Question

Silver Berhad is in the process of finalising the financial statements for the year ended 31 December 2018 and came across the following issues. Its profit after tax before the following adjustments is RM 1.65 million. The authorisation date for the financial statements is 31 March 2019.

(i)The tax rate applicable to the company has been changed from 26% to 25% on 15 January 2019. This new rate is announced to be applied starting for financial year 2019.

(ii)Major fire broke out in one of its factorieson 15 February 2019 and destroyed the inventory valuing RM50,000, the sale value of which is now nil.

(iii)A debtor that owes the company RM30,000 was declared bankrupt by the Insolvency Department on 6 January 2019.

(iv)The fairvalue of investment property held by the company at the reporting date was RM1.2 million. However, a major flood on 5 January 2019 has been affecting the value of this investment property. On 28 March 2019, an independent property valuer estimated that the fair value now has decreased to RM900,000.

Required:

(i)For each case, discuss the accounting treatment.

(ii)Determine the amount profit of Silver Berhad for the year ended 31 December 2018.

Answer 1

i)	Discussion of accounting treatment of following :
	1)	As tax rate reduced to 25% from 26% and applicable for the repective year it self then there is decreament in provision for income tax and it would lead to increase in profit after tax.
		So ptofit after tax =1.65 million
		profit before tax =		2.23
	2)	As per IAS1 10 adjusting event are those events whose condition exist on balance sheet date. So fire broke down on 15/02/2019 and balance sheet date is 31/03/2019. so decrement in value of inventory will be adjusted.
		Profit at the end of year decrease by RM 50,000
	3)	Insolvency of debtor declared by insolvency department on 6/01/2019 that is before balance sheet date so as per IAS 10 these are considered as adjusting events . So profit would be decrease by RM 30,000.
	4)	As per IAS 40 Investment   property can be measured at cost or fair value. And change in fair value adjusted through profit and loss account . So in given case fair value reduced by RM 300000/- . So profit decresed by RM 300000/-
			Million
ii)		Profit before tax =	2.23
		Less: Fire expenses	0.05
		Less : bad debts expense	0.03
		Less : decrease in fair value	0.9
		Net profit before tax	1.25
		Less tax @25 %	0.3125
		Profit after tax=	0.9375