Question

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:

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.

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.

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.

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:

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).

ii) Prepare any note disclosures and adjusting journal entries that are needed in the 2018 financial statements for each situation.

Answer 1

Situation 1:

equipment acquired on 1 July 2015  for $800,000,

useful life of 10 years, residual value of nil.

Depreciation = Equipment value - Residual value of an asset / Life of asset

= $800,000, / 10 = $80,000 per year

IFRS IAS 16

Under IFRS, property, plant, and equipment accounting is treated in accordance with IAS 16. It allows use of the cost model or revaluation model as accounting policy, applying it to the entire class of Property, Plant, and Equipment.

The cost model assumes that a fixed asset is reported in the balance sheet at it initial cost less any accumulated depreciation and impairment losses. IFRS allows a reversal of impairment losses recognized in the past, but this amount is limited to the initial carrying amount of an asset adjusted to accumulated depreciation.

From 1 st july 2017 onwards the Superstore Ltd uses the cost model for manufacturing equipment.

Accordingly we need to apply IFRS IAS 16 ,but as per management decision the equipment has a remaing life of 6 years ,with residual valve but the value of equipment as on 1St july 2017, is = $ 800000 - 80000*2 = 6,40,000 $

Accordingly the accumulated depreciation is need to be deducted from initial value of an equipment in Balance sheet

The financial statements of 2016 , 2017 is required to pass adjustment entry i.e

Depreciation A/c Dr 80000 $

To Accumulated Depreciation 80000 $

(This entry for both 2016, 2017 financial years) as a result of this depreciation already debited to profit and loss account is cancelled by creating accumulated depreciation, any way depreciation is a non cash item no impact on the profits of the company in 2016, 2017, in jun 30,2018 no need to charge depreciation to profit and loss account , it can be directly deducted from value of an equipment.

Situation 2 :

As per Sec 31 Of Income tax act 1961, Expenditure relating to Plant and machinery is divided in to Two types One is Current Repairs another one is capital repairs,

If it is current repairs the Accounting entry is required to be passed in books is

Repairs and Maintenance Expense Dr

To Cash/Accounts Payable Cr

If it is capital repairs the Accounting entry is required to be passed in books is

Plant Assets Dr

To Cash/Accounts Payable Cr

The accounts payable officer is forgotten to pass the journal entry regarding the Repairs to equipment ,any way the amount is not paid in 2017, but the accounts payable is require to pass adjustment entry i.e,

Repairs and Maintenance Expense Dr 20000 $

To Accounts Payable Cr 20000$,

In 2018, again he require to pass Journal entry to Payment of Repairs to equipment,

i.e., Accounts Payable Dr 20000$

To Cash Cr 20000$,

Note: Section 145 of The income tax Act,1961 says income chargeable under the head'profits and gains of business or profession' or 'income from other sources' must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee, Accordingly the accounts payable officer can recognise expense on Mercentail basis , So The Acounts Payable Oficer can show expenditure 20000 $ to Profit and loss account then claim a Refund of 6000 $,

Situation 3:

Provision for loss on investments A/c ( debit to P/L A/c)

To   Investments A/c (Reduced from Investments)

AN ALTERNATIVE TO THAT CAN BE

A) Loss on dimunition on Invesments A/C..............DR                              

TO Provision for  Loss on dimunition on Invesments

B) Profit and loss A/C...........................DR                         

TO Loss on dimunition on Invesments A/C
Accordingly

Provision for loss on investments A/c ( debit to P/L A/c) 350000 $

To   Investments A/c (Reduced from Investments) 350000 $,

Situation 4:

Generally Employee fraud is not danger than management fraud ,wethere it is material or immeterial depends upon the company position ,Max mis use the company funds for personal purpose ,then he passed the entry like

Advertisement expenses A/C Dr 32000$

To Cash / cheque 32000$,

then require to pass reverasal entry like

Cash /Cheque/ personal account Dr 32000 $

To Advertisement expenses 32000$