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

Answer:

a) Changes in appraise include the adjustment in an expected money related articulation sum in light of new data or experience. This may incorporate, for example, changing the awful obligation level of offers gauge from 2%to 3% or changing the helpful existence of an advantage from five to seven years.

Changes in gauges require planned application, implying that the money related explanations are not rehashed yet rather the change is accounted for in the present time frame and in future periods as it were.

Prior helpful life was evaluated to be 10 years which is reconsidered to be 8 years with zero lingering esteem.

For the past estimation plunder accommodated 2 years = $8,00,000/10 * 2 = $1,60,000

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

Forthcoming application requires the devaluation to be balanced from the present year onwards. 2015 and 2016 monetary proclamations require not be balanced. Overhauled plunder every year including 2018 monetary articulations ought to be :

$6,40,000/6 = $1,06,667.

Depreciation A/c ---------- - dr $1,06,667

To Accumulated deterioration A/c $1,06,667

b) Repairs being identified with 2017, ought to be charged as cost for that year and a comparing risk ought to have been accommodated that around the same time. Diary section required for this reason

Repairs A/c - - dr $20,000

To Accrued repairs A/c $20,000

A remedy of a blunder happens when a material mistake is made in an earlier period's money related articulations and requires a change in accordance with rehash the monetary explanations so in total they mirror a precise held procuring balance.

Blunders made that influence the pay or misfortune announcing in earlier periods are rectified by changing the starting equalization of held profit.

Since repairs has not been accommodated in 2017, the held profit adjust and the wage is exaggerated by $20,000. In this way, held profit is additionally exaggerated which ought to be balanced by deducting $20,000 along these lines keeping in mind the end goal to make it remedy .

Assessment forms had just been submitted in 2017 which rejects the deductible consumption of repairs and thus should be altered and refiled . As the conclusion for repairs is accessible in the year in which it is paid, the expense forms of 2017 ought to reflect $20,000 repairs and a $6,000 impose discount is accessible in that year as it were.

(c) :

The company holds shares valuing $6,00,000 in other company by way of a long term investments. Generally, long term investments are carried at the acquisition cost and should be reported on a continual basis. If there is any indication which is more likely than not, going to decrease the value of the investments permanently, the investments are written down to the realisable value. In this case the stock

Market crashes on 10th July, 18 to cause permanent fall in the value of the investments. But the indication for this event was not present at the balance sheet date and therefore, the fall in value must be registered in the subsequent year. In 2018 financial statements, no adjustments is required. But in the next year investments should be written down to $250,000 and the company is to register a loss for the same. Entry should be

Revenue/Profit & Loss Account A/c ----------------dr $3,50,000

To Investments A/c $3,50,000