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Question 3 (Adapted from Loftus, Leo, Picker, Wise & Clark, Understanding Australian
Accounting Standards)
(A) MintyFresh Ltd sells gift certificates in their online designer toy store. The manager,
Joel asks you (the new accountant), what point can revenue be recognised for gift
certificates?
Gift card revenue can only be recognised when the gift certificate is used by the recipient. This is
because standard setters believe that the underlying transaction is the exchange of goods or
services for the gift certificate. The gift certificate is said in this way to not be a sale but a
conversion of cash into an unearned revenue. The revenue is earned when the gift certificate is
used. There is uncertainty about whether the gift certificate will be used therefore, delay
recognition until the certificate is used.
(C) A fashion company has acquired a coffee machine. What would be capitalised and
what would be expensed and provide a reason:
Note: you can argue in different ways and still receive marks for an answer with a
valid supporting argument.
Transaction
Coffee beans
Repairs
Major upgrade of
coffee machine to
make cappuccino
froth and auto descale.
Note: The major repair could be capitalised if the coffee machine itself was capitalised
initially. The coffee machine does provide economic benefits in the form of coffee for
the employees, it is controlled by the company and is from a past transaction, and the cost
is measured as the purchase price. The coffee beans are likely to be of an immaterial
value and are used up quickly. Some students argued that the coffee machine itself be
expensed when purchased because itself could have immaterial value to the company and
may not be worth keeping on the balance sheet (and depreciating it over its useful life).
This argument would be accepted too.
The company has made a definite decision to sell for 30 September delivery; the
provision of the product is completed when delivered to the customer.
DO NOT WRITE OUTSIDE THE BOX
(ii) A customer in Sydney places an online order for a laptop computer with Dell
computers on 10 January 2013 for $599, and pays via direct bank account transfer.
Assembly for the laptop is completed on 15 January 2013, and is shipped on 16
January 2013 from its assembly facility in Penang, Malaysia. The customer receives it
on 22 January 2013. (1 mark for dollar value and date/period of revenue recognition,
1 mark for explanation)
Dollar value and date/period
On 16 January 2013 for $599
Explanation
It is when the provision of the product is fully completed when shipped out to the
customer.
DO NOT WRITE OUTSIDE THE BOX
(b) An IT consultant buys the Dell laptop mentioned in (a)(ii), above. The IT consultant
buys a new laptop every year because technological change necessitates an annual
upgrade to keep up with the latest product and software innovations and upgrades. State
whether the laptop should be accounted for as an asset/expense/liability. Explain with
reference to accounting principles or conventions. (1 mark for accounting treatment, 1
mark for explanation)
Accounting treatment
Expense
Explanation
Note: the futures contract (a)(i) and the laptop (b) questions we can rely on majority of
the work is completed. There are examples where we do have to wait for recognition
after the point of delivery e.g. if there is a warranty with a considerable degree of
uncertainty (and no ability to do a provision for warranty).