ACCOUNTING ASSIGNMENT 1
PART A: EROSION OF CAPITAL
Historical cost is adopted and used by many businesses in Australia. Despite being used by majority, one of the main disadvantages of Historical cost is fails to maintain intact other concepts of capital like constant purchasing power capital, except money capital. It fails to measure assets at their current cost but only use their current cost. In order to maintain capital properly, it should be able to cover the replacement cost of the asset.
Air Monash have been able to maintain its capital of $1,000,000 and also conclude with a profit of $500,000 for the whole year, which all together sums to $1,500,000 of total capital ...view middle of the document...
PART B: CASE STUDY
a) The author has outlined a number of criticisms about the usage of historical cost accounting, thereby eroding the airline’s profit and masking the true state of the company. For instance the author gives an example of the case of profit being overestimated due to the inflation of the price of the asset and replacement cost being ignored. This scenario is an example of irrelevancy of the historical cost, which is known as sunk costs. These prices are useless for predicting future outcomes. Historical cost does not take into account the change in prices. With higher replacement cost comes higher expenses which the company has not accounted for. The author comments that the airline industry is “labour intensive”. The airline have so many staff dependent upon equipment, that it has to continuously maintain and replace equipment and airplanes in order to successfully run the business and serve customers properly. United airlines kept exaggerating their profit amounts, because the usage of historical cost accounting ignores the replacement costs of the assets, thereby not accurately reflecting United airlines performance for the current period.
AASB 116 Revaluations of property, plant and equipment The adoption of the revaluation model to measure United Airlines property and equipment can solve some of the problems to an extent. By adopting this model, the airline will be consistently revaluing the equipment and property to make sure its carrying amount is not materially different from its fair amount ; “the amount for which an asset could be exchanged between knowledgeable, willing parties”. United airlines have failed to acknowledge the price of their assets at present time, thereby erosion of capital occurring and overestimation of profit. Adopting this model allows depreciable assets such as their major assets such as airplanes to be properly depreciated thereby acknowledging and increasing future depreciation expense and decreasing future profits. While adopting the revaluation ensures the management understands the actual status of the business it does not find ways for the business to increase its capital to cover its replacement costs. The author has suggested the increased dependency upon share holders to put more funds into the business. While this suggestion seems to give one airline “solid growth in capital” it’s not an ongoing reliable source and United airlines should learn to be more prudent about obtaining future estimations and planning their liabilities accordingly throughout reporting periods to be able to comfortably cover replacement costs.
QUESTION 2: CCA QUESTION
Building renovations Ltd
INCOME STATEMENT FOR YEAR ENDED 30 JUNE 20X2 (CURRENT COST)
| $ | $ |
Sales revenue | | 150,00 |
Less COGS at replacement cost | 90,000 | |
GROSS PROFIT | | 60,000 |
Less Expenses | | |
Depreciation of building | 4,500 | |
Cash operating expense | 40,000 | 44,500 |
PROFIT | |...