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ACC614: Intermediate Financial Accounting II

Biological Asset Tutorial TUTORIAL IV

1. What are the arguments in favour of using fair value to measure items included in the
financial statements?
Answers:
 Recognises increase in value through natural events
 Recognises price change
 Recognises value of native forest
 Reflect relative value of comparable forest at different purchase price
 Provides useful information to satisfy management accountability obligation

2. What are the arguments against the use of fair value?

Answer:
 Too academic i.e. practically, farmers do not realise profits until biological assets or
agricultural produce is sold
 Provides nothing positive for companies
 Makes dividend payout ratio look unfavourable i.e. there is no cash to support the
profit

3. Lau Lagoon Ltd operates a fish farm. For the first month, the fish are kept in a hatchery
at carefully regulated temperatures. Then they released into larger ponds where they
continue to be fed but require much less attention. After 3 months in the larger ponds,
the fish are harvested and delivered to a retail outlet in Honiara. The following
information is available regarding the fish

Date Fish Stocks Selling Price Delivery Costs

1January 2010 2 000 kg $3.00/kg $0.20/kg

31Dec 2010 1, 800 kg $3.50/kg $0.30/kg

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Required
i. Calculate fish revenue (or loss) from physical change during the year.
Opening balance
Biological assets Quantity Unit Price Market value
(Q1) (P1)
Fish 2000Kg [$3 - $0.20]=$2.80 $5,600

Closing balance
Biological assets Quantity Unit Price Market value
(Q2) (P2)
Fish 1,800Kg [$3.50 - $0.30]=$3.20 $5,760

Change in fair value due to physical change

Biological Physical change Price at start Market value
assets [Q2 – Q1] (P1)
Fish [1,800Kg-2,000Kg]=(200kg) $2.80 ($560)

ii. Calculate fish revenue (or loss) from price changes during the year.
Change in fair value due to price change
Biological Price change Quantity at the end Market value
assets [P2 – P1] (Q2)
Fish [$3.20-$2.80]=$0.40 $1,800Kg $720

iii. Briefly outlined 2 reasons why biological asset should be measured at market value,
rather than historical cost.
Reconciliation
Detail Market value
Opening balance $5,600
Change in fair value due to physical change ($560)
Change in fair value due to price change $720
Closing balance $5,760
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4. Raro Ltd is engaged in floriculture (cultivation of flowering plants). At present, it grows 2 types
of plants and exports the flowers to Australia for sale in major cities.

During the year, 10,000 orchid plants were exported at an average price of $3.00, while 20,000
anthuriums plants were exported at an average price of $2.00.

The average cost of airlifting flowery plants to Australia during the year was $0.40 per plant. All
other operating costs for the year amounted $150,000.

Other information about the plants is provided below.

Orchids Anthuriums
1 Jan 31 Dec 1 Jan 31 Dec
Number of plants 4,000 7,000 11,000 10,000
Selling Price $7.00 $6.00 $3.80 $4.20
Freight Cost $0.70 $0.50 $0.70 $0.50

Required

a Calculate the opening balance

Biological assets Quantity Unit Price Market value

(Q1) (P1)
Orchids $4,000 [$7 - $0.70]=$6.30 $25,200
Anthuriums $11,000 [$3.80 - $0.70]=$3.10 $34,100
$59,300
b Calculate the Physical change
Biological assets Inward Out ward Net change
Orchids 0 10,000 (10,000)
Anthuriums 0 20,000 (20,000)
(10,000)
c Calculate the closing balance
Biological assets Quantity Unit Price Market value
(Q2) (P2)
Orchids 7,000 [$6 - $0.50]=$5.50 $38,500
Anthuriums $10,000 [$4.20 - $0.50]=$3.70 $37,000
$75,500
d Calculate the revenue (loss) from physical change during the year

Biological Physical change Price at start Market

assets [Q2 – Q1] (P1) value
Orchids [7,000-4,000]=3,000 [$7 - $0.70]=$6.30 $18,900
Anthuriums [10,000-11,000]=(1,000) [$3.80 - $0.70]=$3.10 ($3,100)
$15,800
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e Calculate the revenue (loss) from price change during the year

Biological Price change Quantity at the end Market

assets [P2 – P1] (Q2) value
Orchids [$5.50 -$6.30]=(0.80) 7,000 ($5,600)
Anthuriums [$3.70-$3.10 ]= 0.6 10,000 $6,000
$400
f Calculate the revenue from sale of flowering plants during the year

Biological assets Quantity sold Selling price Total sales

Orchids 10,000 $3.00 $30,000
Anthuriums 20,000 $2.00 $40,000
$70,000
g Provide the reconciliation
Reconciliation
Detail Market value
Opening balance $59,300
Change in fair value due to physical change $15,800
Change in fair value due to price change $ 400
Closing balance $75,500

h Calculate the profit for the year.

Sales
Orchids $30,000
Anthuriums $40,000 $70,000

Less freight costs:

Orchids $4,000
Anthuriums $8,000 $12,000
Net sales $58,000
Change in fair value due to physical change $15,800
Change in fair value due to price change $ 400
Less operating costs ($150,000)
Net loss ($75,800)
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