ACC312 Intermediate Financial Accounting II Course Material Summary, Study Notes and Examination Questions | Download ACC312 Summary
ACC312 Intermediate Financial Accounting II – Complete Study Resource
Welcome to this comprehensive study material for ACC312: Intermediate Financial Accounting II, a 300-level course from the School of Management Sciences, National Open University of Nigeria. This resource is designed to help you master every concept in the course, prepare for your examinations, and achieve your academic goals. The course is adapted from the ICAN Study Pack and covers specialized businesses, accounting standards, petroleum accounting, financial reporting, and the regulatory framework of financial accounting in Nigeria.
Below is the complete study content for Module 1, Unit 1: Accounting for Specialized Businesses 1. Download the full PDF at the end of this page to access all five modules, every unit, important definitions, examination-focused questions with model answers, and revision material.
MODULE 1: SPECIALIZED BUSINESSES AND ACCOUNTING STANDARDS
UNIT 1: ACCOUNTING FOR SPECIALIZED BUSINESSES 1
1.0 Introduction
When preparing accounts for a company, it is common to think of companies that generally engage in the sale of goods and services, such that the common way of presenting financial statements is used. However, there are specialized businesses whose financial statements might be different from those of a general nature. The financial statements are usually a summary of all the transactions posted in the various accounts. Without the various accounts, we cannot have the financial statements. Similarly, the various accounts of specialized businesses will enable the preparation and presentation of financial statements for specialized businesses.
2.0 Learning Objectives
After studying this unit, you should be able to:
- Prepare the accounts of estate agencies and property companies.
- Prepare the accounts of farmers.
- Explain the accounting method for oil and gas accounting.
3.1 Estate Agent/Property Company’s Account
Estate Agents and Property Companies prepare a profit and loss account and a balance sheet as a normal trading company and, in addition, prepare an appropriation account. The peculiarity in the balance sheet of an estate/property company is that freehold land held for re-sale is classified as stock under current assets.
Key Concept Explained: Unlike a typical trading company where land is a fixed asset, an estate company that buys land specifically to re-sell it treats that land as stock (inventory). This is because the land is held for sale in the ordinary course of business, not for use in operations.
3.2 Farmer’s Account
Farmers prepare trading, profit and loss account, and balance sheet, just as every other business outfit. However, peculiarities in a farmer’s account are mainly in the valuation of stock of arable plantation products and livestock. Statement of Accounting Standard No. 4 (SAS 4) on stock prescribes the treatment of these peculiarities.
Arable Products
- First-time land clearing and stumping may involve substantial costs which are sometimes capitalised.
- Tillage, in-ground and harvested crops are three distinct operational stages requiring valuation. Costs incurred are charged to each category.
- The value of tillage usually includes the accumulated costs of labour and usage of machinery for preparing the land for planting, ploughing and fertilizer spreading.
- In-ground crops are usually valued by including the costs associated with tillage, labour, seedlings, weeding, disease control and the attributable cost of machinery used.
- The valuation of harvested crops involves the correct determination of actual input costs, labour, depreciation and storage costs at the time of harvest.
- Most farm products are perishable; therefore, it is appropriate to make reasonable provision for deterioration or animal spoilage.
- Where there is adequate record keeping, cost forms the basis for valuation of arable products. In other situations, net realisable value is used.
- Official prices published by commodity boards are not recommended except where they are below cost.
Plantation Products
- A plantation does not usually start to produce until after a long gestation period. Costs are accumulated until the trees come to maturity and are amortized over the estimated productive life of the plantation.
- Planting is normally done in lots or batches to have a continuous flow of output. Costs of such lots are accumulated separately to match revenue with associated costs.
- Some enterprises prefer to use average cost of production because most plantation products are homogenous.
- Annual crops such as sugarcane and banana are valued in the same manner as arable products.
Livestock
Two major problems are associated with the valuation of livestock: (i) determining the actual number and their existence, especially grazing animals; and (ii) identifying the various stages of their development.
Three approaches to valuation of livestock are generally in use:
- Cost approach: value is based on the actual cost incurred on each category of livestock.
- Net realisable value: value is based on the expected returns allowing for the costs of fattening, preparation for sale and selling.
- Appraised value: value is determined by professional valuers, considering current market value, mortality factor and relative marketability.
Where livestock is raised primarily for its products (dairy cattle, egg-laying poultry), the cost of bringing such livestock to maturity is accumulated and amortised over their estimated productive lives.
Main Features of Farm Accounts
- Open departmental accounts for different activities such as dairy, crops, fruits and livestock rearing.
- Open ledger accounts as in commercial activities.
- Rotation of crops resulting in a number of fields lying fallow.
- Large mechanised farms keep financial records but most small farm records are incomplete or at best single entries.
- Large expenditure on seeds and fertilizers may occasionally be spread over a period. Farming equipment of material value should be capitalised.
- Valuation of stock and manorial rights are carried out by farm experts.
- Compensation for loss is computed for possible insurance claims where destruction occurs.
- Large farms take insurance cover for loss of livestock.
3.3 Oil and Gas Accounting – Upstream Activities
Companies involved in prospecting and production of crude oil are guided by the Statement of Accounting Standard (SAS) No. 14.
Classification of Costs in Oil and Gas Operations
Costs in oil and gas operations may be classified broadly as:
- Mineral rights acquisition costs;
- Exploration and drilling costs;
- Development costs;
- Production costs;
- Support equipment and facilities costs; and
- General costs.
Full Cost Method
- All costs incurred on mineral rights acquisition, exploration and development activities (including future development costs) should be capitalised irrespective of whether or not the activities resulted in the discovering of reserves.
- Companies using the full cost method are referred to as “full cost companies”.
- A third method known as reserve recognition accounting (RRA) allows an enterprise to recognise the value of proved reserves as assets. This method is not common and is not recommended.
- A ceiling test should be conducted at least annually to determine whether costs capitalised can be recovered from the proved reserve.
- Proved reserves represent estimated quantity of oil and gas that can be expected to be recovered from known reservoirs using existing technology.
Successful Efforts Method
- Costs incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure should be written off in the period they are incurred.
- All costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalised initially on the basis of wells, field or exploration cost centres, pending determination.
- Such costs should be written off when it is determined that the well is dry.
- Mineral rights acquisition costs that have not been allocated should be amortized over the remaining life of the licence.
Joint Production of Oil and Gas
DD&A is computed based on equivalent units of production in barrels. One barrel of oil is equivalent to 42 US gallons. It is a standard assumption that one barrel of oil contains six times as much energy as gas, hence the volume of gas is divided by 6 to arrive at equivalent barrels.
Revenue Method of Amortization
DD&A could also be computed based on the current prices (year-end) of the reserves and production. The revenue method eliminates distortion caused by the 6:1 conversion ratio by determining amortisation on the relative value of hydrocarbons.
4.0 Conclusion
The peculiarity in agency/property companies’ balance sheet is that freehold land held for re-sale is classified as stock under current assets. The peculiarities in a farmer’s account are mainly in the valuation of stock of arable plantation products and livestock.
5.0 Summary
This unit deals with the peculiarities associated with accounting for specialized businesses of estate agencies and property companies, farmers, and oil and gas related companies.
Examination Practice Questions and Model Answers
Question 1
Question: State the broad classification of oil and gas upstream activities operations cost.
Correct Answer
Costs in oil and gas operations may be classified broadly as: (a) Mineral rights acquisition costs; (b) Exploration and drilling costs; (c) Development costs; (d) Production costs; (e) Support equipment and facilities costs; and (f) General costs.
Key Points Expected
- Mineral rights acquisition costs
- Exploration and drilling costs
- Development costs
- Production costs
- Support equipment and facilities costs
- General costs
Question 2
Question: What is the peculiarity in the balance sheet of an estate agent or property company?
Correct Answer
The peculiarity in the balance sheet of an estate agent/property company is that freehold land held for re-sale is classified as stock under current assets.
Question 3
Question: State the three approaches generally in use for the valuation of livestock stock.
Correct Answer
The three approaches are: (i) Cost approach – value is based on the actual cost incurred on each category of livestock; (ii) Net realisable value – value is based on expected returns allowing for costs of fattening, preparation for sale and selling; and (iii) Appraised value – value determined by professional valuers, considering current market value, mortality factor and relative marketability.
Question 4
Question: Distinguish between the full cost method and the successful efforts method of accounting for oil and gas exploration costs.
Correct Answer
Under the full cost method, all costs incurred on mineral rights acquisition, exploration and development activities (including future development costs) are capitalised irrespective of whether or not the activities resulted in the discovery of reserves. Under the successful efforts method, costs incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure are written off in the period they are incurred; while costs incurred on mineral rights acquisition, exploration, appraisal and development activities are capitalised initially on the basis of wells, field or exploration cost centres pending determination, and written off when the well is determined to be dry.
Key Points Expected
- Full cost capitalises all costs regardless of success
- Successful efforts writes off costs of dry/unproductive wells
- Successful efforts capitalises costs only on successful structures pending determination
Question 5
Question: State the main features of farm accounts.
Correct Answer
The main features of farm accounts include: (a) Open departmental accounts for different activities such as dairy, crops, fruits and livestock rearing; (b) Open ledger accounts as in commercial activities; (c) Rotation of crops resulting in a number of fields lying fallow; (d) Large mechanised farms keep financial records but most small farm records are incomplete or at best single entries; (e) Large expenditure on seeds and fertilizers may occasionally be spread over a period, and farming equipment of material value should be capitalised; (f) Valuation of stock and manorial rights are carried out by farm experts; (g) Where destruction of animals and crops occurs, compensation is computed for possible insurance claim; and (h) Large farms take insurance cover for loss of livestock.
Question 6
Question: Explain how plantation products are valued according to SAS 4.
Correct Answer
A plantation does not usually start to produce until after a long gestation period. All costs associated with land preparation, planting, pruning and development are accumulated until the trees come to maturity and are amortized over the estimated productive life of the plantation. Planting is normally done in lots or batches to ensure a continuous flow of output, and costs of such lots are accumulated separately to match revenue with associated costs. Each year, the cost of plantation output consists of the cost accumulated for quantities harvested plus the cost of extracting and transporting them to the point of sale. Some enterprises use average cost of production because most plantation products are homogenous.
Unit Revision Points
- Estate/property companies classify freehold land held for re-sale as stock under current assets.
- Farm accounts have peculiarities in the valuation of stock of arable products, plantation products and livestock.
- Three valuation approaches for livestock: cost, net realisable value, and appraised value.
- Six broad classifications of oil and gas costs: mineral rights acquisition, exploration and drilling, development, production, support equipment and facilities, and general costs.
- Two common oil and gas accounting methods: full cost method and successful efforts method.
- Ceiling test is conducted at least annually under the full cost method.
- One barrel of oil equals 42 US gallons; one barrel of oil contains six times as much energy as gas.
Download the Complete Course Summary
Continue your preparation with the complete course summary PDF, covering all units, important concepts, definitions, examination-focused questions, answers, and revision material.
