QUESTION 2 a Parson plc has entered into the following trans

QUESTION 2 (a) Parson plc has entered into the following transactions during the year ended 31 December 20X3. i. On 1 October 20X3 Parson plc received £400,000 in advance subscriptions. The subscriptions are for 20 monthly issues of a magazine published by Parson plc. Three issues of the magazine had been despatched by the year end. Each magazine is of the same value and costs approximately the same to produce. ii. A batch of unseasoned timber, which had cost £250,000, was sold to Banko plc for £100,000 on 1 January 20X3. Parson plc has an option to repurchase the timber in 10 years\' time. The repurchase price will be £100,000 plus interest charged at 8% per annum from 1 January 20X3 to the date of repurchase. The market value of the timber is expected to increase as it seasons. Required: For each of the two transactions above explain the correct accounting treatment according to the revenue recognition standard and provide the appropriate accounting entries. You can ignore any financing effects in relation to transaction (). 10 marks (b) With reference to transaction (i) above, explain the concept of \"substance over form. In addition, explain how the \"substance over form\" concept applies to leasing. 10 marks

Solution

(b). Substance over form is an accounting principle used \"to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events\". If an entity practices the \'substance over form\' concept, then the financial statements will show the overall financial reality of the entity.

the application of the concept in the International Financial Reporting Standards (IFRS). The rule found in IAS 17 Leases requires the preparers of financial statements to consider the substance of lease arrangements when determining the type of lease for accounting purposes. For example, an asset may be leased to a lessee without the transfer of legal title at the end of the lease term. Such a lease may, in substance, be considered as a finance lease if for instance the lease term is substantially for entire useful life of the asset or the lease agreement entitles the lessee to purchase the asset at the end of the lease term at a very nominal price and it is very likely that such option will be exercised by the lessee in the given circumstances.