Question

Fruster's Inc. provides audited financial statements to its creditors and is required to maintain certain covenants based on its debt to equity ratio and return on assets. In addition, management of Frusters receives a bonus partially based on revenues for the year. Information related to Frusters Inc. follows.

1. Depreciation expense on the building for the year was $45,000. Because the building was increasing in value during the year, the controller decided not to record any depreciation expense in the current year.

2. New legislation was discussed by the government that would require new pollution control technology for companies such as Frusters. Prior to this, Frusters had been complying with all current requirements and otherwise believed that it was acting in an environmentally responsible manner. In anticipation of this new legislation being passed next year, Frusters expects it will need to upgrade its equipment and has booked the following entry:

Equipment 121,000

Accounts Payable 121,000

3. During the year, the company sold certain equipment for $285,000 recognizing a gain of $45,000. Because the controller believed that new equipment would be needed in the near future, the controller decided to defer the gain and amortize it over the life of the new equipment that would soon be purchased.

4. An order for $61,500 was received from a customer on January 2, 2017, for products on hand. This order was shipped f.o.b shipping point on January 9,2017. The company made the following entry for 2016:

Accounts Receivable 61,500

Sale Revenue 61,500

Questions:

A) Discuss the reporting objectives of the users of Frusters financial statements.

B) Comment on the appropriateness of Frusters accounting procedures and their impact on the company's financial statement users, applying the conceptual framework.

C) Discuss whether there are alternative available under IFRS to provide the reporting desired by Frusters management.

Answer 1

1. The objective of Frusters financial statements seems to be the one in which the profits are stated more than what actually is .
2. The Depreciation should have been booked and the revaluation should also be separately booked and the net effect will in the P&L.

The equipment that has been debited and the AP that has been credited is wrong as nothing has been purchased yet. By this entry there has been a increase in the assets and in liability and both of them does not exists as of date.

The gains should have been recognized as revenue of that year as per the matching concept and cannot be deferred this way. The new equipment that will be purchased next year will separately be depreciated in the relevant years.

The order has been received in next year so that is the revenue of that year in which the order has been received. This order cannot be booked in the year to which it does not belongs.

3. Yes the expenses that are not yet incurred and the income that has not been earned can be accrued. This will solve the problem of recognizing the revenue and expenses in the years to which they do not belongs.