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 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.
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:
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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