Accounting: Provision, Change in Accounting Estimate, Income Taxes, Fixed Assets

ACCOUNTING 1
ACCOUNTING

ACCOUNTING 2
Contents
Answer 1:...................................................................................................................................3
Part 1:......................................................................................................................................3
Part 2:......................................................................................................................................4
Part 3:......................................................................................................................................4
Part 4:......................................................................................................................................5
Answer 2:...................................................................................................................................6
Answer 3:.................................................................................................................................16
Answer 4:.................................................................................................................................22
Answer 5:.................................................................................................................................26
References:...............................................................................................................................30

ACCOUNTING 3
Answer 1:
Part 1:
A provision is something which is considered to be liability of an uncertain timing or an
uncertain amount.
For the purposes of recognising a provision, the company must have some present obligation
which is the result of any past event for the company, the payment of which is very much
likely or possible and the amount is capable of being measured with reliability. An obligating
event is an event wherein there is a creation of some legal or some constructive obligation
and hence, the company would have no realistic obligation for the purposes of settling in the
obligation.
There is a constructive obligation which helps in the creation of a valid expression on behalf
of the third party. There is some possible obligation that there could be a contingent liability
but the same is not accrued. Any sort of disclosure in such a case is not required in the
financial statements.
The amount which is recognised in the financial statements as provision must be the best
estimate of the amount of the expense which is required for the purposes of settling in the
present obligation as on the date of the balance sheet. This is the amount which is required for
the purposes of settling the amount that the company owes to any third party. The amount to
be recognised as provision in the books of accounts shall be based upon the past experience
of the management or their judgment (IAS plus, 2019).
In the given case, the company has an experience that there would be a warranty expense for
it due to the sales. Hence, the company would record the following journal entry for the
same:

ACCOUNTING 4
Warranty expense Dr (430,000*8%)
To Provision for warranty (430,000*8%)
In respect of the disclosures, the company will have to report the above amount in its notes to
financial statements.
Part 2:
Whenever there is a change in an accounting estimate, then there has to be a prospective
recognition of that effect. This is the change has to be applied on to each and every
transaction and condition from the date on which the change in the estimate takes place. Any
amount of extra profit or loss derived from it, would be transferred to the profit and loss
statement and would be charged as either profit or loss. In order to illustrate, any change in
the estimation of the bad debt would affect the profit or loss of the current period and hence,
would be recorded in the current period only. The amount shall be charged in the statement of
profit or loss of the current year. Any change which takes place in the estimated useful life of
the asset or any change in the expected pattern of the consumption of the economic benefits
of the future would affect the expense of deprecation in that asset. And this would affect the
useful life of the asset. In both of the above cases, the changes would relate with the current
period and would be recognised as an income or an expense in the current period (AASB,
2019).
In the given case, there is a change in the % of the provision for the doubtful debts which
means that the earlier provision will have to be increased in the current period. Hence, the
relevant disclosure in such a case would be the increase in the amount of the provision and
the relevant journal entry is as follows:
Bad debt expense Dr 380,000
To Accounts receivables 380,000

ACCOUNTING 5
Part 3:
An expense pertaining with the income taxes would be recognised in the financial statements
on the basis of the best estimate of the weighted average annual income tax for the entire
year. The amounts that are accrued for the expense of the income tax will have to be adjusted
in each year on the basis of the income earned in each year (AASB, 2019).
Hence, in the given case, there shall be as such no disclosure of the change in the tax rate but
the change in the amount of the provision of the income tax would be reported in the notes to
the financial statements. The following journal entry will have to be passed:
Profit and loss Dr
To Provision for income tax
Part 4:
Any amount which is incurred towards the fixed asset of the company would either be
classified as an operating expense or as a capital expense. The classification would depend
upon each case. In case, the amount incurred is not capable of improving the economic
benefits that flow into the entity and would merely keep the asset flowing, then such expense
would be charged as in the profit or loss statement of the current year. And in case, the
expense is capable of improving the economic benefits that flow into the entity, then that
expense will have to be capitalised or be added in the value of the asset (AASB, 2019).
Hence, in the given case, the invoice of $22,000 will have to deducted from the value of the
assets held by the company and be charged to the profit and loss account of the company of
the current year. Any amount of depreciation charged on this $22,000 will be rolled back and
the relevant income tax returns will have to be revised.
The disclosures would include the fact of charging of $22,000 to the profit and loss account
and the following would be the relevant journal entry:

ACCOUNTING 6
Repairs expense Dr 22,000
To Trailer 22,000
Income tax receivable Dr 6,300
To Income tax 6,300
Accumulated depreciation Dr 1,000
To Depreciation expense 1,000
Any amount of depreciation charged would be reversed and the refund which is receivable in
respect of the income taxes would recorded in the financial statements and also be disclosed
in the notes to the financial statements.
Answer 2:
The following are the relevant calculations:
Date
31-Mar-19 Bank A/c
D
r.
1
6,
00
,0
00
To Preference Share Application A/c
Cr
.
16,
00,
000
(Being share application money received