Portable Energy Ltd In fall 2015, David Lee initiated a crowdfunding campaign with help from the Equitise - a crowdfunding platform in Australia. His goal was to raise sufficient capital to launch Portable Energy, a privately held company that manufactures and sells portable energy chews for active people on the go. The company successfully raised $250,000 during the six-month campaign sufficient to cover all costs related to the acquisition of equipment and materials needed to produce its single product, Dragon Energy. Dragon Energy is a portable energy chew favoured by amateur and professional athletes. The product is extremely popular with bikers, runners, and biathletes because of its energy kick and the essential vitamins and minerals delivered naturally through its unique ingredients. The all-natural athletic fuel is produced using two components: maple syrup and a secret caffeine blend consisting of coffee, coconut oil, and dragon fruit extract that the company promotes as the Dragon Blend. The company grows its own fruits; this process is complex and carefully managed. The plants produce fruit for five months each year, generally from September through March, in greenhouses situated in Dandenong South, Victoria, Australia. The pure maple syrup is imported from Canada. The maple syrup and Dragon Blend are mixed together at the companys rented facility. The energy chews are packaged and sold online through the companys website. At the beginning of 2018, Portable Energy entered into a contract with a property owner to use Retail Unit A in a department store in downtown Melbourne to sell its products. The contract is for five years, and Retail Unit A is part of a larger retail space with many retail units in the department store. Portable Energy began producing energy chews in 2017 and has experienced consistent demand since the product hit the market. The unique product and manufacturing process attracted the attention of several private investors. Given these developments, Assurance International, an audit firm, was hired to audit the companys financial statements for the year ending 30 June 2018. The financial statements will be prepared in accordance with Australia Accounting Standards; the monetary unit is the Australian dollars. Portable Energy treats land, equipment, and greenhouses as separate asset classes. Since its inception, the company has used the cost model for valuing property, plant, and equipment. However, management now believes that the revaluation model for both land and equipment is more appropriate, under the presumption that fair value presents more relevant financial information to the potential investors. Some financial information, prepared by Portable Energys accountant, is presented in Tables 1 and 2. The company treats the payments associated with the use of Retail Unit A in the department store part of its operating expenses. Land for Growing Purposes At the end of 2015, Portable Energy paid $80,000 for one acre of land on the outskirts of Dandenong South. An active market exists for similar pieces of land in the region; Portable Energy can access the markets at any time. Management believes the fair value estimate for the land should be classified as Level 1 in the fair value hierarchy. They are fairly certain that the land would not sell for less than $100,000, less selling costs of $5,000 and greenhouse removal costs of $2,000. As such, they propose that the land be reported at a fair value of $93,000, i.e., at 3 their assessment of its fair value less costs of disposal. The recent selling prices of land in the area are presented in Table 3. Production Equipment On 1 July 2016, the company acquired a one-of-a-kind, customized piece of production equipment for blending and packaging the energy chews. The equipment was purchased for $120,000, has a salvage value of $10,000, and an estimated useful life of seven years. Portable Energy elected to depreciate the equipment using the straight-line method over seven years, with one full year of depreciation taken in the first and last years of the assets life. Management believes all components of the equipment depreciate at the same rate. The initial batches of Dragon Energy were produced in 2017. Management believes that neither the market nor the cost approach included in AASB13 is relevant in this situation. As of 30 June 2018, management calculated the fair value of the equipment as $180,151 based on a discounted cash flow (DCF) model calculated using its estimated cost of capital and its own assumptions about future cash flows. Table 4 presents Portable Energys DCF model and the resulting calculations. The auditors cautioned Portable Energys management team that the fair value revaluation model described in AASB16 must be used for all assets within the same class. The auditors also emphasised that AASB16 allows for revaluation when the fair value can be measured reliably, and that, after the revaluation, management needs to monitor the fair value of the asset to assure that the assets carrying value continues to approximate the fair value. They added that AASB 13 clearly explain that present value measurements should be based on the riskfree rate and a risk premium that represents the price for bearing the uncertainty inherent in the cash flows. Management replied that they believe the fair value is important to report under the companys current circumstances and that they believe their estimates are appropriate. Based upon a conversation between the auditors and the equipments manufacturer, the cost for a similar piece of production equipment, roughly approximating the current condition of Portable Energys equipment, ranges from $110,000 to $125,000. Use of Retail Unit A in a Department Store Portable Energy is granted the right to use Retail Unit A in the department store. Based on the terms in the contract, the property owner can require Portable Energy to relocate to another retail unit. In that case, the property owner is required to provide Portable Energy with a retail unit of similar quality and specifications to Retail Unit A and to pay for the relocation costs. The contract requires Portable Energy to use Retail Unit A to sell its goods during the hours that the larger retail space is open. Portable Energy makes all of the decisions about the use of the retail unit during the period of use. For example, Portable Energy decides on the mix of goods sold from the unit, the pricing of the goods sold, and the quantities of inventory held. Portable Energy also controls physical access to the unit throughout the five-year period of use. The contract requires Portable Energy to make fixed payments to the property owner, as well as variable payments that are a percentage of sales from Retail Unit A. The property owner provides cleaning and security services, as well as advertising services, as part of the contract. Requirements Assume you are the auditor, prepare a business memo to Portable Energys management. In the memo, you need comment on the key accounting choices made by the management and provide your own opinions regarding: 1) valuation of land; 2) valuation of production equipment; 3) the contract to use Retail Unit A in the department store. If your opinions are different from those of the management, you need give reasons and assess the impact on the ending balance sheet and income statement. You should refer to the relevant accounting standards to support your opinions. Calculations might be needed to support your arguments.

Assume you are the auditor, prepare a business memo to Portable Energys management. In the memo, you need comment on the key accounting choices made by the management and provide your own opinions regarding: 1) valuation of land; 2) valuation of production equipment; 3) the contract to use Retail Unit A in the department store. If your opinions are different from those of the management, you need give reasons and assess the impact on the ending balance sheet and income statement. You should refer to the relevant accounting standards to support your opinions. Calculations might be needed to support your arguments.

TABLE 1 Statement of Comprehensive Income as Prepared by Management For the Year Ended June 30 2017 Sales revenue $200,000 Cost of sales: variable costs of production 150,000 Cost of sales: fixed costs of greenhouse operations 30,000 Cost of sales: fixed costs of production operations 30,000 Cost of sales: depreciation expense 20.194 Gross profit (30,194) Administrative and operating expenses 100,000 Net loss (130,194) Other comprehensive income - equipment revaluation (180,151 - 88,572) Other comprehensive income - land revaluation (93,000 - 80,000) Comprehensive income loss) (130,194) 2018 $360,000 270,000 30,000 30,000 20,194 9.806 100.000 (90,194) 91,579 13,000 14,385 TABLE 2 Operating Assets as Drafted by Management 2017 Land (2017 at cost, 2018 at fair value) $80,000 Production equipment (2017 at cost, 2018 at fair value) 120,000 Less accumulated depreciation (15,714) Greenhouses, at cost 112,000 Less accumulated depreciation (25 years) (8.960) Subtotal 287,326 Capitalized greenhouse costs: Growing environment 12,000 Dragon fruit seeds 2,000 Total greenhouse costs 14,000 Total operating assets 301,326 2018 $93,000 180.151 0 112,000 (13,440) 371,711 12.000 2,000 14.000 385,711 TABLE 3 Valais Land Market (Active) Market/Region Dandenong Springvale Berwick Price/Acre $85,000 $60.000 $70,000 TABLE4 Managements Production Equipment Discounted Cash Flow (DCF) Assumptions and Model 2017 2018 2019 2020 2021 2022 2023 Dragon Energy Production and Sales in Units 10,000 18.000 20,000 20.800 21.632 22,497 23.400 Revenue per bal 20 400,000 416,000 432.640 449,940 469,000 Variable cost per bar 15 (300,000) (312.000) (24.480) (337,455) (351,000) Annual fixed costs of greenhouse operations 30,000 (30,000) (30,000) (30,000) (30,000) (30,000) Annual fixed costs of production operations 30.000 (30.000) (30,000) (30,000) (30,000) (30.000) Net cash flow 40,000 44,000 48,160 52,485 57,000 Discounted at 10% cost of capital 180.151 36,364 36 364 36,183 35,848 35,393 Book value production equipment Purchase price 120.000 120.000 Accumulated depreciation (1 and 2 years) 15,714 31,429 Book value 104,286 88.571 Fair value-book value 91,380 TABLE 1 Statement of Comprehensive Income as Prepared by Management For the Year Ended June 30 2017 Sales revenue $200,000 Cost of sales: variable costs of production 150,000 Cost of sales: fixed costs of greenhouse operations 30,000 Cost of sales: fixed costs of production operations 30,000 Cost of sales: depreciation expense 20.194 Gross profit (30,194) Administrative and operating expenses 100,000 Net loss (130,194) Other comprehensive income - equipment revaluation (180,151 - 88,572) Other comprehensive income - land revaluation (93,000 - 80,000) Comprehensive income loss) (130,194) 2018 $360,000 270,000 30,000 30,000 20,194 9.806 100.000 (90,194) 91,579 13,000 14,385 TABLE 2 Operating Assets as Drafted by Management 2017 Land (2017 at cost, 2018 at fair value) $80,000 Production equipment (2017 at cost, 2018 at fair value) 120,000 Less accumulated depreciation (15,714) Greenhouses, at cost 112,000 Less accumulated depreciation (25 years) (8.960) Subtotal 287,326 Capitalized greenhouse costs: Growing environment 12,000 Dragon fruit seeds 2,000 Total greenhouse costs 14,000 Total operating assets 301,326 2018 $93,000 180.151 0 112,000 (13,440) 371,711 12.000 2,000 14.000 385,711 TABLE 3 Valais Land Market (Active) Market/Region Dandenong Springvale Berwick Price/Acre $85,000 $60.000 $70,000 TABLE4 Managements Production Equipment Discounted Cash Flow (DCF) Assumptions and Model 2017 2018 2019 2020 2021 2022 2023 Dragon Energy Production and Sales in Units 10,000 18.000 20,000 20.800 21.632 22,497 23.400 Revenue per bal 20 400,000 416,000 432.640 449,940 469,000 Variable cost per bar 15 (300,000) (312.000) (24.480) (337,455) (351,000) Annual fixed costs of greenhouse operations 30,000 (30,000) (30,000) (30,000) (30,000) (30,000) Annual fixed costs of production operations 30.000 (30.000) (30,000) (30,000) (30,000) (30.000) Net cash flow 40,000 44,000 48,160 52,485 57,000 Discounted at 10% cost of capital 180.151 36,364 36 364 36,183 35,848 35,393 Book value production equipment Purchase price 120.000 120.000 Accumulated depreciation (1 and 2 years) 15,714 31,429 Book value 104,286 88.571 Fair value-book value 91,380