Accounting - Accounting Policies, Changes In Accounting Estimates And Errors - Assessment Assignment

Accounting Assignment

Assignment Task

Question 1  Accounting policies, changes in accounting estimates and errors Blake Ltd is finalising its financial statements for the reporting period ending 30 June 2015. A number of unrelated scenarios still need to be considered and accounted for before the financial statements are finalised:

2014. a)   The company has, in the past, always recognised a provision for warranties equal to 5% of sales made during the year. Due to increasing warranty costs and the number of goods returned under warranty, the directors would like to increase the provision to 8% of sales made during the year. The provision for warranties account currently has a balance of $12,000, which is the balance carried forward from 30 June 2014. Sales for the year ended 30 June 2015 amounted to $460,000.
2015. b)   During the verification process for accounts payable, it was discovered that an amount of $80,000, incurred in May 2015 and payable to a supplier for raw materials, was recorded in the accounting records as $8,000. The $80,000 owing at 30 June 2015 was paid in July 2015.
2016. c)   During the verification process for office equipment, it became apparent that an item of office equipment that was thought to be on hand at 30 June 2014 had actually been destroyed in April 2014. The item had a cost of $40,000 and accumulated depreciation of $24,000. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015.
2017. d)   During the verification process for accounts receivable, it was discovered that the sales manager had undertaken fraudulent activity – raising fake sales invoices in June 2015. The motivation of the manager was to ensure that his sales targets were met, so that he was eligible for his performance bonus. The fake sales invoices amounted to $122,000, with this entire amount included in the accounts receivable balance at 30 June 2015.
2018. e)   On 1 July 2014, the directors revised the useful life of its building (acquired 2 years earlier on 1 July 2012 for $600,000, with an estimated useful life of 20 years and residual value of nil on this date). On 1 July 2014, the remaining useful life was estimated to be 30 years. The building has been depreciated using the straight-line method over its useful life. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015.

Assume all amounts are material for financial statement purposes. Required: With reference to AASB 108, explain whether each of the above scenarios is a change in accounting estimate or an error. State the appropriate accounting treatment (including any journal entries needed) for each scenario in the 2015 financial statements.  

    Question 2  Accounting for share capital On 1 April 2015, Sage Ltd was registered and issued a prospectus inviting applications for 2,000,000 shares, at an issue price of $3.50, payable as follows:

• $1.00 on application
• $1.50 on allotment
• $0.50 on first call
• $0.50 on final call

By 30 April, applications had been received for 2,100,000 shares. At the directors’ meeting on 3 May, it was decided to allot shares to the applicants in proportion to the number of shares for which applications had been made. The surplus application money was offset against the amount payable on allotment. All outstanding allotment money was received by 10 May. Legal costs re company formation were $7,000 and were paid on 11 May. Share issue costs of $3,000 were also paid on the same date. The first call was made on 1 September 2015, with money due by 30 September 2015. The final call was made on 2 January 2016, with money due by 31 January 2016. All money owing in relation to the two calls was received by the due dates except for the holders of 100,000 shares who did not pay either call, and the holder of another 20,000 shares who did not pay the second call. On 10 March 2016, as provided in the company’s constitution, the directors forfeited these 120,000 shares. On 25 March 2016, the forfeited shares were reissued as fully paid for a consideration of $2.80 per share. Costs of forfeiture and reissue amounted to $4,000, and were paid. The constitution allowed for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 28 March 2016. Required: Prepare the journal entries to record the transactions of Sage Ltd up to and including that which took place on 28 March 2016. Show all relevant dates, narrations and workings.  

    Question 3  Accounting for income tax Frog Ltd has prepared its draft statement of profit or loss and other comprehensive income and statement of financial position on 30 June 2015. The statements are prepared before considering taxation. The following information is available:  Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2015  

 Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2015  

  Additional information:

• All administration, rent and salaries expenses incurred have been paid as at year end.
• Tax deductions for annual leave, warranties, insurance and rent 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.
• Rent income is taxed when amounts are received, and not as amounts are accrued.
• The company can claim a tax deduction of $10,500 for depreciation on plant, and $12,000 for depreciation on motor vehicles. Accumulated depreciation for tax purposes at 30 June 2014 was $31,500 for plant, and $18,750 for motor vehicles.
• The plant sold during the year (sold on 1 July 2014) had been purchased for $50,000 on 1 July 2013. For taxation purposes, the plant was depreciated at 15% p.a.
• The tax rate is 30%.

  Required: i)  Determine the balance of any current and deferred tax assets and liabilities as at 30 June 2015, in accordance with AASB 112. ii)Prepare the journal entries to record the current tax liability and movement in the deferred tax assets and deferred tax liabilities.    

  Question 4  Property, plant and equipment Walkie Ltd acquires a new motor vehicle on 1 July 2013 for $90,000. The motor vehicle is expected to have a useful life of six years, and has an estimated residual value of $10,000. The straight-line method of depreciation is used. On 1 July 2014, the directors of Walkie Ltd decide to adopt the revaluation model for motor vehicles. The motor vehicle is revalued to $85,000 and its useful life is reassessed: it is expected, at that date, to have a remaining useful life of nine years. The estimated residual value remains unchanged at $10,000. On 30 June 2015, the motor vehicle is revalued to $52,000. On this date, the directors determine that the useful life and residual value does not need to be reassessed. On 30 June 2016, it is determined that the fair value of the motor vehicle does not differ materially from its carrying amount. It is also determined that the useful life and residual value does not need to be reassessed. On 1 January 2017 it is unexpectedly sold for $45,000. Required: Prepare journal entries for Walkie Ltd between 1 July 2013 and 1 January 2017 to record the above. Show narrations and all relevant workings. Assume a tax rate of 30%.  

Question 5  Impairment of assets Jack Ltd has a division that represents a separate cash generating unit. At 30 June 2015, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:  

The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $140,000, and the land has a fair value less costs to sell of $825,000. The directors of Jack estimate that, at 30 June 2015, the fair value less costs to sell of the division amounts to $1,500,000, while the value in use of the division is $1,560,000. As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2016. By 30 June 2016, the recoverable amount of the cash generating unit was calculated to be $55,000 greater than the carrying amount of the assets of the unit. Required: Determine how Jack Ltd should account for the results of the impairment test at 30 June 2015 and 30 June 2016, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.

Rationale This assessment task is designed to assess your understanding of topics 3 to 7, and the following subject learning outcomes:

• be able to prepare basic financial statements for reporting entities;
• be able to discuss critically and comprehensively the statutory and professional requirements upon which published financial statements are based;
• be able to explain the form and content of financial statements;
• be able to interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements.

a)

The increase in the warranty provisions from 5% to 8% cannot be said a significant increase and besides that it is not due to any errors. Hence it is a change in accounting estimate. The calculations and accounting entries are as under:

b)

This is an accounting error and the accounting entry already recorded in the books of accounts is as under:

  Now the remaining difference of $ 72,000 has to be accounted for as under:

c)

This is an accounting error and the rectification journal entry is as under.

d)

This is an accounting error and the rectification journal entry is as under.

e)

  AASB 108 requires that any change in the accounting estimate in respect of useful life shall be applied prospectively. Hence this difference shall not be taken in to account and the depreciation for the upcoming years shall be calculated considering revised useful life.  

Answer 2

Answer 3

i)

The balance of current tax liability as at 30 June 2015 is $ 85,740. The balance of deferred tax assets as at 30 June 2015 is $ 15,090. The balance of deferred tax liability as at 30 June 2015 is $ 3,075.

  WORKING:

ii)

Answer 4

Answer 5

Assessment of impairment loss as at 30 June 2015:

First step is to calculate the carrying value of the CGU: Carrying amount of Assets:   Cash $ 42,000 Plant & Equipment $ 480,000 Land $ 800,000 Inventory $ 90,000 Accounts Receivables $ 27,000 Patent $ 150,000 Goodwill $ 10,000 Carrying amount of CGU $ 1,599,000 Recoverable amount $ 1,560,000 Impairment loss $ 39,000     Calculation of recoverable amount:   Recoverable amount is higher of  

1. i) Fair value less cost to sale i.e. $ 1,500,000.

Or

1. ii) Value in use i.e. $ 1,560,000

  Thus recoverable amount is $ 1,560,000.   The total impairment loss is $ 39,000. First of all goodwill shall be written down by $10 000. After goodwill is written off, the remaining impairment loss, namely $29,000 shall be written off across the other relevant assets. Other relevant assets are land, plant & machinery and patent (Collier 2012). Para 122 of AASB 136 requires that reversal of impartment loss should be allocated on a prorate basis and the reversal of impairment loss is case of CGU is identified to individual assets. It may be noted that the fair value of land is more than its carrying value, hence land is not impaired individually. The fair value of land is $ 825,000 and its carrying amount is $ 800,000. Thus the remaining impairment loss, which is $ 29,000 has to be allocated between Plant & Machinery and Patent (Considine et al. 2010).   Carrying Proportion Allocation   Net Carrying Amount of impairment loss  Amount   Plant & Machinery  $ 480 000 480/630 $ 22 095 $ 457 905 Patent    $ 150 000 150/630 $ 6 905 $ 143 095 $ 630 000 $ 29 000     Journal entry for recording the impairment loss at 30 June 2015 is:     Impairment loss Dr $ 39,000 Accumulated depreciation and Impairment losses –P&M Cr $ 22,095 Patent Cr $ 6,905 Goodwill Cr $ 10,000 (Allocation of impairment loss)    

Assessment of impairment loss as at 30 June 2016: 

The recoverable amount of impairment loss for CGU is $ 55,000. The amount of impairment loss written down in the year 2015 was $ 39,000. Out of this $ 10,000 was written off as goodwill which cannot be recovered and thus remaining impairment loss of only $ 29,000 can be reversed out of $ 55,000 (Davies 2015).   The journal entry for the reversal of impairment loss is as under:   Accumulated depreciation and Impairment losses – P & M Dr $ 22,095   Patent Dr $ 6,905 Income: reversal of impairment loss Cr $ 24,000 (Reversal of impairment loss)

a)

The increase in the warranty provisions from 5% to 8% cannot be said a significant increase and besides that it is not due to any errors. Hence it is a change in accounting estimate. The calculations and accounting entries are as under:

b)

This is an accounting error and the accounting entry already recorded in the books of accounts is as under:

  Now the remaining difference of $ 72,000 has to be accounted for as under:

c)

This is an accounting error and the rectification journal entry is as under.

d)

This is an accounting error and the rectification journal entry is as under.

e)

  AASB 108 requires that any change in the accounting estimate in respect of useful life shall be applied prospectively. Hence this difference shall not be taken in to account and the depreciation for the upcoming years shall be calculated considering revised useful life.  

Answer 2