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04/18/2012

Financial Accounting


Financial Accounting

Part A:

The MP540 and the 12% Interest Rate in Cherry Limited

The aim of the company to achieve the success in the business venture is not new in every industry. Other than that, the effects of the economic crisis in the world seem to prolong. There is no doubt that the company takes appropriate action to lessen the negative impact of the economic constraints and bring back the competency in the business. With the respect to aim and the tailing objectives of the company, the business propellers decided to create a different kind of strategy that can be suitable in the needs of both consumers and the company. The introduction of the 12% interest charge for the consumers is a great opportunity for the company to increase the sustainability of the company. As far as our concern, we all know that the economic crises not only affect the business cycle but also the livelihood of the people. And because of the prolonged impact of the economic crisis, the customers of the Cherry Limited are also subject for the economic challenges. In order to restore the good relationship between the customers and the firm, the expanded time to pay the liabilities of the customers.

The action of the company regarding the interest of 12% under the MP540 marketing initiative is a great deal that the company can offer to the customers and the other potential customers. The new credit offers for the customers will deliver the benefits back for them. Initially, this marketing strategy is composed of various elements that is under the accounting proficiency, therefore, the gains and losses that will appear under this initiative remains under the control of the accounting. On the broad view of the accounting principle, the customers can be charged on 12% rate if they did not make any payment from the date of purchase until it reached the 450 days required. If the customers created the payment before it reached the state of maturity date, then the company will gain more receivables that can turn into revenue.

This simple procedure of MP540 scopes the ability of the company to regain the financial strength of the company. Under the accounting principle, the sales that the company will receive from the customers, earlier than expected, will give the firm an opportunity to divert it into revenue and use another form of investment. On the other hand, if the customers failed to pay the liabilities within the stated date, therefore, the effectiveness of the 12% interest can be realized. This is another advantage for the firm because the impact of the interest rate may appear as additional revenue for the company, and the work of the accounting department is to measure the reliability of the marketing initiative wherein the business can estimate the period of when the company will realize the revenue.

Part of the MP540 is the side wherein there is a possibility for the return the goods. The customers are also compelled by the law wherein they are also bound to have the right to receive the official receipt and allowing them to return the goods as well. This is a natural sale processes but in times when the customers refuse to accept the orders or demand for its return, it can probably another reason for the loss of the company. As another projected hindrance to attain the sustainability in the business process, the economic flow of goods is also in the risky level. To be accountable regarding the losses and the gains of the marketing initiative, there is a need to include the subjected 12% interest rate to generate a sound financial statement.

The use of the financial statement is an advantage for business leaders to generate another strategy and create a comprehensive decision. In driving the business’s future, a sound strategy is more likely amusing than of the other interventions. With the strong belief that the accounting sector can help the leaders, a providing effective decisions and strategy in the business can be formulated. And with the aid of the financial statements, the obligation of the accountants is to detail the implications and effectiveness of the interest rates in the business as well as for its future.

Calculation

Carrying Amount

 

 

 

Industrial Division (IND)

Domestic Division (DOM)

Property, Plant, and Equipment

40,000,000

32,000,000

Other Relevant Assets

24,000,000

24,000,000

Goodwill

 

8,800,000

Office Space

12,400,000

9,800,000

Total Carrying Amount

76,400,000

74,600,000

 

 

 

Impairment Loss

 

 

 

Industrial Division (IND)

Domestic Division (DOM)

Recoverable Amount

72,400,000

61,000,000

Value in Use

16,000

16,000

Total Impairment Loss

4,000,000 (note 1)

13,600,000 (note 2)

Note 1: Total carrying amount – recoverable amount = 76,400,000 – 72,400,000 = 4,000,000.00

Note 2: Total carrying amount – recoverable amount = 74,600,000 – 61,000,000 = 13,600,000.00

The recoverable amount of the asset is its fair value or the value in use, whichever is higher and is use as the amount in preparation for the recognition of the impairment loss. The idea of the impairment loss can be classified as another operating expense and should be treated as another item in financial reporting. With this treatment, it is better if the impairment can be recognize early through reducing the asset’s carrying amount to the recoverable amount.

Depreciation Policy

Every business is able to measure the ability of their business and through the use of impairment the positive or the negative result can be clearly shown in the balances sheet, which is part of the accounting reports. The relationship within the goodwill is already emphasized. Based on the accounting method in conservative approach, the goodwill being as one of the intangible assets, if not been recognized in the balance sheet therefore, there is no harm in the balancing. But goodwill carries the certain amount and, however, plays a role in the balance sheet so it must be measures for the purpose of impairment. Part of the conservative principle, if the fair value of the business is equal or more than the carrying amount of business, then as implied, there is no need for the impairment on goodwill. On the other hand, if the other situation happened, more likely, if the fair market value of the goodwill were found through the deriving differences between eh fair market value and the carrying value of the business assets, such application of the impairment is needed. The basis is to compare the value of goodwill in the carrying amount of the goodwill and be quantified in the process of impairment. Also, the owner can take measurable steps to stop or lessen the impairment which is an action to protect the ownership and its value by engaging the regular business valuation (Natalwala, 2009). This action might be the very same reason why managers have a conflicting idea regarding the reliability, consistency, relevance, and comparability of the enclosed information generated from the conservative method.

After the review of the managing director regarding the accounting procedure of the depreciation, the accounting department proposed another type of the depreciation method. A major change is needed in how the depreciation is calculated. The first principle of the depreciation is to quickly recover in the first appearance of the costs. In the Accelerated Cost Recovery System or ACRS, the salvage value is always in zero even though an asset may have some non zero salvage value. In this situation, the recovery can be allowed and there is sign of the quicker recovery. The recovery period for an asset is mainly depreciable with the real property and anything that is attached to or builds on land such as building, which may be another strategy in expansion. The manufacturing costs and the interest rates in delivering the products to the consumers are all part of the accounting practice. In the long term period, the depreciation system and rates for ACRS method may be charge for a year is obtained by multiplying appropriate percentage with the first cost (Saxena, 1997).

The depreciation practice of the accounting in the organization is important to value the recovery period of the organization. The depreciation method may reflect in the current situation of the organization. In addition, the record of the depreciation method can be a subject for the review of the business leaders, and the detail computation can help the business leaders generate a good decision and strategy. These changes might also affect the financial statement of the organization but all for the consistency and reliability of the information. 

 

 

 

Part B:

The License as an Intangible Asset

The use of the license is very important especially in business sectors. License plays an important role in the keeping the business aligned in any agreement with the government of the country. Without the sufficient license, a business is not bound to operate in the area of where the proprietor/s chooses to. To support of the licenses to keep the business safe is valued according to its principles and practices. The treatment and value in the licenses is likely on the intangible asset. The license can be a good practice in testing the goodwill impairment. The impairment test involves the intangible assets with indefinite lives. In this case, the value of the license plays an important role. Even if there has been a determination regarding the existence of the goodwill impairment, still, accountant cannot assume that the idea of impairment doesn’t exist in the indefinite assets. In the engagement of the organization in the use of the impairment testing, the appropriate method should be first determined to test the indefinite-life of the intangible assets such as the license. The appropriate is suitable enough to measure the impairment.

In addition, indefinite-lived intangible assets are not bound to be amortized or be a subject for amortization. The treatment for the intangible assets is to test them yearly accordingly for the purpose for impairment against the standards within the fair value. However, if the market price is unavailable then, the use of the fair value and its estimates can be the best basis of information which is almost similar in the using the present value technique. Companies should understand that the intangible assets should be also part of the accounting books and be subject for the annual impairment testing. The transition period of the goodwill extends up to six months and the companies have enough time to resolve the accounting for intangibles by the end of the first quarter.

Companies are expected to reassess the remaining and useful life of each of the intangible asset. Therefore, it is better if the companies should engage in the computation early as possible. In addition, the company should also adjust the amortization accordingly, unto what purpose it might be. For the indefinite life intangibles, the complete method for impairment against the fair value is needed (Valuation Researcher, 2002).

Goodwill is the most common and popular intangible asset and usually refers to the price or the value place above the market value of the identifiable assets of the company. Usually, when a business is brought into the arena of competition, the price paid is often above the market value of the firm infrastructure, equipment, inventory, and many other related factors. And usually, a business gathers intangible asset by establishing a strong business record by tracking the beneficial relationships. The relationship might be in terms of business relationship towards the customers, their distributors, and as well as their suppliers. Through that part, the goodwill covers the other valuable and yet intangible aspects of the business. Again, the intangible assets are the credit rating, location, business reputation, and brand name. It is manifested in the forms of the trademarks, manufacturing processes and procedures and the rights in license. License as part of the intangible asset is also the type of royalty that a purchaser could afford and willingly pay for its price. This stream is also part of the strategy in capitalizing that may reflect in the risk and return the relationship in terms of investing the assets (Natalwala, 2009).

The Costs Incurred in Extending the Network

The telecommunications company under the motives of PPE or personal protective equipment is an effective tool to help the employees ensure their securities. Although the company did not sell protective clothes, still the building of the telecommunication devices is another effective tool to lessen the accidents and foster the communication within the workplace is one of the telecommunication’s priorities. Ensuring the safety of the people is never been technological and interactive since the introduction of the information technology. In the area of safety and security, the idea of the personal protective equipment is designed to protect the employees from serious workplace hazards and injuries. Most of the peril environment might trigger or cause the illnesses of the people because of their contact in chemicals, radioactive elements, physical works, electrical and mechanical failures, and many other related misfortunes that might happened in the workplace. In addition to the face masks or shields, safety glasses, hard core hats, and safety shoes, and other essential garments such as the goggles, coveralls, gloves, vests, earplugs, and respirators, the importance of the devices is also placed into priority (U.S. Dep. of Labor, 2002). This gives rise for the business to work hard in the extension of their business domain in network.

The costs that may incur out of this expansion strategy might be based on its structure of managing the network of the system most especially in the telecommunications. There is no question about the elaborative importance and growth of the telecommunications, and most of the country assumes to have a quality service in the telecommunication industry. Therefore, the charge that the company bound to pay is necessary to employ the specific route of the network system. Out of the marketing efforts of the company, the business can achieve and afford to compensate all of their efforts and expenses.

The costs that the company will pay on the government is part of their authorization in location and the brand name, which is in the long process can be process in the valuation of the organization. In the beginning, the responsibility of the people is part of incorporating the design of the network. In addition, the need for the procurement of the valuable information are another action can be use to develop and complete the objectives of the telecommunication industry. The use of the procured data will give rise to the appropriate networking strategies and contracting the other customers (CRP, 2005). As expressed in the interest of the industries such as the manufacturing firms, the need for the reliable telecommunication device in the PPE is very advantage not only to keep the people safe but also to keep them align and being monitored in their workplace. The telecommunication company should understand the technical and financial qualification which is greatly involved in their chosen line of business. Placing in the interactive work of telecommunications is a great opportunity which has great challenges. However, due the valuation process, the impairment of the goodwill and the amortization process can be duly discussed within the ongoing process of business ventures.  

 

 

Recognition of the Revenue

In telecommunications industry, the revenue is recognized when an entity has satisfied the consumers through the performance which is generally part of its obligation. Part of it is also under the contract with the contract and the responsibility of the service provider is to deliver the satisfaction. Therefore, the telecommunication firm should not rely in the increase of sales and expect the return of the revenue is and only if the consumers are in between of satisfaction and not satisfied. Moreover, the control of the asset, which resembles in the offered goods or services, in involved in its transfer to the consumer. The significant change in the timing of the revenue recognition is when the contracts for the telecommunication’s services are involved and there is no identified continuous transfer of goods. In acknowledging the differences of the service contracts against the construction contracts, the suggestion regarding the service contracts is usually in continuous flow.

Services, such as in telecommunications are delivered at the end of the contract, which means that there is no continuous transfer, and in which the revenues can be recognized under the current standards. The provision of the expert opinions, including the specific auditing in the business is another opportunity for the telecommunications company to achieve the trust of the consumers which means that there will be a continuous flow of transaction and the continuous flow of revenue (EFRAG, 2009). In addition, the rights of the telecommunications company possessed is the entity and the performance obligations are taking participation in measuring the price of the transaction. The performance of the service is part of meeting the obligations and then afterwards the revenue. The performance and the obligation of the service can be paid according to the allocated selling price.

References:

CRP, (2005) “Central Ranges Pipeline Gas Network”, CRP Access Arrangement Information for Network, Accessed 24 March 2010, from http://www.ipart.nsw.gov.au/files/.PDF

EFRAG, (2009) “Recognizing the Revenue”, European Financial Reporting Advisory Group, Accessed 24 March 2010, from http://www.efrag.org/files/.pdf

Natalwala, H., (2009) “Business Valuation” Needs & Techniques, Accessed 24 March 2010, from www.icai.org/resource_file/ 17798business_valuation.pdf

Saxena, F., (1997) “Depreciation”, Accessed 24 March 2010, from https://pantherfile.uwm.edu/uksaxena/www/course/IE360-Saxena/six.pdf

U.S. Department of Labor, (2002) “Personal Protective Equipment”, Occupational Safety and Health Administration, Accessed 24 March 2010, from http://www.osha.gov/OshDoc/data_General_Facts/ppe-factsheet.pdf

Valuation Researcher, (2002) “Tackling the Implementation of SFAS 141 & 142”, Accessed 24 March 2010, from http://www.valuationresearch.com/content/Knowledge_center/back_issues/pdf/29_Tackling141and142.pdf

 

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