Question

Question 3 Part A XYZ Windows Ltd is involved in a research and development project to create a filtering window that removes the need for curtains. For the current year ended 30 June 2020 expenditure on the project is as follows: Research $235,000 Development $500,000 The window is expected to return profits of $70,000 per year for the 10 years commencing 1 July 2020. Assuming the company uses a straight-line method amortisation. This company uses a discount rate of 8 per cent. Required: i) How much research and development cost should be expensed in the year to 30 June 2020? ii) How much development expenditure should be amortised in the year to 30 June 2021?

Part B An assistant of yours has encountered the following matter during the preparation of the draft financial statements of XYZ Ltd for the year ending 30 June 2020. He /She has given an explanation of his/her treatment of the item. “XYZ Ltd management spent $200,000 sending its staff on training courses during the year. This has already led to an improvement in the company’s efficiency and resulted in cost savings. The organiser of the course has stated that the benefits from the training should last for a minimum of four years. The assistant has therefore treated the cost of the training as an intangible asset and charged six months’ amortisation based on the average date during the year on which the training courses were completed.” Required: Comment on the assistant’s treatment of them in the financial statement for the year ended 30 June 2020 and advise him how they should be treated under AASB 138 Intangible Assets.

Part C If an organisation is constructing a building, and that building will take a number of years to complete, can the organisation recognise revenue throughout the contract, or does the construction-based organisation have to wait until project completion before it recognises the revenue associated with the construction contract? Discuss this statement in accordance to AASB 15.

Answer 1

Question 3  Part A
Research and development cost should be expensed in the year to 30 June 2020	$         235,000.00	Given
Amortization of Development Expenditure = $500,000/10 yrs	$           50,000.00
Part B
AASB 138 Intangible Assets makes the point that an entity usually has insufficient control over the expected future economic benefits arising from a tearn of skilled staff. XYZ's trained staff may stay with the Company for a minimum of four years or they may decide to leave and take their skills with them. The company has no control over that, for that reason the expenditure on training cannot be treated as asset and must be Charged to profit and loss.
Part C
Accordance to AASB 15 Construction Contracts revenue was recognized by construction firms on Completed Contracts Basis under which, profit on the construction contract was deferred until the completion of the related project . Where a net inflow of economic benefits under a construction contract is probable, costs and revenue are recognized accruals basis. If however a loss is expected under the contract, the entire loss is immediately recognized.