Question

Protek Ltd, a masks distributor company, provides the following trial balance for the year ended 30 June 2020:

Protek Ltd

Trial balance as at 30 June 2020

Debit ($)

Credit ($)

Sales of N97 surgical masks

2,151,670

Sales of 4-ply masks

3,120,850

Sales of masks filters

3,288,426

Cost of goods sold

4,688,000

Rental expenses

375,950

Salaries and wages

1,980,000

Administration expenses

128,450

Annual leave expense

98,510

Doubtful debts expense

158,000

Depreciation expense

376,000

Amortisation expense - patent

56,900

Interest expense

22,500

Interest income

8,200

Selling expenses

66,800

Income tax expense

228,600

Cash on hand

53,000

Cash management account

230,000

Trade debtors

478,600

Allowance for doubtful debts

19,144

Inventories

455,040

Land   

760,000

Motor vehicles

630,000

Accumulated depreciation - motor vehicles

252,000

Office equipment

620,000

Accumulated depreciation - office equipment

124,000

Patent (5 years)

569,000

Accumulated amortisation - patent

56,900

Deferred tax asset

28,500

Deferred tax liability

125,000

Bank loan

450,000

Trade creditors

182,560

Provision for annual leave

43,000

Current tax liability

132,100

Retained earnings, 1 July 2019

70,000

Dividends paid

20,000

Share capital

2,000,000

12,023,850

12,023,850

Additional information:

Protek Ltd is a reporting entity in accordance with the requirements of Australian’s Conceptual Framework.

The bank loan is repayable in 3 years.

The depreciation expense of $376,000 relates to motor vehicles and office equipment amounted to $252,000 and $124,000 respectively.

60% of the provision for annual leave are expected to be payable within 1 year and the remaining is payable after 1 year.

The patent was acquired on 1 January 2020. It represents fees paid to Teknova Group, a manufacturer company based in China. Protek Ltd is given the sole distributorship in Australia to sell the new high quality mask, N97, designed for first line workers in the health industry. The patent lasts for 5 years.

There was no new shares issued during the financial year ending 30 June 2020.

Protek Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and presents an analysis of expenses by function on the statement.

The following expenses are allocated to administrative expenses and distribution costs for the purposes of preparation of the statement of profit or loss and other comprehensive income:

Administrative expenses

Distribution costs

Rental expenses

40%

60%

Salaries and wages

50%

50%

Administration expenses

100%

-

Annual leave expense

50%

50%

Doubtful debts expense

-

100%

Depreciation expense – motor vehicles

10%

90%

Depreciation expense – office equipment

80%

20%

Amortisation expense - patent

100%

-

Selling expenses

-

100%

In relation to the statement of financial position, where AASB 101 requires entities to disclose further sub-classifications of the minimum line items on the face of the statement or in the notes, the directors of Protek Ltd want to report only the minimum line items on the face of the statement, and leave the sub-classifications to be disclosed in the notes.

Part A

As the accountant for the entity, prepare the following statements of Protek Ltd the year ended 30 June 2020 in accordance with AASB101:

Statement of profit or loss and other comprehensive income;

Statement of financial position; and

Statement of changes in equity.

In preparing the above statements, you should use the line items that a listed company is likely to use and refer to paragraphs 54, 82, 82A and 106 of AASB 101 in determining the line items to be presented. Show all workings to support your figures presented in the statements. Disclosure notes and comparative figures are not required.

  

Note: In preparing the statements for Part A, you should consider only information given in this part and ignore information given in Part B below.

Part B

The following events occurred after the preparation of statements was completed in Part A above.

Event 1

The directors have asked you to review the doubtful debts allowance due to the high level of bad debts expense that occurred during the year. The allowance is currently measured based on 4% of trade debtors’ balances following the advice of Jane, who is one of the directors. After reviewing industry averages, you have advised the directors that the allowances should be revised to 8% of the trade debtors’ balances and the directors agreed to your proposal and adopt the new basis from 1 July 2019. This change is considered material in Protek Ltd’s case.

Required:

State if the above situation would constitute a change in accounting policy or a change in accounting estimate. Explain and support your answers by making reference to relevant paragraphs in AASB108.

Prepare necessary adjusting entries and/or notes disclosures required to account for the change in the doubtful debt allowance for the year ended 30 June 2020.

Event 2

Protek Ltd stored its masks in rented warehouses located in several locations. One of the warehouses in Orange was destroyed by bushfires on 29 July 2020. From the accounting records, there were 8,000 boxes of N95 masks stored in that warehouse, with cost of inventories valued at $120,000. Unfortunately, there was no insurance policy acquired to cover this loss and the loss is considered material for Protek Ltd.

The financial statements for the year ended 30 June 2020 were authorised for issue by the directors on 28 August 2020.

Required:

Classify the above event as either an adjusting or non-adjusting event after the end of the reporting period. Justify your answer by making reference to AASB110.

Consistent with your answer to (i) above, prepare any journal entries and/or note disclosures required to comply with the requirements of AASB110.

Answer 1

Part A

Statement of financial position

Particulars	30 June 2020 ($)	Remarks
Non Current asset
Property, plant and equipment	1,634,000	Note 1
Intangible assets	512,100	Patent (5 years) Less Accumulated amortisation - patent (569000-56900)
Deferred tax asset	28,500
	2,174,600
Current asset
Inventories	455,040
Trade debtors	459,456	Trade debtors less Allowance for doubtful debts (478600-19144)
Cash and cash equivalents	283,000	Cash on hand plus Cash management account (53000+230000)
	1,197,496
Total assets	3,372,096
Non Current liabilities
Financial liability	450,000	Bank loan
Provision for annual leave	25,800	(43000*60%)
Deferred tax liability	125,000
	600,800
Current liabilities
Trade creditors	182,560
Provision for annual leave	17,200	(43000*40%)
Current tax liability	132,100
	331,860
Equity
Share capital	2,000,000
Retained earnings	439,436
	2,439,436
Total equity and liabilities	3,372,096

Statement of changes in equity	30 June 2020 ($)
Particulars	Share capital	Retained earnings
As on 1 July 2019	2,000,000	70,000
Add: Total comprehensive income		389,436
Less: Dividends paid		(20,000)
	2,000,000	439,436

Statement of profit or loss and other comprehensive income

Particulars	Year ended 30 June 2020 ($)
Revenue from contracts with customers	8,560,946
Cost of goods sold	(4,688,000)
Gross profit	3,872,946
Other income	8,200	Interest income
Distribution costs	(1,741,225)	Note 2
Administrative expenses	(1,499,385)	Note 2
Finance cost	(22,500)	Interest expense
Profit before tax	618,036
Tax expense	(228,600)
Profit after tax	389,436
Total comprehensive income	389,436	(Profit after tax+Other comprehensive income)

Note 1

Property, plant and equipment	Amount ($)
Land	760,000
Motor vehicles	630,000
Accumulated depreciation - motor vehicles	(252,000)
Office equipment	620,000
Accumulated depreciation - office equipment	(124,000)
	1,634,000

Note 2

	Administrative expenses	Distribution costs
Rental expenses	40%	60%
Rental expenses - 375,950	375950*40%	375950*60%
	150,380	225,570	(a)
Salaries and wages	50%	50%
Salaries and wages - 1,980,000	1,980,000*50%	1,980,000*50%
	990,000	990,000	(b)
Administration expenses	100%	0%
Administration expenses - 128,450	128,450	0	(c)
Annual leave expense	50%	50%
Annual leave expense - 98,510	98,510*50%	98,510*50%
	49,255	49,255	(d)
Doubtful debts expense	0%	100%
Doubtful debts expense - 158,000	0	158,000	(e)
Depreciation expense – motor vehicles	10%	90%
Depreciation expense - 252,000	252,000*10%	252,000*90%
	25,200	226,800	(f)
Depreciation expense – office equipment	80%	20%
Depreciation expense - 124,000	124000*80%	124000*20%
	99,200	24,800	(g)
Amortisation expense - patent	100%	0%
Amortisation expense - patent- 56,900	56,900	0	(h)
Selling expenses	0%	100%
Selling expenses - 66,800	0	66,800	(i)
Total	1,499,385	1,741,225

Part B

Event 1

The change in the allowances of the trade debtors’ balances from 4% to 8% is change in accounting estimate.

Para 32 of AASB 108, provides illustration of estimates made in the financial statement. One of them is bad debts.

	Amount ($)
Trade debtors	478,600
Allowance for doubtful debts @ 8%	38,288	(478600*8%)
Less: existing allowance for doubtful debts	(19,144)
Entry to be posted	19,144

Date	Particulars	Debit	Credit
30 June 2020	Doubtful debts expense	19,144
	Allowance for doubtful debts		19,144
	(Being adjustment for allowance for doubtful debts made)

Disclosure: The Company was previous recognising Allowance for doubtful debts @ 4% of trade debtors, basis the review of industry averages, management believes from the current financial year it should be 8% and has made appropriate adjustment in the current year.

Event 2

As per AASB 110, it is a 'Non-adjusting events after the reporting period'. As per AASB 110, para 3, Non-adjusting events after the reporting period are those that are indicative of conditions that arose after the reporting period.

The bushfire occured on 29 July 2020 after the reporting period (30 June 2020). There was no indication of this event on 30 June 2020. Hence, it is a non-adjusting event as per para 3. Further para 22 of AASB 110, 'the destruction of a major production plant by a fire after the reporting period' is classified as examples of non-adjusting events after the reporting period which also gives an indication that this a non-adjusting events after the reporting period.