of an accounting policy. You are NOT required to justify the policy.

Question 2

Should the warranty be recognised as a liability? Justify your answer based on the Conceptual Framework.

Question 3

To what extent does historical cost measurement provide useful information? In answering this question consider the qualitative characteristics of useful information specified in the Conceptual Framework.

Question 4

Good Bank provided a loan of $5 million to Solarobots Pty Ltd. The loan contract states that the loan is to be repaid at a rate of 10% of profit before tax generated by Solarobots Pty Ltd and will fall due if and when Solarobots Pty Ltd generates profit before tax. Assume that the probability of repayment is as follows:

Payment in full 5%

Payment of $2.5 million    40%

No payment 55%

Should Good Bank recognise the loan receivable as an asset according to the Conceptual Framework?