You are a CPA working for an accounting firm called AccPlus. One of your clients is Cairns Ltd. James Manning is the Managing Director of Cairns Ltd. He often contacts you for accounting issues, which he cannot understand. Currently he has expressed some concerns over a couple of accounting issues as shown in the memo below and he is seeking for your professional advice.
I have been told by a colleague who is studying accounting that our current accounting policy in relation to dividend may not be correct or in accordance with accounting standards. My colleague stated that many public companies have dividend policies, which have been communicated to shareholders as to the amount of the fully franked distribution, which will be paid to shareholders. It may be argued that such a policy provides the company with a constructive liability to pay the dividend. Currently, the dividend is not treated as constructive liability in Cairns Ltd. Could you please advise whether the constructive liability should arise?
Cairns Ltd gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the company undertakes to remedy, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. As this is the first year that the warranty has been available to Product X, there is no data from the firm to indicate whether there will be claims under the warranties. However, industry research suggests that it is likely that such claims will be forthcoming. Should a provision be recognized in accordance with accounting standards?
I am very concerned about the depreciation charges being made in relation to the company’s equipment. In particular, I believe that the depreciation charges are not high enough in relation to the factory machines because new technology applied in that area is rapidly making the machines obsolete. In addition, the machines will have to be replaced in the near future and, with the low depreciation charges, the fund will not be sufficient to pay for the replacement machines. However, my colleague suggested that I should not worry about the depreciation charges due to the nature of depreciation. Could you please advise me on this matter?
Currently, all non-current assets, including Land and Buildings, Motor Vehicles and Furniture and Fixtures are reported in the Statement of Financial Position at historical cost. I would like to provide more relevant information to the users of our financial statements, so I am considering whether to revalue the non-current assets. But I have a problem that one of the buildings is a heritage listed building which would be extremely difficult to
Can you please advise whether my proposed accounting treatment regarding the revaluation is acceptable? If yes, how can I solve the difficulty with the heritage listed building? What are the disclosure requirements for this change? If not, please explain the reasons. I would like to see appropriate references to support your advice.
Write a business letter giving advice to James Manning, providing clear answers and explanations to each of the four accounting issues he stated in the memo. Each accounting issue will be marked out of ten and equal mark will be allocated to each accounting issue. Your total marks will be prorated to a mark out of ten.