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Brittle Ltd is a reporting entity which operates in the mining industry in Australia. The fim has been in operation for the past five (5) and has recently gotten listed on the Australian Stock Exchange (ASX). The firm had revamped its corporate governance structure to ensure compliance with the recommendations of ASX. The firm's financial performance has been improving steadily until the Covid-19 pandemic. Due to a high Covid-19 infection rate among the employees of the firm, the operating capacity of the firm reduced to 50%, which resulted in a significant decline in the sales revenue of the firm for the reporting years, 2020 and 2021. While an operating loss of $550 000 was made in 2020, an operating profit of $120 000 was generated in 2021. Currently, management is unsure of the future profitability of the firm's operation but remains hopeful of a better performance if the pandemic is managed effectively. Prior to the pandemic, Brittle Ltd signed an eight (8) year lease contract with Leasing Asset Ltd. The lease contract gave Brittle Ltd access to the use of a specialised item of machinery produced by Leasing Asset Ltd. The machinery has an economic useful life of 10 years. There are annual lease payments of $232 000 at the end of each reporting year which includes a service fee of 10%. Brittle Ltd has the option to purchase the machinery at price of 10% of its fair value at end of the lease terms which is lower the market value at that time. Brittle Ltd incurs a legal fee of $25 000 in relation to the lease contract. As part of Brittle Ltd's sustainability goals, the firm has adopted the Global Reporting Initiative (GRI) Framework as its guideline for preparing its sustainability reports. In addition to this, two members of the accounting department were sent for training programmes geared towards the provision of knowledge about the GRI Framework and its proper implementation as a reporting process. Furthermore, the firm has provided more logistics and resources to the accounting department to help equip them in implementing the GRI Framework. However, the accounting system of the firm has not been modified in any way. At the end of the reporting period 30 June 2021, Brittle Ltd released its first sustainability report with disclosures on economic, environmental, and social issues. Under environmental and social disclosures, Brittle presented a detailed discussion on activities and expenditures that reflected favourably on the firm. However, less detailed discussions were made on issues that related to the operations of the firms and had less favourable outcome for the firm. For instance, Brittle Ltd experienced a security breach with regards to its information system and preliminary assessment suggested that information about some key clientele had been compromised. Although the report highlighted this event, detailed elements of the breach had been omitted. Additional Information on lease contract: The fair value of machinery is $1 294 384 Applicable rate of interest is 14% With reference to the case of Brittle Ltd, provide appropriate responses to the following questions: A. (1) With regards to the provisions of AASB 112, present a critical analysis with justifications of at least three points of how Brittle Ltd is expected to account for the loss made in 2020 assuming Brittle Ltd is not likely to generate profit in 2022 and 2023 respectively. (7 marks) (ii) Provide an appropriate journal entry to account for the response provided in (1) if any (4 marks) (iii) How would your response in (1) change if it is assumed that Brittle Ltd is likely to generate profit in 2022 and 2023 respectively. Assume an applicable tax rate of 30% for Brittle Ltd. (5 marks) B. (1) With regards to the provisions of AASB 16, present a critical analysis with justifications on how Brittle Ltd should classify the lease contract. (10 marks) (ii) Present an extract of the statement of financial position and statement of income for the lease contract for the end of year 1 and 2 for Brittle Ltd. (12 marks) Brittle Ltd is a reporting entity which operates in the mining industry in Australia. The fim has been in operation for the past five (5) and has recently gotten listed on the Australian Stock Exchange (ASX). The firm had revamped its corporate governance structure to ensure compliance with the recommendations of ASX. The firm's financial performance has been improving steadily until the Covid-19 pandemic. Due to a high Covid-19 infection rate among the employees of the firm, the operating capacity of the firm reduced to 50%, which resulted in a significant decline in the sales revenue of the firm for the reporting years, 2020 and 2021. While an operating loss of $550 000 was made in 2020, an operating profit of $120 000 was generated in 2021. Currently, management is unsure of the future profitability of the firm's operation but remains hopeful of a better performance if the pandemic is managed effectively. Prior to the pandemic, Brittle Ltd signed an eight (8) year lease contract with Leasing Asset Ltd. The lease contract gave Brittle Ltd access to the use of a specialised item of machinery produced by Leasing Asset Ltd. The machinery has an economic useful life of 10 years. There are annual lease payments of $232 000 at the end of each reporting year which includes a service fee of 10%. Brittle Ltd has the option to purchase the machinery at price of 10% of its fair value at end of the lease terms which is lower the market value at that time. Brittle Ltd incurs a legal fee of $25 000 in relation to the lease contract. As part of Brittle Ltd's sustainability goals, the firm has adopted the Global Reporting Initiative (GRI) Framework as its guideline for preparing its sustainability reports. In addition to this, two members of the accounting department were sent for training programmes geared towards the provision of knowledge about the GRI Framework and its proper implementation as a reporting process. Furthermore, the firm has provided more logistics and resources to the accounting department to help equip them in implementing the GRI Framework. However, the accounting system of the firm has not been modified in any way. At the end of the reporting period 30 June 2021, Brittle Ltd released its first sustainability report with disclosures on economic, environmental, and social issues. Under environmental and social disclosures, Brittle presented a detailed discussion on activities and expenditures that reflected favourably on the firm. However, less detailed discussions were made on issues that related to the operations of the firms and had less favourable outcome for the firm. For instance, Brittle Ltd experienced a security breach with regards to its information system and preliminary assessment suggested that information about some key clientele had been compromised. Although the report highlighted this event, detailed elements of the breach had been omitted. Additional Information on lease contract: The fair value of machinery is $1 294 384 Applicable rate of interest is 14% With reference to the case of Brittle Ltd, provide appropriate responses to the following questions: A. (1) With regards to the provisions of AASB 112, present a critical analysis with justifications of at least three points of how Brittle Ltd is expected to account for the loss made in 2020 assuming Brittle Ltd is not likely to generate profit in 2022 and 2023 respectively. (7 marks) (ii) Provide an appropriate journal entry to account for the response provided in (1) if any (4 marks) (iii) How would your response in (1) change if it is assumed that Brittle Ltd is likely to generate profit in 2022 and 2023 respectively. Assume an applicable tax rate of 30% for Brittle Ltd. (5 marks) B. (1) With regards to the provisions of AASB 16, present a critical analysis with justifications on how Brittle Ltd should classify the lease contract. (10 marks) (ii) Present an extract of the statement of financial position and statement of income for the lease contract for the end of year 1 and 2 for Brittle Ltd. (12 marks)
