Essay: Profit/Loss & Comprehensive Income For KLZR Ltd, 30 June 2018.

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.

Notes:

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 30^th June and on 20^th 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:

• The provision for debtors was made at 50%, but on 10^thAugust 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:

• 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:

• 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:

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 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 .