As per IAS 8 which deals with the changes in the accounting policies and accounting estimates, the change could take place prospectively. Usually, a company is encouraged to adopt the same accounting policies, estimates in all of the years to follow but sometimes, due to the change in the market conditions etc, the company may go for the change in the accounting estimates.
Just like in the present case, the company has gone for the change in the useful life of the asset. This is alright for the company to follow, but the depreciation will have to be charged on the same, no matter what.
The value of the equipment on 01.07.2017 shall be $(800,000-160,000).
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
(IAS plus, 2018).
The fact shall be disclosed in the notes to the financial statements.
As per the accounting standard on the change in the accounting policies, an amount may be missed out from being reported in the financial statements and such cases, the amount shall be reported in the financial statements but the following shall also be disclosed in them:
(IAS plus, 2018).
Hence, the same shall be reported in the financial statements:
The following would be its entry:
Repairs on equipment expense Dr 20,000
To Profit and Loss A/c 20,000
With regard to the notes in financial statements, the fact shall not be recorded in the notes.
As per IFRS 13 which deals with the fair value measurement, the standard states the fact all of the assets and the liabilities shall be disclosed at their respective fair values which means the fair values less the costs to sell. This applies to all except in some special circumstances. The standard does not lay down the specific requirements which pertains to the measurement and the disclosure for such transactions.
The standard further deals with the definition of the term “fair value” which means the amount that the company would receive if it sells and asset or transfers its liability onto another (IFRS, 2018).
Therefore, the shares shall also be revalued and reported at their fair values.
The following would be its entry:
Profit and Loss Dr 350,000
To Investment 350,000
This shall be disclosed in the notes to the financial statements.
This activity of the previous accountant of the company seems to be a fraudulent activity which needs some investigation, hence the fact cannot be included in the books of account. But since, the expense has already been charged in the financial statements, it shall be written back through the following entry.
The following would be its entry:
Profit and Loss A/c Dr 20,000
To Advertising expense 20,000
This shall be disclosed in the notes to 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 |
||
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 |
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 |
|
|
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
IAS 8 Changes in Accounting Estimates | Explanation | Examples. (2018). Retrieved from https://accounting-simplified.com/standard/ias-8/changes-in-accounting-estimates.html
IFRS. (2018). Retrieved from https://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/
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