Question

(a) Rivers Limited purchased a machine for $200,000. The machine was depreciated at the rate of 25% per annum using the straight-line method. In order to raise the reported profit, the company’s accountant decided to change the depreciation rate to 10% per annum.

(b) Talent Limited is a recruitment agency. On 10 December 2018, Talent Limited helped Ocean Limited hire its Senior Manager and charged the company an agency fee of $30,000. The agency fee was received on 15 January 2019. Talent Limited did not include the $30,000 agency fee in its statement of profit or loss and other comprehensive income for the year ended 31 December 2018.

Q:For each of the above cases, identify the accounting principle or concept that has been violated and give a brief explanation.

Answer 1

(a) Rivers Limited purchased a machine for $200,000. The machine was depreciated at the rate of 25% per annum using the straight-line method. In order to raise the reported profit, the company’s accountant decided to change the depreciation rate to 10% per annum.

Answer : (i) Depreciation means expiration of the cost of the fixed asset concerned during the period for which accounts are being prepared; in other words, it means the cost of the fixed asset used up in the period. This must be treated as cost or expense and debited to the income statement, otherwise the profit will not be correctly assessed and as a result asset amount reported in the balance sheet will also not show the correct figure.

Now when the machine is depreciated in its useful life one method of depreciation is adopted. In the instant case it is straight line method and the adopted rate of depreciation was 25% p.a. However, it was decided by company's accountant to change rate to 10% p.a. which means there is a change in the following:

(i-a) Cost or expenses debited to the income statement, asset amount in the balance sheet and also the cost allotted to depreciation account which are the deviations in the following accounting principles:

(i-a-1) Cost Principle

(i-a-2) Matching Principle

(b) Talent Limited is a recruitment agency. On 10 December 2018, Talent Limited helped Ocean Limited hire its Senior Manager and charged the company an agency fee of $30,000. The agency fee was received on 15 January 2019. Talent Limited did not include the $30,000 agency fee in its statement of profit or loss and other comprehensive income for the year ended 31 December 2018.

Answer : The statement of profit or loss and other income comprehensive income are required to be maintained as per International Accounting Standards which is in this case should be revised IAS 1: Presentation of Financial Statements since in the instant case the reporting fro the period beginning after 1.1.2009 as per which the following which two following statements are required to be maintained.

(i) statement of profit or loss - income statement

(ii) Other comprehensive income - which includes figures of income statement and other comprehensive income

Since the omission of agency fee of $30,000 in both the statement of profit or loss and other comprehensive income it is a violation of revised IAS 1: Presentation of Financial Statements.