Question

Financial statement disclosures

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

GIVEN DATA:-

Equipment = $800,000

Estimated useful life =  10 years

Repairs to equipment = $20,000

Tax refund = $6,000

Market value =  $600,000

ABC Ltd declined = $250,000

Cheque dated = $32,000 ect..,

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.

SOLUTION:-

1.

Changes in assess incorporate the alteration in a normal cash related enunciation entirety in light of new information or experience. This may join, for instance, changing the terrible commitment level of offers measure from 2%to 3% or changing the supportive presence of leverage from five to seven years.

Changes in checks require arranged application, suggesting that the cash related clarifications are not reiterated yet rather the change is represented in the present time allotment and in future periods in a manner of speaking.

Earlier accommodating life was assessed to be 10 years which is reexamined to be 8 years with zero waiting regard.

For the past estimation loot obliged 2 years = $8,00,000/10.2 = $1,60,000

Recorded a motivator as on first July, 17 = $8,00,000 - $1,60,000 = $6,40,000

Anticipated application requires the degrading to be adjusted from the present year onwards. 2015 and 2016 money related declarations require not be adjusted. Updated loot each year including 2018 fiscal explanations should be :-$6,40,000/6 = $1,06,667.

2. Repairs being related to 2017, should be charged as cost for that year and a contrasting danger should with have been obliged that around a similar time.

Journal segment required thus:

A cure of a bungle happens when a material oversight is made in a before period's cash related enunciations and requires an adjustment as per repeat the money related clarifications so in complete they reflect an exact held acquiring balance.

Bungles made that impact the compensation or hardship reporting in prior periods are redressed by changing the beginning evening out of held benefit.

Since repairs has not been obliged in 2017, the held benefit modify and the wage is misrepresented by $20,000. Thusly, held benefit is moreover overstated which should be adjusted by deducting $20,000 thusly remembering the ultimate objective to influence it to cure .

Appraisal shapes had quite recently been submitted in 2017 which rejects the deductible utilization of repairs and hence ought to be modified and refiled . As the end for repairs is open in the year in which it is paid, the cost types of 2017 should reflect $20,000 repairs and a S6,000 force rebate is available in that year in a manner of speaking.

3.

The organization holds shares esteeming $6,00,000 in other organization by method for a long haul ventures. For the most part, long haul ventures are conveyed at the obtaining fetched and ought to be accounted for on a persistent premise. On the off chance that there is any sign which is almost certainly, going to diminish the estimation of the speculations for all time, the ventures are composed down to the feasible esteem. For this situation the stock

Market crashes on tenth July, 18 to cause lasting fall in the estimation of the ventures. Be that as it may, the sign for this occasion was absent at the monetary record date and hence, the fall in esteem must be enrolled in the consequent year. In 2018 monetary articulations, no modifications is required. Yet, in the following year speculations ought to be composed down to $250,000 and the organization is to enroll a misfortune for the same.

Journal Entry should be :-