Topic 5 Tutorial Activities Solutions PDF

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16.11 AASB 108, paragraph 5, defines ‘accounting policies’ as: the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Only Scenario 2 represents a change in accounting policy. In Scenario 1 the company is making a change in accounting estimate (an estimate of what percentage of debts will be bad). In Scenario 2 the company changed its accounting policy in terms of how it assigns costs to inventory. Where there has been a change in accounting policy, paragraph 29 of AASB 108 requires: When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose: (a)

the nature of the change in accounting policy;

(b)

the reasons why applying the new accounting policy provides reliable and more relevant information;

(c)

for the current period and each prior period presented, to the extent practicable, the amount of the adjustment: (i)

for each financial statement line item affected; and

(ii) if AASB 133 applies to the entity, for basic and diluted earnings per share; (d)

the amount of the adjustment relating to periods before those presented, to the extent practicable; and

(e)

if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Financial statements of subsequent periods need not repeat these disclosures. AASB 108 requires all significant changes in accounting policies to be disclosed in the summary of significant accounting policies.

16.13 (a)

Journal entry at 30 June 2019 At the beginning of the current reporting period the carrying amount of the asset was $1 280 000 (which is $2 million x 16/25—that is, at the beginning of the year the asset would have been depreciated for nine years of the expected life of 25 years). Based on the revised useful life of the asset, the remaining useful life is six years from the beginning of the financial period and not 16 years. The carrying amount of $1 280 000 is to be depreciated over a six-year period so that the remaining depreciation is charged over the useful life of the asset.

(b)

Dr

Depreciation

Cr

Accumulated depreciation—buildings

213 333 213 333

Supporting note—change in accounting estimate 2019

2018

($)

($)

80 000

80 000

Profit before tax has been arrived at after taking into account: Depreciation Original Change in accounting estimate

133 333

–

213 333

80 000

As a result of the revision during the year of the remaining estimated useful life of a building from 16 to 6 years the depreciation charge will increase by $133 333 for the following 6 years. 16.20 Wedding Cake Island Limited Abridged statement of comprehensive income for the year ended 30 June 2019

2019 ($)

2018 ($)

19 000

20 600

5700

6180

13 300

14 420

Share capital 3000

Retained earnings 3040

Total 6040

–

14 420

14 420

(4000)

(4000)

3000

13 460

16 460

Profit for the year

–

13 300

13 300

Distributions

–

(4000)

(4000)

3000

22 760

25 760

Profit before tax Income tax expense Profit for the year Wedding Cake Island Limited Statement of changes in equity for the year ended 30 June 2019 Balance at 30 June 2017 Profit for the year as restated Distributions Balance at 30 June 2018

Balance at 30 June 2019 Notes to the financial statements

Note 2 Prior period error An amount incurred for electricity was omitted during preparation of 2018 financial statements. The 2018 figures have been restated to take into account the omission. The effect of the restatement on those financial statements is summarised below. There is no effect on 2019 results.

Effect on 2018 (Increase) in expenses

(3000)

Decrease in income tax expense

900

(Decrease) in profit

(2100)

Increase in accounts payable

(3000)

Decrease in tax payable

900

(Decrease) in equity

(2100)

16.21 It should be noted that although not provided in the solution to this question (due to insufficient data), prior year comparatives would be required to be disclosed. Fergie Limited Statement of profit or loss and other comprehensive income for the financial year ended 30 June 2019 Note 2019 Sales revenue 1 600 000 Cost of goods sold

(550 000)

Gross profit

1 050 000

Other income—interest revenue

200 000

Administrative expenses

(240 000)

Borrowing costs Other expenses Profit before income tax Income tax expense Profit for the year

(25 000) 2

(175 000) 810 000 (150 000) 660 000

Other comprehensive income Gain on property revaluation Expense recognised directly in equity as a result of applying new accounting standard

80 000 (50 000)

Other comprehensive income for the year

30 000

Total comprehensive income for the year

690 000

Fergie Limited Statement of changes in equity for the year ended 31 December 2019 Balance at 30 June 2018

Share Revaluation capital surplus ($) ($) 510 000

–

–

80 000

Retained earnings ($)

Total ($)

1 950 000 2 460 000

Changes in equity for 2019 Total comprehensive income for the year Distributions to shareholders

610 000

690 000

(200 000) (200 000) 510 000

80 000

2 360 000 2 950 000

Notes to the financial statements Note 2: Profit for the period Profit for the period has been derived after charging the following items (net of tax): Damage occurring to property, plant and equipment as a result of space junk re-entering atmosphere (before tax amount $65 000; related tax $21 450) Expense pertaining to the insolvency of a customer (before tax amount $110 000; related tax $36 300)

$43 550 $73 700 $117 250...