Question

The directors of a company are considering the company’s draft financial statements for the year ended 31 December 2017.

The following material points are unsolved:

a. From past experience, the management estimated that 6% of trade receivables were uncollectible.

b. Land is measured using the revaluation model. In February 2018, the company received confirmation that land has a fair value increase of $10,500 million at 31 December 2017. Land is not subject to depreciation.

c. The balance on current tax in the trial balance (Debit 4,800 million) represents the under/over provision of tax liability of the previous year. Current tax expense amount is estimated to be $2,700 million. The tax consultant advised that the deferred tax liability balance (including the tax effects of item b) should be $7,400 million at 31 December 2017. Corporate tax rate is 20%.

With reference to relevant International Accounting Standards,

Explain whether each of the above items (a) to (c) should be included in the financial statements for the year ended 31 December 2017. If the answer is yes, what should be the adjustment /amount that would appear in the financial statements? (Note: the items do   not carry equal weighting).

Answer 1

a. Yes, the trade receivables should be included to full amount in financial statements, but a provision for uncollectible accounts @ 6% must be made. Trade receivables must be shown as Gross (Total) less Provision as Net off balance.

b.Under Revaluation model, assets should be included in financial statements at fair value. Any increase in fair value should be included as Revaluation Surplus under the head 'Equity' unless this increase relates to a previously recognised decrease in which case it should be credited to Profit & Loss A/c to the extent of previous loss.

In our case, land should be shown at fair value including increase of $10,500 million. Since it has no depreciation, this increase does not relate to previous decrease as there was no case of recognising decrease. So, it should be credited to 'Revaluation Surplus A/c' under Equity.

c. Debit balance of $4800 million in current tax represents over provision. Current tax expense is $ 2700 million.Deferred tax liability of item b. is $10500 * 20% = $2100 million.

Profit & Loss a/c should be debited by ($2700+$2100-$4800) = Nil

Balance sheet, Deferred Tax liability will stand at $ 2100 million;