Accounting Treatment for Various Situations - Desklib

This article explains the accounting treatment for various situations such as change in accounting estimate, errors, sudden decline in investment value, and fraudulent activity. It provides detailed journal entries and financial statements for each situation. The article is relevant for accounting students and professionals. No specific course or university is mentioned.

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
To Accumulated depreciation $
106,667
(To record depreciation for the
year, refer *)
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.
Comparativ
e figures of
FY 2016-17
shown in the
FY 2017-18
financials &
FY 2017-18
financials
Retained earnings $ 20,000
To Cash $ 20,000
(To record prior period error)
Income tax receivable $6,000
To Retained earnings $ 6,000
(To record tax impact of above
adjustment)
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,
"The company evidenced a steep
fall in the value of investment by
$350,000, due to sudden fall in
the market, resulting a potential
loss to the company”
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
To Advertising expense $
32,000
(To record recovery of amount
from previous accountant)
* 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.
1. 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
2. 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:
http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-15.pdf
http://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