The bookkeeper for Branford Ltd. has drawn up a financial statement on 31 December 20X1. Some of the items on the draft balance sheet are as follows:...

The bookkeeper for Branford Ltd. has drawn up a financial statement on 31 December 20X1. Some of the items on the draft balance sheet are as follows:

Upon further inquiry, you discover that at 31 December 20X1, the Canadian dollar is worth HK$7.5. You also ascertain that the value of the marketable securities was $987,000 at 20X1 year-end.

Required:

1. Indicate what change, if any, you would make in reporting each of the preceding items.

2. In each case, discuss the accounting principle involved.

Solutions

Expert Solution

Cash:

The cash should be reported at $313,333; i.e., [$300,000 + ($100,000 ÷ 7.5)] The HK$ must be reported at its Canadian dollar equivalent.

Branford has violated the principle of faithful representation, since the $100,000 reported is not an accurate reflection of the value of the cash in a Canadian dollar financial statement.

Marketable securities:

Marketable securities should be reported at market value (here, $987,000); as “temporary investments”, they are either FVTPL or FVTOCI.

Branford has violated the principle of relevance, since the $900,000 reported cost is not the most important information with respect to the investment.

Accounts receivable:

The revenue recognition criteria have not been met. The vendor, Branford, has not performed all acts required x the product has not yet been delivered. The order is an executory contract at this point and should not be recognized.

Branford has violated the the revenue recognition concept. He has also violated the principle of reliability, since there is no account receivable or revenue until delivery, so the $500,000 reported is not representationally faithful to its real identity.

Contract liability:

This is an executory contract. There is a contract between Branford and the contractor, but Branford has not yet paid anything nor has the contractor begun work. This amount should not be recorded or recognized until at least one party to the contract has ‘executed’ its obligation (or a part thereof).

Other liabilities:

Branford knows that it has an obligation to pay $75,000 next year but has not recorded the liability in the financial statements. The amount should be recorded.

The faithful representation of the financial statements is reduced when this liability is omitted.

Junaid answered 9 months ago

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