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Trial Balance

Question 1

Topic 2: Presentation of financial statements 
 
The trial balance of KLZR Ltd for the year ended 30 June 2018 is presented below:

    Debit    Credit
    $    $
Sales revenue        997,000
Dividend revenue        7,000
Interest revenue        3,000
Cost of sales    355,000    
Impairment loss – goodwill    5,000    
Auditor remuneration    36,000    
Depreciation – motor vehicles     45,000    
Depreciation – plant and equipment     46,000    
Doubtful debts    8,000    
Interest expense    32,000    
Office expenses    92,000    
Rental expenses     15,000    
Salaries     104,000    
Selling expenses    97,000    
Bad debt recovered        26,000
Loss on destruction of building     42,000    
Income tax expenses    61,000    
Cash on hand    13,000    
Inventories     298,000    
Receivables     192,000    
Provision for doubtful debts        12,000
Bank deposits     40,000    
Deferred tax assets    24,000    
Franchises (cost)    95,000    
Goodwill     100,000    
Accumulated impairment losses – goodwill        20,000
Motor vehicles     150,000    
Accumulated depreciation – motor vehicles        50,000
Plant and equipment    460,000    
Accumulated depreciation – plant and equipment        147,000
Shares in listed companies (cost)    62,000    
Accounts payable        102,000
Bank loan        100,000
Bank overdraft        35,000
Current tax liabilities        59,000
Deferred tax liabilities        24,000
Unsecured notes        150,000
Paid up capital (400,000 ordinary shares)        400,000
General reserve 1 July 2017        15,000
Retained earnings 1 July 2017        225,000
    2,372,000    2,372,000

Additional information:
Auditor remuneration includes $16,000 in fees for management consulting services.
The franchises currently valued at cost of $95,000, were revalued to fair value of $115,000. Assume a tax rate of 30%.
The directors have declared a dividends of $65,000.
The directors have proposed a transfer from retained earnings to a general reserve of $25,000.
The depreciation expenses for the relevant assets are used for selling and distribution and administrative purposes, as detailed below:

 Selling and distribution     Administrative 
    $    $
For motor vehicle    25,000    20,000
For plant and equipment    36,000    10,000


Salaries of $104,000 are incurred for: $60,000 for selling and distribution purposes and $44,000 for administrative purposes.
The rental expenses are for administrative purposes.
KLZR Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies expenses by function within the statement.
Required:

Prepare a statement of profit or loss and other comprehensive income and a statement of changes in equity for KLZR Ltd for the year ended 30 June 2018, according to the requirements of AASB 101. Notes to the accounts are not required but figures in your statements must be supported by explanations and/or workings. Ignore the requirement for prior period comparative figures.

Question 1    Max. marks allocated
SPLOCI    5
SCE    4.5
Workings/explanation     8
Overall presentation    1.5
Total     19

Question 2
 
Topic 3: Accounting policies and other disclosures
 
UTAR Ltd is finalising its financial statements for the reporting period ending 30 June 2018. On 20 August 2018, before the financial statements have been finalised and authorised for issue, the company’s directors become aware of the following situations:    
1.The company holds shares in a public listed company, Binnie Ltd. The shares were valued at their market value at reporting date of $200,000. A major fall in the share market occurred on 12 August 2018, and the value of UTAR Ltd’s shareholding in Binnie Ltd declined to $150,000.
2.One of the company’s major debtors, Fancy Ltd, filed for bankcruptcy on 10 August 2018. UTAR Ltd’s financial statements have been prepared reflecting a 50% doubtful debts provision for this account, with the carrying amount of this debtor stated at $400,000 ($800,000 less provision for doubtful debts of $400,000). It appears, at 10 August 2018, that no amount will be recovered from Fancy Ltd’s liquidator in respect of this account.
3.On 30 June 2018, UTAR Ltd had a United States dollar loan outstanding (non-current liability) amount of US$200,000. Given the exchange rate at reporting date of A$1.00 = US$0.91, the load is stated in UTAR Ltd’s statement of financial position at a value of $219,780. A major fall in the value of the Australian dollar occurred on 13 August 2018, such that the exchange rate fell to A$1.00 = US$0.87. The Australian dollar equivalent of the United State dollar loan therefore rose to A$229,885.
4.On 18 July 2018, it is discovered that a divisional manager has been under-depreciating plant and equipment. The motivation of the manager was to maximise the division’s profit figure in order to maximise his bonuses. The carrying amount of the relevant plant and equipment in UTAR Ltd’s financial statement is $1,500,000. An investigation by the company’s internal audit division, presented to UTAR Ltd’s directors on 15 August 2018, suggests that the plant and equipment has a recoverable amount of $1,150,000.
Required:

Assuming that each of the independent events described above are material events, you are required to:
1.Classify the events as either an adjusting or non-adjusting event after the end of the reporting period. Justify your classification and make reference to relevant authority when appropriate.
2.Base on your answer to 1 above, prepare the necessary journal entries or note disclosures to comply with the requirements of.

KLZR LIMITED

Statement Of Profit/Loss And Other Comprehensive Income

Particulars

Notes

 Amount

Sales revenue

                      9,97,000

Dividend revenue

                           7,000

Interest revenue

                           3,000

Revenue

 

                    10,07,000

Cost of sales

                      3,55,000

Gross Profit

 

                      6,52,000

Administrative Expenses

1

                         89,000

Selling and distribution expenses

2

                      2,18,000

Finance Cost

                         32,000

Impairment of non-current asset

                           5,000

Other Expenses

3

                      1,52,000

Profit Before Tax

 

                      1,56,000

Income tax Expense

                         61,000

Profit for the year

 

                         95,000

Other comprehensive income

                                -   

Total Comprehensive Income for the year

 

                         95,000

Profit attributable to

Owners of the company

                         95,000

Non-controlling interest

                                -   

Total comprehensive income attributable to

Owners of the company

                         95,000

Non-controlling interest

                                -   

 Earnings per share

4

                             0.24

Notes:

1. Administrative

Depreciation

 - Motor Vehicles

 20,000

 - Plant and Equipment

 10,000

Salaries

 44,000

Rental expenses

 15,000

Total

 89,000

2. Selling and distribution

Depreciation

 - Motor Vehicles

 25,000

 - Plant and Equipment

 36,000

Salaries

 60,000

Selling expenses

 97,000

Total

2,18,000

3. Other expenses

Auditor remuneration

 36,000

Doubtful debts

 8,000

Office expenses

 92,000

Bad debt recovered

-26,000

Loss on destruction of building 

 42,000

Total

1,52,000

4. Earnings per Share

Total Earnings for the year

 95,000

Total number of shares outstanding

4,00,000

EPS

 0.24

KLZR LIMITED

Statement Of Changes In Equity

Particulars

Share capital

Retained earnings

General Reserve

Revaluation Surplus

Total equity

$

$

$

$

$

Balance at 1 July 2017

4,00,000

2,25,000

15,000

 -

6,40,000

Changes in equity for the year 2017-18

Transfer

-

 (25,000)

25,000

 -

-

Dividends

-

 (65,000)

 -

 -

 (65,000)

Income for the year

-

 95,000

 -

 -

 95,000

Revaluation gain

-

-

 -

20,000

 20,000

Balance at 30 June 2018

4,00,000

2,30,000

40,000

20,000

6,50,000

Other explanations:

  • The auditors fee mentioned as a part of other expense include $ 16000 towards fee for management consulting services
  • Dividend declared by the management would be should under payable in the current liabilities section of the balance sheet
  • Impairment of goodwill has been shown as a spate line item in the profit and loss statement

There is a gap between the balance sheet date and signing of balance sheet date. During this period any events might take place which might affect the financials of the last year.  Adjusting events are those events for which conditions exist on the balance sheet date for which adjustments in the balance sheet are required. (Fridson & Alvarez, 2012)Any important events which occur between these two dates for which the conditions exist on balance sheet date would require adjustments in the books of account. (Ramírez, 2018)Any other non-adjusting event if important will be required to be mentioned in the notes to account. Any event occurring after the balance sheet date that might be favourable for the company need not be mentioned in the financials. (Girard, 2014)If any adjusting event occurs which might affect the going concern assumption of the entity, then such events needs to be reported in the financial. If the assumption of going concern is harmed, then the financials needs to be made in the format specified by the standards in connection with the same. (Ittelson, 2009)

In the given scenario the balance sheet date is 30th June and on 20th august that has been finalised. Any important events which occur between these two dates for which the conditions exist on balance sheet date would require adjustments in the books of account. (Kuti, 2014)We have been provided with few events of Utar Ltd. we have classified the same as adjusting and non adjusting events and the treatment in such circumstances:

  • The company holds the shares of the listed company which are recorded at market price. (Lerner, 2009)A considerable decline in value of investments before signing of the books requires making of a provision for diminution in value of these investments. Since the company holds the shares of the publically listed company as on the balance sheet date and there are events after such date that are likely to affect the financials, this event will be classified as an adjusting event and appropriate adjustments in the books shall be made. The following journal shall be passed:

Date

Particulars

Dr Amt

Cr Amt

30-06-2018

Profit and Loss

50000

To Investment Fluctuation Reserve

50000

(Being provision for decline in value of investments of Binnie Ltd accounted for)

 
  • The provision for debtors was made at 50%, but on 10thAugust it was sure that no amount can be recovered from them. The management should provide for the whole amount of the debtor as provision. Since the company had Fancy Ltd as there debtors as on the balance sheet date and there are events after such date that is likely to affect the financials, this event will be classified as an adjusting event and appropriate adjustments in the books shall be made. The following journal shall be passed:

Date

Particulars

Dr Amt

Cr Amt

30-06-2018

Profit and Loss

400000

To Provision for Doubtful Debts

400000

(Being Provision for doubtful debt increased for Fancy Ltd)

 
  • The company has an outstanding loan in foreign currency. Any major fluctuations in the currency rate will affect the position of the company. (McLaney & Adril, 2016)Before the finalisation of the balance sheet a major shift in the currency rate was witnessed which increased the company’s liability by A$10105. Since the company had the foreign currency loan as on the balance sheet date and there are events after such date that is likely to affect the financials, this event will be classified as an adjusting event and appropriate adjustments in the books shall be made. The following journal shall be passed:

Date

Particulars

Dr Amt

Cr Amt

30-06-2018

Profit and Loss

10105

To Foreign Currency Fluctuation Reserve

10105

(Being reserve created for fluctuations in foreign currency)

  • Charging of lesser depreciation in order to arrive at higher profits is a wrong. The fixed assets should be appropriately depreciated and they should be valued at fair value.(Piper, 2015) In the given case the fixed assets should be valued at $1150000. Since the company had these fixed assets as on the balance sheet date and there are events after such date that is likely to affect the financials, this event will be classified as an adjusting event and appropriate adjustments in the books shall be made. The following journal shall be passed:

Date

Particulars

Dr Amt

Cr Amt

30-06-2018

Depreciation

350000

To Plant and Equipment

350000

(Being under charged depreciation accounted for)

 

In the books of TARA Limited

Journal

Date

Particulars

 Dr amt

 Cr amt

01-Aug-17

No entry

30-Sep-17

Bank

156,00,000

To Share Application

156,00,000

(Being Share application money received for 5200000 shares at $3 each)

10-Oct-17

Share Application

6,00,000

To Bank

6,00,000

(Being money received for extra application on 200000 shares refunded)

10-Oct-17

Share Application

150,00,000

To Share Capital

150,00,000

(Being amount received on application transferred to share capital account)

10-Nov-17

Bank

100,00,000

To Share Allotment

100,00,000

(Being Share allotment money received for 5000000 shares at $2 each)

28-Feb-18

Bank

49,00,000

To Share Call

49,00,000

(Being Share call money received for 4900000 shares at $1 each)

14-Mar-18

Share Capital

5,00,000

To Share Forfeiture

5,00,000

(Being money received for 100000 shares forfeited for non receipt of call money)

14-Mar-18

Bank

5,30,000

Share forfeiture

70,000

To Share Capital

6,00,000

(Being Shares forfeited reissued at $5.3 per share)

14-Mar-18

Share forfeiture

4,30,000

To Bank

4,30,000

(Being remaining money in forfeiture account refunded to former shareholders)

 

Calculation of amount to be forfeited:

No of shares on which call not paid =  100000

Monies already received on these shares = 3+2 =5 per share

Total amount received on forfeited shares =  100000*5 = 500000

Calculation of amount to be refunded:

Total money forfeited = 500000

Less: Loss on reissue of forfeited shares = 70000

Amount to be refunded to former shareholders = 500000-70000 =430000

In the books of Companion Ltd

Journal

Date

Particulars

 Dr amt

 Cr amt

01-07-2016

Machine

 1,90,000

To Bank

1,90,000

(Being Machine purchased for $190000)

30-06-2017

Accumulated Depreciation

 30,000

To Machine

30,000

(Being depreciation for the year charged)

30-06-2017

Revaluation Reserve

 10,000

To Machine

10,000

(Being machine revalued at year end)

30-06-2017

Deferred tax asset

 3,000

To Profit & Loss

3,000

(Being deferred tax asset created on tax bas due to revaluation)

30-06-2018

Accumulated Depreciation

 28,800

To Machine

28,800

(Being depreciation for the year charged)

30-06-2018

Machine

 18,800

To Revaluation Reserve

18,800

(Being machine revalued at year end)

30-06-2018

Deferred tax asset

 12,000

To Profit & Loss

12,000

(Being deferred tax asset created on tax bas due to revaluation (15000-3000))

 

Year

Opening value of Block

Depreciation for the year

Value after depreciation

Revaluation

Total Block- Closing

2016-2017

 1,90,000

 30,000

1,60,000

 -10,000

 1,50,000

2017-2018

 1,50,000

 28,800

1,21,200

 18,800

 1,40,000

Particulars

As per accounting record

As per taxable record

Tax Base

Value of Asset on 01.07.2016

 1,90,000

 1,90,000

Less: Depreciation

 -30,000

 30,000

Less: Revaluation

 -10,000

-

Closing Value on 30.06.2017

 1,50,000

 1,60,000

 -10,000

Value of Asset on 01.07.2017

 1,50,000

 1,60,000

Less: Depreciation

 -28,800

 -30,000

Add: Revaluation

18,800

-

Closing Value

 1,40,000

 1,90,000

 -50,000

DTA on 30.06.2017

 10000*30%

3000

DTA on 30.06.2018

 50000*30%

15000

In the above solution we have assumed that the depreciation charged charges under tax laws is on straight line basis.

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner's Guide. New York: John Wiley & Sons.

Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.

Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.

Kuti, M. (2014). Crowdfunding: How to Fund Your Business Idea. Retrieved from www.business.gov.au: https://www.business.gov.au/info/run/finance-and-accounting/finance/crowdfunding-how-to-fund-your-business-idea

Lerner, J. J. (2009). Schaum's outline of principles of accounting. New York: Schaum.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.

Ramírez, C. Z. (2018). The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach. Accounting in Europe .

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