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Accounting Policies, Changes in Accounting Estimates and Errors under IFRS

You are the financial accountant for Superstore Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2018.  Whilst preparing the financial statements, you become aware of the following situations:

  1. On 1 July 2017, the directors made a decision, using information obtained over the last couple of years, to revise the useful life of an item of manufacturing equipment.  The equipment was acquired on 1 July 2015 for $800,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and residual value of nil.  Superstore Ltd uses the cost model for manufacturing equipment.  The directors estimate that as at 1 July 2017, the equipment has a remaining useful life of 6 years and a residual value of nil.  No depreciation has been recorded as yet for the year ended 30 June 2018 as the directors were unsure how to account for the change in the 2018 financial statements, and unsure whether the 2016 and 2017 financial statements will need to be revised as a result of the change.
  2. In June 2018, the accounts payable officer discovered that an invoice for repairs to equipment, with an amount due of $20,000, incurred in June 2017, had not been paid or provided for in the 2017 financial statements.  The invoice was paid on 12 July 2018.  The repairs are deductible for tax purposes.  The accountant responsible for preparing the company’s income tax returns will amend the 2017 tax return, and the company will receive a tax refund of $6,000 as a result (30% x $20,000).  No journal entries have been done as yet in the accounting records of Superstore Ltd, as the directors are unsure how to account for this situation, and what period adjustments need to be made in.
  3. Superstore Ltd holds shares in a listed public company, ABC Ltd, which are valued in the draft financial statements on 30 June 2018 at their market value on that date - $600,000.  A major fall in the stock market occurred on 10 July 2018, and the value of Superstore’s shares in ABC Ltd declined to $250,000.
  4. On 21 July 2018, you discovered a cheque dated 20 April 2018 of $32,000 authorised by the company’s previous accountant, Max. The payment was for the purchase of a swimming pool at Max’s house.  The payment had been recorded in the accounting system as an advertising expense.  You advise the directors of this fraudulent activity, and they will investigate.

Assume that each event is material.

Required:

  1. i) State the appropriate accounting treatment for each situation. Provide explanations and references to relevant paragraphs in the accounting standards to support your answers.  Where adjustments to Superstore Ltd’s financial statements are required, explain which financial statements need to be adjusted (ie. 2016, 2017, 2018 or 2019).  
  2. ii) Prepare any note disclosures and adjusting journal entries that are needed in the 2018 financial statements for each situation.  

Accounting for share capital

Rippa Ltd was incorporated on 1 July 2017.  The following transactions and events occurred during the year ended 30 June 2018:

1 Jul 2017:  Rippa Ltd makes an offer to the public for investors to subscribe for 5,000,000 shares, at an issue price of $4.00 per share, with $2.50 payable on application, $1.00 being payable within one month of allotment, and $0.50 payable on a call to be made at a later date.  The issue is underwritten at a commission of $12,000.

31 Jul 2017:  Applications close, with applications received for 6,000,000 shares.

10 Aug 2017:  5,000,000 shares are allotted in proportion to the number of shares for which applications had been made.  The surplus application money is offset against the amount payable on allotment.

12 Aug 2017:  The underwriter’s commission is paid.10 Sep 2017:  All allotment money is received.1 Feb 2018:  The call is made, with money due by 28 February 2018.  28 Feb 2018:  All call money is received except for holders of 40,000 shares who fail to meet the call.  

20 Mar 2018:  The shares on which call money was not received are forfeited and sold as fully paid.  An amount of $3.20 is received for each share sold.  Costs of the forfeiture and reissue amount to $4,000, and are paid.  25 Mar 2018:  The balance of the Forfeited Shares Account is returned to the former shareholders.

Required:

  1. i)  Prepare the journal entries to record the transactions of Rippa Ltd up to and including that which took place on 25 March 2018.  Show all relevant dates and narrations.
  2. ii)  After returning money to the former shareholders on 25 March 2018, one of the former shareholders has contacted you in relation to the amount of money that he received.  He tells you that he paid the application money and allotment money for the shares that he had, so he should get an amount back of $3.50 per share.  Explain why the amount returned to the former shareholders was not $3.50 per share, and prepare workings to show how the refund per share was calculated. 

Accounting for income tax

Jackson Storm Ltd commenced business on 1 July 2017, with share capital of $300,000.  On 30 June 2018, the company presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position.  The statements are prepared before considering taxation.  The following information is available

Additional information

  • The company purchased equipment at a cost of $700,000 on 1 July 2017.  The equipment is depreciated over ten years for accounting purposes, and seven years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).  
  • The company purchased motor vehicles at a cost of $120,000 on 1 July 2017.  The motor vehicles are depreciated over four years for accounting purposes, and six years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).  
  • Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
  • Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
  • Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
  • The tax rate is 30%.

Required:

  1. i)  Determine the balance of any current tax liability and deferred tax assets and deferred tax liabilities for Jackson Storm Ltd as at 30 June 2018, in accordance with AASB 112.  Use appropriate worksheets and show all necessary workings.
  2. ii)  Prepare the journal entries to record the current tax liability and deferred tax assets and deferred tax liabilities.

Revaluation of property, plant and equipment

You are the accountant for Superstar Ltd, and you are required to account for the company’s equipment for the years ended 30 June 2017 and 30 June 2018, which are measured using the revaluation model.  The directors elect to depreciate equipment on a straight-line basis.

Equipment 1:

The first equipment has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017

Revalued amount (as at 30 June 2016):

$60,000

Carrying amount

$60,000

this equipment was revalued for the first time on 30 June 2016, from $70,000 to $60,000.  The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $10,000.  

The directors have determined that the fair value of this equipment on 30 June 2017 is $55,000.  At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value remains unchanged at $10,000.  

The directors have determined that the fair value of this equipment on 30 June 2018 is $44,000.  

Equipment 2:

The second equipment at has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017

Revalued amount (as at 30 June 2016):  

$20,000

Carrying amount    

$20,000

This equipment has been revalued a number of times, with revaluation decrements amounting to $1,000 being previously recognised in profit or loss.  The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $4,000.  

The directors have determined that the fair value of this equipment on 30 June 2017 is $18,000.  At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value has been revised to $6,000.  

This equipment is sold on 31 December 2017 for $13,000.  

Required

Prepare the necessary journal entries to account for each of the above equipment for the years ended 30 June 2017 and 30 June 2018 (including entries for depreciation, revaluations, and any disposals).   Show all relevant workings. Note: you are not required to account for income tax associated with revaluations.

Accounting Policies, Changes in Accounting Estimates and Errors under IFRS

This case deals with the IAS 8 which pertains to Accounting Policies, changes in the Accounting estimates and errors. This standard states that the accounting estimates can be changed on the basis of the judgement of the management of the company. This standard further states that the changes in the accounting policies have to be applied from retrospective basis whereas the change in the accounting estimates will have to be applied form prospective basis. Hence in the given case, the number of useful years of life of the equipment has changed and therefore, the deprecation charged on it shall be based upon that new piece of information.

As per the accounting standard, the following are the disclosures in respect of the same:

  • The effect of that change in the accounting estimate shall be applied prospectively and the same shall be charged in the profit or loss account.
  • The period of change, in the given case, it would be 2017 year
  • Or the period of the change, in case the change affects that period only

The carrying value of that asset shall be changed accordingly.

Also, the nature and the amount of the change in that estimate shall be disclosed in the given period or in the expected future periods

In case, the amount of the effect on the future periods are not disclosed, then the estimating would not be change and the company shall disclose in the stated fact (IAS plus, 2018).

 Value of equipment= $(800,000-160,000)=$640,000

Which means if the useful life of the equipment reduces to 6, then the following would be its entry:

Depreciation expense Dr 106,667

To Accumulated depreciation 106,667

The AASB 108 deals with the period errors. Such are the errors that affects the financial statements and also there could be errors that are due to the mistakes done in the applying of the accounting policies, oversights or the misinterpretations of the facts and the frauds.

In case, any such error takes place, then an adjustment shall be made for each one of the financial statement line that has been affected and the amount of the adjustment which relates in with that specific adjustment.

On the discovery of such information, the company must restate in the comparative amounts that have bene presented in the financial statements.

The company shall disclose in the nature of the error that took place in the prior period, the amount of the correction, the basic and the diluted earnings per share. The financial statements of the subsequent period shall not disclose in these notes in the financial statements (AASB, 2018).

In the given case, the company found out about an expense which pertained to an earlier period and which was tax deductible. Since that expense is subject to tax, hence, the same shall have to be disclosed in the financial statements, the prior period books have been closed, so, the company would report this expense in the current year’s financial statements as an expense which relates to the previous year. In the subsequent year, the comparative figures shall be changed and the changed basic and the diluted earnings per share shall be shown.

Analysis of Accounting for Share Capital

The following entry would be passed:

Repairs on equipment expense Dr 20,000

To Profit and Loss A/c 20,000

Part 3:

 IFRS 13 deals with the measurement of the fair values. This standard requires in the reporting of the fair values. This standard defines the term fair value as the basis of an exit price and also uses the hierarchy of the fair value which is more like market based rather than being specific to any particular company. The main aim of this standard is the estimation of the price at which the asset could be sold in the market or the liability could be transferred on to another or be sold in the open market as on the date of the measurement and under some market conditions. The concept of measurement of the fair value determine as the following:

  • That particular asset or the liability which is to be reported at its fair value
  • In respect of the non-financial assets, the most apt technique of measurement shall be evaluated.
  • The most advantageous market for that asset or the liability
  • The techniques of valuation that would be the most apt for the purposes of measurement and this would consider in the availability of the data for the purposes of developing in the inputs that would show in some assumptions that the market participants would use when it comes to the pricing of that asset or the liability

In respect of the disclosure requirements, the company would disclose in the information in the financial statements so that the users of these financial statements are able to assess in the assets and the liabilities that are capable of being measured at their fair values and they could be measured after these have been recognised initially along with the techniques that are used for the purposes of valuing in the same and the inputs that have bene used for the purposes of developing these. For the purposes of fair value measurements, the most unobservable inputs should be considered and their effect of the measurement in the profit and loss account shall be disclosed (IFRS, 2018).

In the given case, the shares were initially disclosed at their cost and so, now, the same shall be disclosed at its fair value which is $250,000.

Hence, the following entry

Profit and Loss Dr 350,000

To Investment 350,000

Part 4:

This transaction seems to be a fraudulent activity and so, an investigation has to be done in respect of the same. But in the meantime, the company is duty bound to correct their financial statements and write back this transaction to the profit and loss A/c which shall be done through the below entry:

The following would be its entry:

Profit and Loss A/c Dr 20,000

To Advertising expense 20,000

If this transaction is not written back, then that would report the earnings of the company in wrong amounts. Also, the fact that such a transaction took place will have to be reported in the notes to accounts in the financial statements.

Part 1:

Date

Particulars

 

 Debit

 Credit

31.07.2017

Bank

    150,00,000.00

       To Share Application

    150,00,000.00

(being money received for the shares)

10.08.2017

Share Application

    150,00,000.00

       To Share Capital

    150,00,000.00

(being shares applied)

12.08.2017

Shares underwriting commission

           12,000.00

       To Bank

           12,000.00

(being underwriting commission paid)

10.09.2018

Bank

      25,00,000.00

         To Share Capital

      25,00,000.00

(being share allotment money received)

01.02.2018

Bank

      24,80,000.00

         To Share Capital

      24,80,000.00

(being final call made)

Equity share capital

        1,40,000.00

       To share first call

        1,00,000.00

       To share second call

           40,000.00

       To Calls in arrear

                       -   

(being the accounting for the share forfeiture)

20.03.2018

Equity share capital

        1,60,000.00

          To Calls in Arrear

           20,000.00

          To Forfeited shares

        1,40,000.00

(being the accounting for the share forfeiture)

20.03.2018

Cash

        1,28,000.00

Shares reissue expenses

             4,000.00

Discount on shares

           12,000.00

            To shares forfeited

        1,40,000.00

           To discount on shares

             4,000.00

 ( being the share forfeiture and reissue)

Part 2:

The following table shows in the calculations:

Amounts paid

 1,40,000.00

Less; discount

    32,000.00

Less: reissue expenses

      4,000.00

 1,04,000.00

    40,000.00

Amount to be paid to each shareholders

             2.60

The following would be the journal entry:

Share forfeiture Dr 104000

          To bank                   104000

(Being amount returned to shareholders)

Part a:

a)

 Statement of Taxable Income

 $

 

 

 

 

 Accounting Profit Before Tax

 

 5,55,800.00

 

 

 

 

 Add:

 

 

 

 5,10,300.00

 1,53,090.00

 

 Book Depreciation - equipment

     70,000.00

 

 

 

 

 

 Book Depreciation - motor vehicles

     30,000.00

 

 

 

 

 

 Doubtful Debts expense

     34,000.00

 

 

 

 

 

 Entertainment Expense

       4,500.00

 

 

 

 

 

 Annual Leave

     25,000.00

 

 

 

 

 

 Warranty Expenses

     18,500.00

 

 

 

 

 

 Insurance

     18,000.00

 2,00,000.00

 

 

 

 

 

 

 

 

 

 

 

 Less:

 

 

 

 

 

 

 Government Grant

     50,000.00

 

 

 

 

 

 Depreciation for Tax Purposes - equipment

  1,00,000.00

 

 

 

 

 

 Depreciation for Tax Purposes – motor vehicles

     20,000.00

 

 

 

 

 

 Bad debts written off

       2,000.00

 

 

 

 

 

 Annual Leave actually paid

       4,000.00

 

 

 

 

 

 Warranty expenses actually paid

       2,000.00

 

 

 

 

 

 Insurance expenses actually paid

     25,000.00

 2,03,000.00

 

 

 

 

 

 

 

 

 

 

 

 Taxable Income

 

 5,52,800.00

 

 

 

 

 

 

 

 

 

 

 

 Current Tax

              0.30

 1,65,840.00

 

 

 

 

 

 

 

 

 

 

Part b:

Item

 Carrying amount

 Tax Base

 Deductible Temporary Difference

 Taxable Temporary Difference

 Income Tax Expense

 Revaluation Surplus

 Tax Payable

 

 $

 $

 $

 $

 $

 $

 $

 Assets

 

 

 

 

 

 

 

 Cash

         40,000.00

             40,000.00

                               -   

                          -   

                   -   

 

 

 Inventory

      1,62,900.00

          1,62,900.00

                               -   

                          -   

                   -   

 

 

 Receivables (Net)

      2,18,000.00

          2,50,000.00

                  32,000.00

                          -   

         9,600.00

 

 

 Prepaid Insurance

           7,000.00

                         -   

                               -   

              -7,000.00

       -2,100.00

 

 

 Equipment - net

      6,30,000.00

          6,00,000.00

                               -   

            -30,000.00

       -9,000.00

 

 

 Motor Vehicle - net

         90,000.00

          1,00,000.00

                  10,000.00

                          -   

         3,000.00

                -   

 

 Total Assets

    11,47,900.00

        11,52,900.00

                  42,000.00

            -37,000.00

         1,500.00

                -   

 

 Liabilities

 

 

 

 

 

 

 

 Accounts Payables

         54,600.00

             54,600.00

                               -   

                          -   

                   -   

 

 

 Loan

      2,00,000.00

          2,00,000.00

                               -   

                          -   

                   -   

 

 

 Provision for annual leave

         21,000.00

                         -   

                 -21,000.00

                          -   

       -6,300.00

 

 

 Provision for warranty

         16,500.00

                         -   

                 -16,500.00

                          -   

       -4,950.00

 

 

 Total Liabilities

      2,92,100.00

          2,54,600.00

                 -37,500.00

                          -   

     -11,250.00

 

 

 Net Assets

      8,55,800.00

          8,98,300.00

                  79,500.00

            -37,000.00

       12,750.00

 

 

 Temporary difference for year

 

           -42,500.00

 

 

 

 

 

 Tax effected at 30%

      2,56,740.00

          2,69,490.00

                  23,850.00

            -11,100.00

 

 

 

 Taxable Income

      5,55,800.00

          5,52,800.00

 

 

 

 

 

Part c:

Journal Entries

 $

 

 Current Tax

 1,65,840.00

Deferred Tax Liability

    11,100.00

Deferred Tax Asset

    23,850.00

Provision for Tax

 1,53,090.00

 

Equipment 1:

 

 

Particulars

 Debit

 Credit

 

30.06.2016

Depreciation

 12,500.00

       To Accumulated depreciation

 12,500.00

(being amounts charged for depreciation)

Property, plant and equipment

   7,500.00

     To Profit and Loss

   7,500.00

(being revaluation)

Value as on 30.06.2017

 47,500.00

30.06.2018

Depreciation

 15,000.00

       To Accumulated depreciation

 15,000.00

(being the amounts charged for depreciation)

Property, plant and equipment

   4,000.00

     To Profit and Loss

   4,000.00

(being revaluation)

Value as on 30.06.2017

 40,000.00

 

Equipment 1

 

 

 

 

Particulars

 Debit

 Credit

 

Depreciation

   4,000.00

       To Accumulated depreciation

   4,000.00

(being amounts charged for depreciation)

Value as on 30.06.2017

 16,000.00

30.06.2017

Property, plant and equipment

   2,000.00

     To Profit and Loss

   2,000.00

(being revaluation)

Depreciation

   2,000.00

       To Accumulated depreciation

   2,000.00

(being amounts charged for depreciation)

Value as on 30.06.2017

 16,000.00

Bank

 13,000.00

Loss on sale

      300.00

           To Property, plant and equipment

 16,000.00

Particulars

 Frizzy Drinks

 Impairment loss

 Carrying value

 Ice Creamy

 Impairment loss

 Carrying value

 

 

 

 

 

 

 

 

 

 

 

 Cash

         18,000.00

                      -   

         18,000.00

           14,000.00

                      -   

            14,000.00

 

 

 Inventory

         34,000.00

                      -   

         34,000.00

           25,000.00

                      -   

            25,000.00

 

 

 Furniture and fixtures

         25,000.00

                      -   

         25,000.00

           35,000.00

                      -   

            35,000.00

 

 

 Accumulated depreciation – fixtures and fittings

          -5,000.00

                      -   

 

         -10,000.00

                      -   

 

 

 

 Equipment

      1,65,000.00

         28,875.00

      1,36,125.00

           25,000.00

           2,857.14

            22,142.86

 

 

 Accumulated depreciation – equipment

        -55,000.00

 

 

         -15,000.00

 

 

 

 

 Land and buildings

      6,50,000.00

      1,13,750.00

      5,36,250.00

        1,85,000.00

         21,142.86

         1,63,857.14

 

 

 Accumulated depreciation – buildings

        -25,000.00

 

 

           -6,000.00

 

 

 

 

 Patent

         25,000.00

           4,375.00

         20,625.00

                       -   

                      -   

                         -   

 

 

 Goodwill

         40,000.00

         40,000.00

                      -   

           15,000.00

         15,000.00

                         -   

 

 

 

 

 

 

 

 

 

 

 

 Total

      8,72,000.00

      1,87,000.00

      7,70,000.00

        2,68,000.00

         39,000.00

         2,60,000.00

 

 

 

 

 Weighted average

 Carrying value

 

 

 

 Weighted average

 Carrying value

 Equipment

      1,65,000.00

                  0.20

      1,36,125.00

 

 Equipment

            25,000.00

      0.12

   22,142.86

 Land and buildings

      6,50,000.00

                  0.77

      5,36,250.00

 

 Land and buildings

         1,85,000.00

      0.88

##########

 Patent

         25,000.00

                  0.03

         20,625.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      8,40,000.00

 

      6,93,000.00

 

 

         2,10,000.00

 

##########

 

 

 

 

 

 

 

 

 

 Impairment Loss

      1,87,000.00

 Impairment Loss

         39,000.00

          Equipment

         28,875.00

          Equipment

              2,857.14

          Land and buildings

      1,13,750.00

          Land and buildings

            21,142.86

           Patent

           4,375.00

           Patent

                         -   

           Goodwill

         40,000.00

           Goodwill

            15,000.00

Frizzy Drinks:

Impairment Loss Dr

      1,87,000.00

          Equipment

         28,875.00

          Land and buildings

      1,13,750.00

           Patent

           4,375.00

           Goodwill

         40,000.00

Ice creamy:

Impairment Loss Dr

         39,000.00

          Equipment

              2,857.14

          Land and buildings

            21,142.86

           Patent

                         -   

           Goodwill

            15,000.00

References:

IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors. (2018). Retrieved from https://www.iasplus.com/en/standards/ias/ias8

IFRS. (2018). Retrieved from https://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/

Accounting Policies, Changes in Accounting Estimates and Errors. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-15.pdf

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