For a period of years, the Remote Shire Council controlled a very large rubbish site in the southern area of Western Australia. Unfortunately, the site was nearly full and the council had to search for a new location. One of the preferred locations was an area that had previously been an open-cut coal mine. It was owned and controlled by the No More Coal Mining Venture, and the Remote Shire Council offered $4 per cubic metre to lease the quarry for a period of ten years. This amounted to a total of lease payment of $8.8 million. After this, the local paper reported the following:
This has the appearance of something for nothing but, to some experts in private enterprise; it appeared more like nothing for something. One private company, Environmental Disposals, had previously tendered $5.00 per cubic metre for the same mine site for disposal purposes, a total of $11 million.
Using the above information, explain how an asset can consist of 'nothing' and, taking into account the amounts mentioned above, illustrate your understanding of the concept of asset valuation.
Using this information, discuss whether the No More Coal Mining Venture should recognize an asset for the abandoned coal mine.
The Northshore Sailing Association (NSA) is a not-profit-association with 1875 members. The association represents the interests of its members through a management committee, which organizes the publication of a quarterly newsletter, and holds an annual meeting; it has subcommittees which create various competitions and outings for the members, as well as getting involved in community-care programs.
Every June, the newly appointed management committee meets with the old committee to discuss whether the general policy of the NSA has been adhered to over the 12-month period. The financial policy of the association for each year focuses on matching expenses with revenues; in other words, the expenses of the year should approximately equal the income of the year.
At the annual meeting on 30 June 20X2, the executive secretary presented an estimated statement of financial performance for the past financial year to the new management committee. Even though some of the June transactions had been estimated, the executive secretary assured the committee that these figures were carefully arrived at and should approximate the actual totals for the month.
Estimated statement of financial performance for the period of 1 July 20X1 - 30 June 20X2
Membership fees 76680
Newsletter subscriptions 8668
Publication sales 3168
Government grant 14400
Annual National Sailing Championship, 20X1 profit 908
Total Revenues 103824
Printing and mailing publications 24640
Committee meeting expense 13120
Annual National sailing Championship advance 2880
IBM publishing system 7200
Administrative salaries and expenses 45724
Total Expenses 100244
Excess of revenues over expenses 3580
A question raised by one of the new committee members was whether a grant of $14400 from the government should be included as income. If it was not, a deficit would show; this would mean that the association's reserves had been touched and therefore the 20X1-X2 board had not adhered to the general financial policy of the NSA.
This resulted in further questioning about items on the statement of financial performance, and led to the disclosure of the flowing information by the executive secretary.
? In March 20X2, the NSA received a $14400 grant from the government to finance a clean-up and erosion prevention along the Swanlee River, to commence in August of the same year. Up to 30 June 20X2, $720 had been spent in preparations for the operation and was included in Committee Meeting Expenses. When asked to explain why the $14400 had been recorded in the 20X1-X2 financial year instead of 20X2-X3, the executive secretary explained that the grant had been obtained as a result of the persuasiveness of the 20X1-X2 committee, and hence it should receive the credit for securing the grant.
? In early June 20X2, the association had fully installed and paid for an IBM publishing system which cost $7200. This system would dramatically reduce the hours involved in preparing membership lists, correspondence and manuscripts for publication. All of the other equipment in the association office was old.
? Members normally paid their fees during the first two months of the financial year. Due to the need to raise finance for the new IBM system, the association announced to members in April 20X2 that anyone paying their fees before 20 June 20X2 would receive a free T-shirt which would be on sale when the Swanlee River clean-up and erosion prevention operation commenced later in the year. The approximate cost of producing this T-shirt was expected to be $7.20, and it was expected to sell for $15. As a result, $8640 of fees for 20X2-X3 was received by 20 June 20X2.
? In May 20X2, the association sent a membership directory to each member; such a directory was published and sent out to members once every two years. The preparation and printing costs totaled $5760. Of the 2000 copies printed, 1875 were posted to members while the remaining 125 were held until new members joined the NSA upon which time a directory would be sent to them free of charge.
? One of the entitlements of being an NSA member was the receipt of the association newsletter free of charge. The $8668 reported as subscription revenue was the cash received from non-members, such as libraries and interest groups, in the 20X1-X2 financial period, of which $2160 was for newsletters that would be delivered during the next financial period, 20X2-X3. Offsetting this was $1440 of subscription revenue received in 20X0-X1 for newsletters delivered in 20X1-X2.
? The association had advanced $2880 for preliminary expenses to the committee responsible for planning the 20X2 annual national sailing championship held in late May. Entrance fees at the competition were set at a price to cover all of the championship costs, so it was expected that the $2880, plus any profit, would be returned to the NSA after the committee had paid the championship bill. The 20X1 championship let to a $908 profit; the 20X2 results were not known, although the anticipated attendance was about the same.
Use generally accepted accounting principles to determine if the Northshore Sailing Association had an excess or deficit for 20X1-X2.
Footnotes: Question 1 is from Chapter 4.17, Question 2 from 4.18 and Question 3 from Chapter 5.19.
Remote Shire Council controlled now is offering $8,800,000 @ $4 per cubic meter to lease the quarry for a period of ten years. This means the Remote Shire Council will be using 2,200,000 of quarry space. The general perception people have of quarry space is that the space is not having any use and so the term "something for nothing".
However, this same quarry space has other uses, and in this case that of disposal purposes, for which the Environmental Disposals, had previously tendered $5.00 per cubic meter for the same mine site. In this case No More Coal Mining Venture would ...
Here is just a sample of what you'll find in this solution:
"Now the revenue according to the current statement is $3580. From this revenue those items that have been wrongly added need to be deducted, these amount to $23,040."