Ex1.

1 Measuring inventories of gold and silver

Unlike other ordinary goods,

there is a ready liquid
market with quoted prices,
minimal
transaction costs, minimal
selling effort, minimal after-
costs, and immediate cash
settlement.
Under the conceptual
framework, an item that meets
the definition of an asset,
liability, income,
or expense should be
recognised if:
(a) it is probable that any
future economic benefit
associated with the item will
flow to
or from the entity; and
(b) the item has a cost or value
that can be measured with
reliability.
The AASB concluded that
because of the nature of the
market in which gold and
silver are
bought and sold, the conditions
for income recognition are met
at the time of production.
Unlike other ordinary goods, there is a ready liquid market with quoted
prices, minimal transaction costs, minimal selling effort, minimal after-costs, and
immediate cash settlement.
Under the conceptual framework, an item that meets the definition of an asset,
liability, income, or expense should be recognised if:
(a) it is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability. The
AASB concluded that because of the nature of the market in which gold and silver are
bought and sold, the conditions for income recognition are met at the time of
production.

The AASB concluded that

because of the nature of the
market in which gold and
silver are
bought and sold, the conditions
for income recognition are met
at the time of production.
The IASB concluded that because of the nature of the market in which gold and
silver are bought and sold, the conditions for income recognition are met at the time of
production.
Ex 1.2: Recognising a loss from a lawsuit
a. The definition of liability can help decide the accounting treatment of the situation.
Under the Conceptual Framework a liability is a present obligation of the entity arising
from past events, the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits. In this case, the past event is the fall
and injury to the pedestrian.
b. Present obligation depends on the probability of payment. The attorney has advised
that a $25 000 loss is probable. Therefore appropriate accounting involves recognising
a liability for the probable payment. An expense would also be recognised.
c. Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities. In this case, the
expense arises at the time the pedestrian is injured because a liability has also arisen at
that time.
Ex 1.3: Need for the conceptual framwork vs interpretations
a. No. The fact that the Conceptual Framework involves judgement does not mean that
it should be abandoned.
b. The guidance developed by the interpretations committee would be ad hoc – that is,
developed case by case without the foundation of the Conceptual Framework to look
to. The standards themselves would suffer from the same problem if there were no
Conceptual Framework.
c. The Conceptual Framework provides guidance and direction to the standard setters,
and therefore will lead to consistency among the standards.
d. But it is a set of concepts. It provides a boundary for the exercise of judgement by
the standard setter and the interpretive body.
Ex 1.5: Purchase orders
(a) Under the Conceptual Framework, the airline should not recognise any asset or
liability at the time it place the order, because the transaction has not taken place.
Accounting recognises purchase transactions when delivery takes place, and title
passes. At this point the airline, and not the manufacturer, has assumed the risks and
rewards of owning the airplane.
Nonetheless, the airline has made an important and irrevocable commitment.
Generally, major capital spending commitments are disclosed in the notes to the
financial statements.
(b) The airline is better off for having locked in the price than if it had not done so.
Conversely, if the price had fallen, it would be worse off for having signed the non-
cancellable fixed price order. Nonetheless, under current accounting standards, such
gains and losses are not recognised.
Accounting treats commitments to purchase financial assets differently from
commitments to purchase property. If the airline had agreed to purchase a foreign
currency at a fixed price for delivery at a future date, and the exchange rate goes up or
down, it is required to recognise a gain or loss.
Ex 1.6 Definitions of elements and recognition criteria
a. A trinket of sentimental value only: The trinket would not be recognized as an asset
under the conceptual framework, as it does not meet the definition of an asset. An
asset is defined as a resource controlled by an entity as a result of past events and from
which future economic benefits are expected to flow to the entity. Since the trinket
does not have any economic benefits, it cannot be recognized as an asset.
b. You are a guarantor for your friend's bank loan in 2 situations:
If you have no reason to believe your friend will default on the loan, there is no need
to recognize any liability in the financial statements. As per the conceptual framework,
a liability is defined as a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow of resources from the entity.
Therefore, in this case, there is no present obligation to settle any loan, and hence no
liability needs to be recognized.
If you think it is likely that your friend will default on the loan, then you may need to
recognize a provision in the financial statements. A provision is recognized when the
entity has a present obligation as a result of a past event, and it is probable that an
outflow of resources will be required to settle the obligation. As a guarantor, you have
a legal obligation to repay the loan if your friend defaults, and if you believe that it is
probable that you will have to fulfill this obligation, a provision needs to be
recognized.
c. You receive 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client:
The shares should be recognized as an asset at fair value in the financial statements.
The conceptual framework defines an asset as a resource controlled by the entity as a
result of past events, from which future economic benefits are expected to flow to the
entity. In this case, the shares represent a resource that is controlled by the entity, and
the fair value of the shares is a reliable measure of the future economic benefits that
will flow to the entity.
d. The panoramic view of the coast from your cafe's windows, which you are
convinced attracts customers to your cafe: The panoramic view cannot be recognized
as an asset in the financial statements, as it does not meet the definition of an asset. An
asset is defined as a resource controlled by an entity as a result of past events and from
which future economic benefits are expected to flow to the entity. Since the panoramic
view does not represent any resource controlled by the entity, it cannot be recognized
as an asset.
e. The court has ordered your firm to repair the environmental damage it caused to the
local river system, and you have no idea how much this repair work will cost: The
conceptual framework requires that a provision should be recognized if the entity has a
present obligation as a result of a past event, and it is probable that an outflow of
resources will be required to settle the obligation. In this case, the court order
represents a past event that has created a present obligation for the entity to repair the
environmental damage. Since it is probable that an outflow of resources will be
required to settle the obligation, a provision needs to be recognized in the financial
statements. The amount of the provision should be estimated based on the best
available information at the reporting date. If the range of possible outcomes is wide,
then a range of estimates should be disclosed.
1.7 Assets
 The Conceptual Framework defines an asset as a resource controlled by the entity as
a result of past events and from which future economic benefits are expected to flow to
the entity.
 The expenditure of developing a new line of chemical-free cosmetics meets this
definition as: (1) it represents future economic benefits via sale of the new line of
cosmetics; (2) the benefits are controlled, as Lampeter Cosmetics will enjoy the
economic benefits flowing from the new line; and (3) there is a past event, as
Lampeter Cosmetics has already spent the $220 000.
 Under the Conceptual Framework an asset is recognised only when it is probable
that the future economic benefits will flow to the entity and the asset has a cost or
value that can be reliably measured.
 The expenditure fails the probability criterion, as it is not yet possible to predict
whether the project will prove to be commercially relevant.
 Accordingly, Lampeter Cosmetics cannot (yet) recognise the expenditure as an
asset.
1.8 Asset definition and recognition
The Conceptual Framework defines expenses as decreases in economic benefits during
the period in the form of asset decreases or liability increases that result in decreases in
equity, other than those relating to distributions to owners.
The theft of the $20 000 cash satisfies the expense definition as: o It is a decrease in
economic benefits during the period, as cash (economic benefits) has decreased; o The
decrease in economic benefits is in the form of an asset decrease, as cash (an asset) has
decreased; and o It has resulted in a decrease in equity, as assets have decreased and
liabilities have not changed.
 In accordance with the Conceptual Framework an expense must be recognised
when: o A decrease in economic benefits related to an asset increase or a liability
decrease has arisen; and o The decrease can be reliably measured.
 The theft of the cash satisfies both recognition criteria as: o The decrease in
economic benefits related to an asset decrease (a decrease in cash) has occurred; and o
The decrease can be reliably measured, as the amount of cash lost is known (i.e.
$20000).
 Accordingly, an expense (Dr) and asset decrease (Cr) of $20 000 must be
recognised.
1.9
To calculate the profit for the year under different capital maintenance views, we first
need to understand the concept of capital maintenance. Capital maintenance refers to
the way a company maintains the value of its capital or investment over time. There
are two main views of capital maintenance: financial capital maintenance and physical
capital maintenance.
Financial Capital Maintenance:
Under the financial capital maintenance view, profit is measured as the increase in the
monetary amount of the company's net assets from the beginning to the end of the
year, after excluding any capital contributions or withdrawals. In other words, the
financial capital maintenance view focuses on maintaining the purchasing power of the
company's capital.
Calculation of Profit under Financial Capital Maintenance:

The capital at the beginning of the year is 2000 CU, which is sufficient to purchase
200 units of merchandise at a cost of 10 CU per unit. Therefore, the cost of goods sold
(COGS) is 200 x 10 CU = 2000 CU.
The merchandise is sold at 2,200 CU, which results in a sales revenue of 200 x 2,200
CU = 440,000 CU.
The cost of goods sold (COGS) is calculated as follows:
The cost per unit of merchandise increased from 10 CU to 10.75 CU during the year,
which results in a total cost of 200 x 10.75 CU = 2,150 CU.
The gross profit is calculated as follows:
Gross Profit = Sales Revenue - Cost of Goods Sold = 440,000 CU - 2,150 CU =
437,850 CU.
To adjust for the increase in purchasing power by 5%, we need to multiply the profit
by the inflation rate:
Adjusted Profit = Gross Profit x (1 + Inflation Rate) = 437,850 CU x (1 + 0.05) =
459,742.50 CU.
Therefore, the profit under financial capital maintenance view is 459,742.50 CU.
Physical Capital Maintenance:
Under the physical capital maintenance view, profit is measured as the increase in the
physical productive capacity of the company from the beginning to the end of the year,
after excluding any capital contributions or withdrawals. In other words, the physical
capital maintenance view focuses on maintaining the company's ability to produce
goods and services.
Calculation of Profit under Physical Capital Maintenance:
The capital at the beginning of the year is 2000 CU, which is sufficient to purchase
200 units of merchandise at a cost of 10 CU per unit. Therefore, the company's
physical productive capacity is 200 units.

The merchandise is sold at 2,200 CU, which results in a sales revenue of 200 x 2,200
CU = 440,000 CU.
The cost of goods sold (COGS) is calculated as follows:
The cost per unit of merchandise increased from 10 CU to 10.75 CU during the year,
which results in a total cost of 200 x 10.75 CU = 2,150 CU.
The gross profit is calculated as follows:
Gross Profit = Sales Revenue - Cost of Goods Sold = 440,000 CU - 2,150 CU =
437,850 CU.
Therefore, the profit under physical capital maintenance view is 437,850 CU.
In conclusion, the profit for the year under financial capital maintenance view is
459,742.50 CU, while the profit under physical capital maintenance view is 437,850
CU.
Chương 2
Ex 2.1
The capitalized cost of the equipment on the assumption that
a. The sales tax is deductible = New equipment + freight cost + insurance while in
transit + Installation cost + testing = 365.000 + 5.600 + 800 + 2.000 + 700 = 374.100
b. The sales tax is NOT deductible = New equipment + sales tax + freight cost +
insurance while in transit + Installation cost + testing = 365.000 + 29.200 + 5.600 +
800 + 2.000 + 700 = 403.300
Ex 2.2
Total Fair value = 476,190 + 793,650 +1,269,840 + 634,920 = 3,174,600
Cost of Land = (476,190/3,174,600) x 2,886,000= 432,900
Cost of Building = (793,650/3,174,600) x 2,886,000 = 721,500
Cost of Equipment = (1,269,840/3,174,600) x 2,886,000 = 1,154,400
Cost of Inventories = (634,920/3,174,600) x 2,886,000 = 577,200
Dr Land $432,900
Dr Building $721,500
Dr Equipment $1,154,400
Dr Inventories $577,200
Cr Cash $2,886,000
Ex2.3
Date Expenditures Fraction Average
construction period Accumulated
Expenditures
(AAE)
1/1/20X3 $630.000 9/9 $630.000
28/2/20X3 90.000 7/9 70.000
 30/4/20X3 180.000 5/9 100.000
1/7/20X3 36.000 3/9 12.000
30/9/20X3 64.000 0/0 0
Total $1.000.000 $812.000
Interest = AAE x Specific Borrowing Rate x Time = 812.000 x 12% x 9/12 = 73.080
Capitalized cost of the library = 1.000.000 + 73.080 = $1.073.080