Question

Latestech Equipment Ltd operates an equipment rental business. The equipment has an internal computer that enables remote monitoring of usage:

Casual equipment hire at a rate of $25 per machine hour, with a minimum charge of $200 per day, e.g., if a customer hires a machine on Monday, collecting it at 5.00 p.m. and returns it by 5.00 p.m. Tuesday, after using it for 10 machine hours, the customer will be charged $250, but if the customer used the machine for only 4 hours, the charge would be $200, being the minimum daily charge.

 Extended equipment hire agreement for a fixed fee of $12,000 payable in advance, which entitles the customer to the following:

o possession of the equipment for one year

o use of the equipment for up to 500 machine hours

o additional machine hours are charged at $25 per hour.

The equipment has a useful life of five years.Big Plans Ltd is a customer of Latestech Equipment Ltd. Big Plans Ltd entered into an extended equipment hire agreement on 1 March 20X3. The initial payment of $12,000 was debited to Prepayments. The equipment was used for 200 machine hours in the first four months of the extended hire agreement. Big Plans Ltd’s reporting date is 30 June.

a) Identify the relevant facts in relation to the transaction with Latestech Ltd.

b) What is the major accounting policy issue from the perspective of Big Plans Ltd in relation to the extended equipment hire agreement in preparing the financial statements for the year ended 30 June 20X3?

c) List the accounting standards, interpretations and other pronouncements (such as the Conceptual Framework) that are relevant to the accounting problem described in part b). Identify and describe two principles from these pronouncements.

d) The trainee bookkeeper suggests that $12,000 payment should be treated as an expense in the current period. Propose an alternative accounting policy that differs in terms of definition, recognition or measurement from that suggested by the trainee bookkeeper. In this question you are required to describe the policy only. You are not required to evaluate or justify it (save that for part e)

e) Based on the principles you identified in part c) evaluate

i) the policy suggested by the trainee bookkeeper and

ii) the policy that you suggested in part d) f) Recommend a policy.

g) Prepare a note to describe how the extended hire agreement has been accounted for, and disclosing the amount, if any, included in profit or loss in the current period.

Answer 1