Question

You are the newly hired accountant for Quail Plc. The director is not a trained accountant but recently attended a conference where the concept of substance over form was discussed. He has sent you an email following up on a recent staff meeting and asked you to answer the following queries that he has with regard to the draft accounts for year end 31 December 2020.

(a) We discussed yesterday that often the substance of a transaction rather than the strict legal form is recorded in accounting. I am confused, are we acting illegally if we are not complying with the law?

(b) One of our construction divisions has won a tender for a 5-year bridge construction. The following was the detail received from the site foreman last week.

The price agreed for the contract is $5million. The costs incurred to date are $1.6million and they expect to spend a further $2.4 million to complete the project. There work certified on the site is $1.8m and we have received a payment of $1.5 million to date. We measure the progress of contracts based on the work certified as a percentage of the contract price.

Can we recognise any of the build or do we have to wait to complete the contract in order to record any revenue?

(c) We account for all properties at fair value and have been renting out a property for many years. On 1 January 2020, the property had a fair value of $30 million. On 1 July 2020, we decided to move back into the property following the end of the rental agreement with the tenants and use it has our head office. At this date the asset had a fair value of $35 million and a remaining useful life of 14 years.

How will this property be accounted for this year?

(d) We received a letter on 15th January 2021 that one of our long-standing customers had gone into liquidation. We are owed $550,000 by this customer. The balance at the end of the year was $350,000, the rest was sales made in the first week of January 2021. The letter says we may receive a payment of $0.20 for every $ owed to us.

Does this have any effect on the accounts at year end?