Solution-1
|
Sr. No. |
Situation |
Accounting Treatment |
Financial Statement to be adjusted |
Note Disclosure / journal entry |
|
1 |
Change in accounting estimate |
As per para 36 of AASB 108, “Accounting Policies, Changes in Accounting Estimates and Errors “, any change in accounting estimate should be recognized prospectively in P&L from the date of change. |
FY 2017-18 financials and other future financials |
Depreciation $ 106,667 |
|
2 |
Discovery of errors after reporting date – Prior period errors |
The adjustment is a prior period error for not recording the expense and its corresponding provision. As per para 42 of AASB 108, the prior period errors should be corrected retrospectively in the first set of financial statements authorized for issue after their discovery by restating the comparative amounts and corresponding amounts. |
Comparative figures of FY 2016-17 shown in the FY 2017-18 financials & FY 2017-18 financials |
Retained earnings $ 20,000 |
|
3 |
Sudden decline in value of Investment after reporting date |
As per AASB 110, the adjusting events are those whose evidence of occurrence are available on the reporting date, else it is a non-adjusting event. Since, the given case related to a non-adjusting event, as there are no evidences of fall in the value of investment, hence no adjustment is required. |
No adjustment is required. |
As per para 21 of AASB 110, the following disclosure is required, |
|
4 |
Discovery of Fraudulent activity |
As it is a adjusting event, so according to para 8 of AASB 110, the company should adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period. |
FY 2017-18 financials |
Recoverable from Max Dr. $ 32,000 |
Calculation of depreciation amount
|
Cost of Equipment -1 July, 2015 |
$ 800,000 |
|
Dep for FY 2015-16 |
$ 80,000 |
|
Dep for FY 2016-17 |
$ 80,000 |
|
Carrying value of Equipment as on 30 June, 2017 |
$ 640,000 |
|
Revised useful life (years) |
6 |
|
Dep for FY 2017-18 |
$ 106,667 |
Solution-2 (i)
|
Journal Entries |
|
||
|
In the books of Rippa Ltd |
|
||
|
Date |
Description |
Amount |
|
|
31-Jul-17 |
Bank |
$ 15,000,000 |
|
|
To Share Application Money |
$ (15,000,000) |
||
|
(Receipt of share application money recorded on 6,000,000 shares @ $2.50 per share) |
|||
|
10-Aug-17 |
Share Application Money |
$ 12,500,000 |
|
|
To Share Capital |
$ (12,500,000) |
||
|
(Allotment of 5,000,000 shares recorded) |
|||
|
12-Aug-17 |
Underwriter’s Commission |
$ 12,000 |
|
|
To Bank |
$ (12,000) |
||
|
(Payment of underwriter’s commission recorded) |
|||
|
10-Sep-17 |
Share Allotment Money |
$ 5,000,000 |
|
|
To Share Capital |
$ (5,000,000) |
||
|
(Share allotment money due on 5,000,000 shares @ $1 each) |
|||
|
10-Sep-17 |
Bank |
$ 2,500,000 |
|
|
Share Application Money |
$ 2,500,000 |
||
|
To Share Allotment Money |
$ (5,000,000) |
||
|
(Receipt of share allotment money recorded, balance of application adjusted) |
|||
|
01-Feb-18 |
Share Call Money |
$ 2,500,000 |
|
|
To Share Capital Account |
$ (2,500,000) |
||
|
(Share call money due on 5,000,000 shares @ $0.50 each) |
|||
|
28-Feb-18 |
Bank |
$ 2,480,000 |
|
|
To Share Call Money |
$ (2,480,000) |
||
|
(Receipt of share call money recorded on 4,600,000 shares) |
|||
|
20-Mar-18 |
Share Capital |
$ 160,000 |
|
|
To Share Forfeiture |
$ (140,000) |
||
|
To Share Call Money |
$ (20,000) |
||
|
(40,000 share forfeited due to non-payment of call) |
|||
|
20-Mar-18 |
Bank |
$ 128,000 |
|
|
Share Forfeiture |
$ 32,000 |
||
|
To Share Capital |
$ (160,000) |
||
|
(Reissuance of forfeited shares) |
|||
|
20-Mar-18 |
Share Forfeiture |
$ 4,000 |
|
|
To Bank |
$ (4,000) |
||
|
(Share reissue charges recorded) |
|||
|
25-Mar-18 |
Share Forfeiture |
$ 104,000 |
|
|
To Bank |
$ (104,000) |
||
|
(Excess amount after forfeiture & reissue refunded to shareholders) |
Solution-2 (ii)
The amount to be returned to the shareholders after reissue of shares is net off of reissue expenses and losses, that’s why the amount returned is $2.60 and not $3.50 per share. This amount is calculated as under:
|
Description |
Amount |
|
Amount received on application on 40,000 shares @ $2.5 each |
$ 100,000 |
|
Amount received on allotment on 40,000 shares @ $1 |
$ 40,000 |
|
Loss due to reissue of shares on 40,000 shares @ $ 0.80 each (4 – 3.20) |
$ (32,000) |
|
Expenses on Reissue |
$ (4,000) |
|
Amount refunded to shareholder |
$ 104,000 |
|
No. of shares |
40,000 |
|
Amount per share |
$ 2.60 |
Solution-3 (i)
|
Determination of balances of current tax liability as at 30 June, 2018 |
|
|
Description |
Amount |
|
Accounting profit before tax |
$ 555,800 |
|
Less: Expenses not allowed/ Incomes not taxable |
|
|
Government grant |
$ (50,000) |
|
Depreciation as per tax (equipment) (WN-1) |
$ (100,000) |
|
Depreciation as per tax (motor vehicles) (WN-1) |
$ (20,000) |
|
Annual leave disallowed |
$ (4,000) |
|
Insurance expense disallowed |
$ (25,000) |
|
Warranty expense disallowed |
$ (2,000) |
|
Doubtful debts written off disallowed |
$ (2,000) |
|
Add: Expenses taxable |
|
|
Depreciation as per accounts (Equipment) |
$ 70,000 |
|
Depreciation as per accounts (Motor Vehicle) |
$ 30,000 |
|
Annual leave allowed |
$ 25,000 |
|
Insurance expense allowed |
$ 18,000 |
|
Warranty expense allowed |
$ 18,500 |
|
Doubtful debts expense allowed |
$ 34,000 |
|
Entertainment expense allowed |
$ 4,500 |
|
Taxable income |
$ 552,800 |
|
Current tax liability (552,800 * 30%) |
$ 165,840 |
|
Determination of balances of deferred tax assets / liability as at 30 June, 2018 |
|||
|
|
|
|
|
|
Description |
Value as per accounting books |
Value as per taxation books |
Temporary Differences |
|
Accounts receivable |
$ 218,000 |
$ 250,000 |
$ 32,000 |
|
Prepaid insurance |
$ 7,000 |
$ – |
$ (7,000) |
|
Equipment |
$ 630,000 |
$ 600,000 |
$ (30,000) |
|
Motor Vehicle |
$ 90,000 |
$ 100,000 |
$ 10,000 |
|
Provision for annual leaves |
$ 21,000 |
$ – |
$ 21,000 |
|
Provision for warranty expenses |
$ 16,500 |
$ – |
$ 16,500 |
|
Total temporary diff. |
$ 42,500 |
||
|
Deferred tax asset @ 30% |
$ 12,750 |
|
WN-1 Calculation of carrying value |
||||
|
Description |
Accounting books |
Taxation books |
||
|
Equipment |
Motor Vehicles |
Equipment |
Motor Vehicles |
|
|
Cost on 1 July, 2017 |
700,000 |
120,000 |
700,000 |
120,000 |
|
Less: Depreciation for the year |
70,000 |
30,000 |
100,000 |
20,000 |
|
Carrying value as on 30 June, 2018 |
630,000.00 |
90,000 |
600,000 |
100,000 |
Solution-3 (ii)
|
Description |
Amount |
|
Deferred tax asset |
$ 23,850 |
|
Income tax expense |
$ (12,750) |
|
To Deferred tax liability |
$ (11,100) |
|
(Deferred tax expense booked) |
|
|
Current tax expense |
$ 165,840 |
|
To Current tax liability |
$ (165,840) |
|
(Current tax expense booked) |
Solution-4
|
Journal Entries |
|
|
|
In the books of Superstar Ltd |
|
|
|
For the year ended on 30 June 2017 |
|
|
|
Date |
Description |
Amount |
|
30-Jun-17 |
Dep expense (Equipment 1) |
$ 12,500 |
|
To Acc. Dep (Equipment 1) |
$ (12,500) |
|
|
(Dep expense recorded for year) |
||
|
30-Jun-17 |
Dep expense (Equipment 2) ((20000 – 4000) / 4) |
$ 4,000 |
|
To Acc. Dep (Equipment 2) |
$ (4,000) |
|
|
(Dep expense recorded for year) |
||
|
30-Jun-17 |
Acc. Dep (Equipment 1) |
$ 12,500 |
|
To Equipment 1 |
$ (5,000) |
|
|
To Revaluation gain |
$ (7,500) |
|
|
(equipment revalued) |
||
|
30-Jun-17 |
Acc. Dep (Equipment 2) |
$ 4,000 |
|
To Equipment 2 |
$ (2,000) |
|
|
To Revaluation gain |
$ (2,000) |
|
|
(equipment revalued, refer WN-1) |
|
Journal Entries |
||
|
In the books of Superstar Ltd |
||
|
For the year ended on 30 June 2018 |
|
|
|
Date |
Description |
Amount |
|
31-Dec-17 |
Dep expense (Equipment 2) ((18000 – 6000) / 3)/2 |
$ 2,000 |
|
To Acc. Dep (Equipment 2) |
$ (2,000) |
|
|
(Dep expense recorded till 31 Dec) |
||
|
31-Dec-17 |
Acc. Dep (Equipment 2) |
$ 2,000 |
|
Bank |
$ 13,000 |
|
|
Loss on sale |
$ 3,000 |
|
|
To Equipment 2 |
$ (18,000) |
|
|
(Sale of equipment recorded, refer WN-1) |
||
|
30-Jun-18 |
Dep expense (Equipment 1) ((55000 – 10000) / 3) |
$ 15,000 |
|
To Acc. Dep (Equipment 1) |
$ (15,000) |
|
|
(Dep expense recorded for the year) |
||
|
30-Jun-18 |
Acc. Dep (Equipment 1) |
$ 15,000 |
|
To Equipment 1 |
$ (11,000) |
|
|
To Revaluation gain |
$ (4,000) |
|
|
(Equipment revalued, refer WN-1) |
||
|
WN-1- Determination of revaluation gain / loss on sale on equipment:
|
||
|
Equipment 1 |
||
|
Determination |
Amount |
|
|
As on 30 June, 2017 |
||
|
Fair valued amount |
$ 55,000 |
|
|
Carrying amount as on 30 June, 2017 (60,000-12,500) |
$ 47,500 |
|
|
Revaluation gain (55,000-47,500) |
$ 7,500 |
|
|
|
|
|
|
As on 30 June, 2018 |
||
|
Fair valued amount |
$ 44,000 |
|
|
Carrying amount as on 30 June, 2018 (55,000-15,000) |
$ 40,000 |
|
|
Revaluation gain (44,000-40,000) |
$ 4,000 |
|
|
Equipment 2 |
||
|
Description |
Amount |
|
|
As on 30 June, 2017 |
||
|
Fair valued amount |
$ 18,000 |
|
|
Carrying amount as on 30 June, 2017 (20,000-4,000) |
$ 16,000 |
|
|
Revaluation gain (18,000-16,000) |
$ 2,000 |
|
|
As on 30 June, 2018 |
||
|
Carrying amount as on 31 Dec, 2017 (18,000-2,000) |
$ 16,000 |
|
|
Proceeds from sale of equipment |
$ 13,000 |
|
|
Loss on sale of equipment |
$ 3,000 |
Solution-5
The impairment loss is excess of assets carrying amount over its recoverable amount. Recoverable amount refers to the amount that the assets is able to fetch if sold in the open market and is calculated as higher of assets fair value less costs to sell and value in use, on the other hand, carrying amount is the amount shown in the accounting books. As per AASB 136, the company needs to show their assets at their realizable value or fair value, hence the need for impairment arises.
- Determination of impairment loss
|
Fizzy Drinks |
|
|
Description |
Amount |
|
Carrying value of Fizzy Drinks |
$ 872,000 |
|
Recoverable amount (higher of 750,000 & 810,000) |
$ 810,000 |
|
Impairment loss |
$ 62,000 |
|
|
|
|
Ice creamery |
|
|
Description |
Amount |
|
Carrying value of Fizzy Drinks |
$ 268,000 |
|
Recoverable amount (higher of 260,000 & 240,000) |
$ 260,000 |
|
Impairment loss |
$ 8,000 |
|
|
|
- Allocation of impairment loss to the assets
|
As per para 104 of AASB 136, allocation of impairment loss is made to the assets is made as per following steps: |
|
1. Loss is allocated to the assets to which it belongs, if determinable |
|
2. remaining loss is then allocated to the goodwill, if available |
|
3. Rest loss is allocated to the remaining assets in the CGU, proportionately as per their carrying amount |
|
Allocation to respective assets to which loss belongs – Fizzy Drinks |
||||
|
Description |
Carrying value |
Loss Allocation |
Balance |
|
|
Land and buildings |
$ 625,000 |
$ 5,000 |
$ 620,000 |
|
|
Patent |
$ 25,000 |
$ 5,000 |
$ 20,000 |
|
|
$ 872,000 |
$ 10,000 |
$ 862,000 |
The balance impairment loss of $52,000 ($62,000-$10,000) is allocated to goodwill.
After goodwill, the remaining loss of $12,000 ($52,000-$40,000) is allocated to the remaining assets in the proportion of their carrying amount.
|
Description |
Balance |
Loss Allocation |
Balance |
|
Fixtures and fittings |
$ 20,000 |
$ 1,846 |
$ 18,154 |
|
Equipment |
$ 110,000 |
$ 10,154 |
$ 99,846 |
|
$ 130,000 |
$ 12,000 |
$ 118,000 |
The new carrying amount of assets of Fizzy Drinks is as below:
|
Description |
Old carrying value |
Impairment loss |
New carrying value |
|
Cash |
$ 18,000 |
$ – |
$ 18,000 |
|
Inventory |
$ 34,000 |
$ – |
$ 34,000 |
|
Fixtures and fittings |
$ 20,000 |
$ 1,846 |
$ 18,154 |
|
Equipment |
$ 110,000 |
$ 10,154 |
$ 99,846 |
|
Land and buildings |
$ 625,000 |
$ 5,000 |
$ 620,000 |
|
Patent |
$ 25,000 |
$ 5,000 |
$ 20,000 |
|
Goodwill |
$ 40,000 |
$ 40,000 |
$ – |
|
Total |
$ 872,000 |
$ 62,000 |
$ 810,000 |
|
Allocation to respective assets to which loss belongs – Ice Creamery |
|
|
||
|
Description |
Carrying value |
Loss Allocation |
Balance |
|
|
Land and buildings |
$ 179,000 |
$ 4,000 |
$ 175,000 |
|
|
$ 268,000 |
$ 4,000 |
$ 264,000 |
The remaining impairment loss of $4,000 ($8,000-$4,000) is allocated to goodwill.
The new carrying amount of assets of Ice Creamery is as below:
|
Description |
Old carrying value |
Impairment loss |
New carrying value |
|
Cash |
$ 14,000 |
$ – |
$ 14,000 |
|
Inventory |
$ 25,000 |
$ – |
$ 25,000 |
|
Fixtures and fittings |
$ 25,000 |
$ – |
$ 25,000 |
|
Equipment |
$ 10,000 |
$ – |
$ 10,000 |
|
Land and buildings |
$ 179,000 |
$ 4,000 |
$ 175,000 |
|
Goodwill |
$ 15,000 |
$ 4,000 |
$ 11,000 |
|
Total |
$ 268,000 |
$ 8,000 |
$ 260,000 |
|
Journal Entry as on 30 June, 2018 |
|
|
Description |
Amount |
|
Fizzy Drinks |
|
|
Impairment Loss |
$ 62,000 |
|
Fixtures and fittings |
$ (1,846) |
|
Equipment |
$ (10,154) |
|
Land and buildings |
$ (5,000) |
|
Patent |
$ (5,000) |
|
Goodwill |
$ (40,000) |
|
Ice creamery |
|
|
Impairment Loss |
$ 8,000 |
|
Land and buildings |
$ (4,000) |
|
Goodwill |
$ (4,000) |
References:
https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-15.pdf
https://www.aasb.gov.au/admin/file/content105/c9/AASB110_08-15.pdf
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
