Accounting Topics: Financial Statements, Equity Transactions, Taxation, And Revaluation Of Equipment

Accounting treatment for given situations and their accounting entries / disclosures

Event	Accounting Treatment	Adjusted Financial Statement Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Note Disclosure / journal entry
Change in accounting estimate (AASB 108 “Accounting Policies, Changes in Accounting Estimates and Errors “)	As per para 36 of AASB 108, any change in accounting estimate should be recognised prospectively in P&L from the date of change.	FY 2017-18	Depreciation 106,667 To Accumulated depreciation 106,667 (To record depreciation for the year ((800000-80000*2)/6))
Prior period errors (AASB 108 “Accounting Policies, Changes in Accounting Estimates and Errors “)	As per para 42 of AASB 108, it is a prior period error, and should be corrected retrospectively in the first set of financial statements authorized for issue after their discovery by restating the comparative amounts and corresponding amounts.	FY 2017-18 and comparative numbers of FY 2016-17	Retained earnings 20,000 To Cash 20,000 (To record prior period error) Income tax receivable 6,000 To Retained earnings 6,000 (To record tax impact of above adjustment)
Sudden decline in value of Investment after reporting date (AASB 110 “Events after the reporting period”)	In accordance with AASB 110, it is an non-adjusting event, since, as there are no evidences of fall in the value of investment as on reporting date, hence no adjustment is required.	–	As per para 21 of AASB 110, the following disclosure is required, “The company’s investment value has declnied by 350,000, due to sudden fall in the market. This loss will be reflected in the next years financial statements”
Fraudulent activity (AASB 110 “Events after the reporting period”)	In accordance with AASB 110, it is an adjusting event, hence as per para 8 of AASB 110, the company should adjust the amounts in its current financial statements to reflect adjusting events after the reporting period.	FY 2017-18	Recoverable from Max Dr. 32,000 To Advertising expense 32,000 (To record recovery of amount from previous accountant)

Part (i)	Journal Entries – In the books of Rippa Ltd

Date	Account Titles	Calculation basis	Amount
31-Jul-17	Bank	(6,000,000*2.50)	15,000,000
	To Share Application Money		(15,000,000)
	(Receipt of share application money)

10-Aug-17	Share Application Money	(5,000,000*2.50)	12,500,000
	To Share Capital		(12,500,000)
	(Allotment of shares recorded)

12-Aug-17	Underwriter’s Commission		12,000
	To Bank		(12,000)
	(Underwriter’s commission paid)

10-Sep-17	Share Allotment Money	(5,000,000*1)	5,000,000
	To Share Capital		(5,000,000)
	(Share allotment money due recorded)

10-Sep-17	Bank		2,500,000
	Share Application Money		2,500,000
	To Share Allotment Money		(5,000,000)
	(Receipt of share allotment money)

01-Feb-18	Share Call Money	(5,000,000*0.50)	2,500,000
	To Share Capital Account		(2,500,000)
	(Share call money due recorded)

28-Feb-18	Bank	(4,960,000*0.50)	2,480,000
	To Share Call Money		(2,480,000)
	(Receipt of share call money recorded)

20-Mar-18	Share Capital		160,000
	To Share Forfeiture		(140,000)
	To Share Call Money	(40,000*0.50)	(20,000)
	(40,000 share forfeiture recorded)

20-Mar-18	Bank		128,000
	Share Forfeiture		32,000
	To Share Capital		(160,000)
	(Forfeited shares reissued recorded)

20-Mar-18	Share Forfeiture		4,000
	To Bank		(4,000)
	(Share reissue charges paid)

25-Mar-18	Share Forfeiture		104,000
	To Bank		(104,000)
	(Excess amount after forfeiture refunded)
Part – (ii) – Explanation on amount refunded
The amount returned to shareholders is 2.60 which was after meeting all the reissue expenses and losses. This amount is calculated as under:

Amount received on application on 40,000 shares @ 2.5 each	100,000
Amount received on allotment on 40,000 shares @ 1	40,000	140,000
Loss due to reissue of shares on 40,000 shares @ 0.80 each (4 – 3.20)	(32,000)
Reissue expenses	(4,000)	(36,000)
Amount refunded to shareholder		104,000
Amount per share (104,000/40,000)		2.60

Part – (i) Determination of balances of current tax liability as at 30 June, 2018

Particulars	Amount
Accounting profit before tax	555,800

Less: Expenses allowed / Incomes disallowed
Government grant	(50,000)
Depreciation as per tax *	(120,000)
Annual leave	(4,000)
Insurance expense	(25,000)
Warranty expense	(2,000)
Doubtful debts written off	(2,000)

Add: Expenses disallowed
Depreciation as per accounts	100,000
Annual leave	25,000
Insurance expense	18,000
Warranty expense	18,500
Doubtful debts expense	34,000
Entertainment expense	4,500

Taxable income	552,800
Current tax liability (552,800 * 30%)	165,840

Determination of balances of deferred tax assets / liability as at 30 June, 2018

Particulars	As per accounting books	As per taxation books	Temporary Differences
Assets
Accounts receivable	218,000	250,000	32,000
Prepaid insurance	7,000	–	(7,000)
Equipment	630,000	600,000	(30,000)
Motor Vehicle	90,000	100,000	10,000
Liabilities
Provision for annual leaves	21,000	–	21,000
Provision for warranty expenses	16,500	–	16,500
Total temporary differences			42,500
Deferred tax asset @ 30%			12,750

Part – (ii) – Journal entries
Account Titles	Amount
Deferred tax asset	12,750
To Income tax expense	(12,750)

Income tax expense	165,840
To Income tax liability	(165,840)

* Calculation of depreciation and closing value of assets

Particulars	Accounting books
Equipment	Motor Vehicles	Total
Cost – 1 July, 2017	700,000	120,000	820,000
Less: Depreciation for the year	(70,000)	(30,000)	(100,000)
WDV – 30 June, 2018	630,000	90,000	720,000



Particulars	Taxation books
Equipment	Motor Vehicles	Total
Cost – 1 July, 2017	700,000	120,000	820,000
Less: Depreciation for the year	(100,000)	(20,000)	(120,000)
WDV – 30 June, 2018	600,000	100,000	700,000

Journal Entries – In the books of Superstar Ltd

Date	Account Titles	Amount
30-Jun-17	Dep expense – Equipment 1	12,500
	To Acc. Dep – Equipment 1	(12,500)
	(Depreciation expense recorded)

30-Jun-17	Dep expense – Equipment 2 ((20000 – 4000) / 4)	4,000
	To Acc. Dep – Equipment 2	(4,000)
	(Depreciation expense recorded)

30-Jun-17	Acc. Dep – Equipment 1	12,500
	To Equipment 1	(5,000)
	To Revaluation gain	(7,500)
	(Revaluation of equipment -1)

30-Jun-17	Acc. Dep – Equipment 2	4,000
	To Equipment 2	(2,000)
	To Revaluation gain (WN)	(2,000)
	(Revaluation of equipment -2)

31-Dec-17	Dep expense – Equipment 2 ((18000 – 6000) / 3)/2	2,000
	To Acc. Dep – Equipment 2	(2,000)
	(Depreciation expense recorded till date of sale)

31-Dec-17	Acc. Dep – Equipment 2	2,000
	Bank	13,000
	Loss on sale	3,000
	To Equipment 2 (WN)	(18,000)
	(Sale of equipment -2 recorded)

30-Jun-18	Dep expense – Equipment 1 ((55000 – 10000) / 3)	15,000
	To Acc. Dep – Equipment 1	(15,000)
	(Depreciation expense recorded)

30-Jun-18	Acc. Dep – Equipment 1	15,000
	To Equipment 1	(11,000)
	To Revaluation gain (WN)	(4,000)
	(Revaluation of equipment -1)

WN: Revaluation gain / loss on sale on equipment’s:

Equipment 1 – as on 30 June, 2017
Fair valued amount	55,000
Carrying amount as on 30 June, 2017 (60,000-12,500)	47,500
Gain on revaluation	7,500

Equipment 1 – as on 30 June, 2018
Fair valued amount	44,000
Carrying amount as on 30 June, 2018 (55,000-15,000)	40,000
Gain on revaluation	4,000


Equipment 2 – as on 30 June, 2017
Fair valued amount	18,000
Carrying amount as on 30 June, 2017 (20,000-4,000)	16,000
Gain on revaluation	2,000

Equipment 2 – as on 30 June, 2018
Carrying amount as on 31 Dec, 2017 (18,000-2,000)	16,000
Proceeds from sale	13,000
Loss on sale	3,000

5.The impairment loss is defined as excess of assets carrying value over its market value known as recoverable amount. Recoverable amount is calculated as higher of assets fair value less costs to sell and value in use. Carrying amount is the amount shown in the accounting books. As per AASB 136, the company needs to reflect their assets at fair value, hence the need for impairment arises.

1	Determination of impairment loss

	Particulars	Fizzy Drinks	Ice creamery
	Carrying value	872,000	268,000
	Recoverable amount (Higher of fair value less costs to sell ot value in use)	810,000	260,000
	Impairment loss	62,000	8,000


	Allocation of impairment loss to the assets
	As per para 104 of AASB 136, allocation of impairment loss is made to the assets is made as per following steps:

I.	FIZZY DRINKS
	1: Allocation to respective assets to which loss belongs – Fizzy Drinks

	Particulars	Carrying value	Loss Allocation	Balance
	Land and buildings	625,000	5,000	620,000
	Patent	25,000	5,000	20,000
		650,000	10,000	640,000

	2: The balance impairment loss of 52,000 (62,000-10,000) is allocated to goodwill.
	3: After goodwill, the remaining loss of 12,000 (52,000-40,000) is allocated to the remaining assets in the proportion of their carrying amount.

	Particulars	Balance	Loss Allocation	Balance
	Fixtures and fittings	20,000	1,846	18,154
	Equipment	110,000	10,154	99,846
		130,000	12,000	118,000


II.	ICE CREAMERY
	Allocation to respective assets to which loss belongs – Ice Creamery

	Particulars	Carrying value	Loss Allocation	Balance
	Land and buildings	179,000	4,000	175,000
		179,000	4,000	175,000

	The remaining impairment loss of 4,000 (8,000-4,000) is allocated to goodwill.

The new carrying amount of CGUs are as below:
	Fizzy Drinks	Ice Creamery
Particulars	Old carrying value	Impairment loss	New carrying value	Old carrying value	Impairment loss	New carrying value
Cash	18,000	–	18,000	14,000	–	14,000
Inventory	34,000	–	34,000	25,000	–	25,000
Fixtures and fittings	20,000	1,846	18,154	25,000	–	25,000
Equipment	110,000	10,154	99,846	10,000	–	10,000
Land and buildings	625,000	5,000	620,000	179,000	4,000	175,000
Patent	25,000	5,000	20,000		–
Goodwill	40,000	40,000	–	15,000	4,000	11,000
	872,000	62,000	810,000	268,000	8,000	260,000

Journal Entry as on 30 June, 2018

Account Titles	Amount
Fizzy Drinks
Impairment Loss	62,000
Fixtures and fittings	(1,846)
Equipment	(10,154)
Land and buildings	(5,000)
Patent	(5,000)
Goodwill	(40,000)

Ice creamery
Impairment Loss	8,000
Land and buildings	(4,000)
Goodwill	(4,000)