Advance Financial Accounting: Case Study Analysis and Solutions

This article provides solutions to a case study on Advance Financial Accounting covering topics such as accounting estimates, change in useful life, adjustment entries, underwriting commission, deferred tax, and revaluation of assets. It includes journal entries and worksheets for tax liability and deferred tax assets and liabilities.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student:
Name of the University:
Author’s Note

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ADVANCE FINANCIAL ACCOUNTING
Table of Contents
Assignment 3...................................................................................................................................2
Question 1....................................................................................................................................2
Part 1........................................................................................................................................2
Part 2........................................................................................................................................2
Part 3........................................................................................................................................3
Part 4........................................................................................................................................3
Question 2....................................................................................................................................4
Requirement i:.........................................................................................................................4
Requirement ii.........................................................................................................................6
Question 3:...................................................................................................................................7
Requirement 1:.........................................................................................................................7
Requirement ii:........................................................................................................................9
Question 4:...................................................................................................................................9
Question 5:.................................................................................................................................11
Reference.......................................................................................................................................13

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ADVANCE FINANCIAL ACCOUNTING
Assignment 3
Question 1
Part 1
As per the case which is provided in the question, on the basis of accounting information
available to the directors of Superstore ltd, the decision of the management is to revise the useful
life of a manufacturing equipment. The equipment is to be depreciated on a straight-line basis as
per the policy of the management. Due to the change in the useful life of the equipment the same
will be treated as a change in accounting estimate of the business. As per International
Accounting Standard 8, para 36 states that any change in accounting estimate is to be considered
prospectively which means that the transaction will affect the current period and also future
period if the change relates to the same (Capkun, Collins & Jeanjean, 2016). Therefore, the
director needs to calculate the revised depreciation amount on the basis of the new useful life of
the assets and apply the change prospectively (Barbu et al., 2014). The director does not need to
make changes in the financial statements of 2016 or 2017. In the current year the directors need
to change the depreciation amount and also makes changes to balance sheet of the business as
per the revision.
Part 2
As per the case which is provided, the accountable payable officer identified that
Superstore ltd has not paid an invoice of $ 20,000 which is related to repair expenses on
equipment. The management of the company needs to make changes in the financial statements
for the year 2018. Due to the inclusion of repair expenses, the business will be getting a refund of
taxes for the year (Das, 2013). In this situation, the management of the company needs to pass
adjustment entries in order to make appropriate changes in the financial statements of the

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ADVANCE FINANCIAL ACCOUNTING
business. The journal entry which is required by the management to make necessary adjustment
are shown below:
Retained Earnings A/c……………………………Dr 14,000
Deferred Tax Assets A/c…………………………Dr 6,000
To Account Payable A/c 20,000
(Being Adjustment entry passed)
Part 3
As per the case which is provided in the question, the share prices of ABC ltd which was
held by Superstore ltd declined sharply in 2018. The share price of ABC ltd was recognized to be
$ 6,00,000 in 30th June and the same declined tremendously to $ 2,50,000 in 10th July 2018. The
management needs to make necessary changes in the financial statements in order to make the
presentation accurate. The management will be passing the following journal entry
Unrealized Holding Loss A/c……………………………Dr 3,50,000
To Shares in ABC ltd 3,50,000
(Being loss recorded)
Part 4
As per the case which is provided in question, the accountant of Superstore ltd has
wrongly recorded expenses which the accountant has used for personal purposes has been
recorded as advertisement expenses. The management of the company needs to investigate the
fraudulent activity which is undertaken by the management. The management also needs to make

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ADVANCE FINANCIAL ACCOUNTING
changes to the journal entry which is recorded in the annual report of the business. The journal
entry which is needed to be passed is shown below
Cash A/c …………………………………………………Dr $ 32,000
To Advertisement A/c $ 32,000
(Being wrong entry reversed)
Advertisement A/c ………………………………..……….Dr $ 32,000
To Max A/c $
32,000
(Adjustment Entry Passed)

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ADVANCE FINANCIAL ACCOUNTING
Question 2
Requirement i:
Date Particulars Debit Credit
31-07-2017 Bank A/c. $1,50,00,000
Share Application A/c. $1,50,00,000
(Share application money @$2.50 per share received
for 6,000,000 shares)
10-08-2017 Share Application A/c. $1,50,00,000
Share Capital A/c. $1,25,00,000
Share Allotment A/c. $25,00,000
(Share application money for 5,000,000 shares alloted
to Share Capital A/c. and balance amount adjusted to
allotment due)
Share Allotment A/c. $50,00,000
Share Capital A/c. $50,00,000
(Share allotment money @$1.00 per share due for
5,000,000 shares)
In the books of Rippa Ltd.
Journal Entries

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ADVANCE FINANCIAL ACCOUNTING
12-08-2017 Underwritting Commission A/c. $12,000
Bank A/c. $12,000
(Commission for underwritting the issue of shares duly
paid)
10-09-2017 Bank A/c. $25,00,000
Share Allotment A/c. $25,00,000
(Share allotment money, due, received)
01-02-2018 Share Call A/c. $25,00,000
Share Capital A/c. $25,00,000
(Share call money @$0.50 per share for 5,000,000 shares
due)
28-02-2018 Bank A/c. $24,80,000
Calls-in-Arrear A/c. $20,000
Share Call A/c. $25,00,000
(Due share call money received except 40,000 shares)
20-03-2018 Share Capital A/c. $1,60,000
Calls-in-Arrear A/c. $20,000
Share Forfeiture A/c. $1,40,000
(40,000 shares forfeited due to non-payment of share
call money)
Bank A/c. $1,28,000
Share Forfeiture A/c. $32,000
Share Capital A/c. $1,60,000
(40,000 forfeited shares re-issued @$3.20 per share)
Share Re-Issuing Cost A/c. $4,000
Bank A/c. $4,000
(Cost of re-issuing the forfeited shares paid)
25-03-2018 Share Forfeiture A/c. $1,08,000
Share Re-Issuing Cost A/c. $4,000
Bank A/c. $1,04,000
(Balance amount of share forfeiture a/c., after
adjusting the share re-issuance cost, returned to
former shareholders)

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ADVANCE FINANCIAL ACCOUNTING
Requirement ii
As per the case, one of the shareholders of Rippa Ltd whose shares was forfeited due to
non-payment of call money has received lesser amount for the shares held instead of $ 3.50
which is made up of application and allotment money. The management has incurred expenses
which is related to issue of forfeited shares and cost of forfeiture which is undertaken by the
management. The company has to incur such expenses due to the fault of the shareholder and
therefore such cost is also transferred to the shareholder as it is reduced from the share money
which is to be refunded to the shareholder. The management had to sell the forfeited shares at $
3.20 per share for the share which originally was valued at $ 4 per share. In addition to this, the
management also incurs $ 4,000 on reissue of shares which is the main reason the money
refunded to the shareholders are lower than what the shareholder originally paid for the share.

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ADVANCE FINANCIAL ACCOUNTING
Question 3:
Requirement 1:
Particulars Amount Amount
Accounting profit before tax $5,55,800
Add:
Doubtful Debt Expense $34,000
Entertainment $4,500
Annual Leave $25,000
Warranty Expense $18,500
Depreciation on Equipment for accounting
purpose
$70,000
Depreciation on Motor Vehicle for accounting
purpose
$30,000
Insurance $18,000 $2,00,000
$7,55,800
Less:
Government Grant $50,000
Bad debt expense $2,000
Annual Leave Paid $4,000
Insurance Paid $25,000
Warranty Expense Paid $2,000
Depreciation on Equipment for Tax purpose $1,00,000
Depreciation on Motor Vehicle for Tax Purpose $20,000 $2,03,000
Taxable income $5,52,800
Tax on taxable income @30% $1,65,840
Less: 30% Tax paid on Sales Revenue $6,45,000
Income Tax Refundable ($4,79,160)
Worksheet for Curret Tax Liability/(Refundable):

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ADVANCE FINANCIAL ACCOUNTING
Particulars Carrying Amount Tax Base Taxable
Temp’y Diffs
Deductible
Temp’y Diffs
$ $ $ $
Assets
Cash $40,000 $40,000
Accounts Receivables $2,50,000 $2,50,000
Allowance for Doubtful Debts ($32,000) $0 $32,000
Inventories $1,62,900 $1,62,900
Prepaid Insurance $7,000 $7,000
Motor Vehicles $1,20,000 $1,20,000
Accumulated Depreciation ($30,000) ($20,000) $10,000
Equipment $7,00,000 $7,00,000
Accumulated Depreciation ($70,000) ($1,00,000) ($30,000)
Liabilities
Accounts Payables $54,600 $54,600
Provision for Warranties $16,500 $16,500
Provision for Annual Leave $21,000 $21,000
Loan Payable $2,00,000 $2,00,000
Total Temporary differences $7,000 $49,500
Deferred tax liability (30%) $2,100
Deferred tax asset (30%) $14,850
Deferred Tax Worksheet:

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ADVANCE FINANCIAL ACCOUNTING
Requirement ii:
Dr. Cr.
Date Particulars Amount Amount
30-06-2018 Income Tax Expense A/c. $1,65,840
Income Tax Refundable A/c. $4,79,160
Advance Tax Paid A/c. $6,45,000
(Income tax expenses adjusterd with advance tax
paid and income tax refundable recorded)
Deferred Tax Assets A/c. $14,850
Deferred Tax Liability A/c. $2,100
Income Tax Expense A/c. $12,750
(Deferred tax assets and deferred tax liabilities
recorded)
Profit & loss A/c. $1,63,740
Income Tax Expense A/c. $1,63,740
(Income tax expense transferred to P/L A/c.)
Question 4:
Dr. Cr
Date Particulars Amount Amount
30-06-2017 Depreciation Expense A/c. $16,500
Accum. Dep. - Equipment 1 A/c. $12,500
Accum. Dep. - Equipment 2 A/c. $4,000
(Depreciation charged on equipment 1 and equipment 2)
Accum. Dep. - Equipment 1 A/c. $12,500
Gain on Revaluation A/c. $7,500
Equipment 1 A/c. $5,000
(Equipment 1 revalued at fair value and gain on
revaluation recorded)
Journal Entries
In the books of Superstar Ltd.

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ADVANCE FINANCIAL ACCOUNTING
Accum. Dep. - Equipment 2 A/c. $4,000
Gain on Revaluation A/c. $2,000
Equipment 2 A/c. $2,000
(Equipment 2 revalued at fair value and gain on
revaluation recorded)
Gain on Revaluation A/c. $9,500
Asset Revaluation Reserve A/c. $9,500
(Gain on revaluation transferred to asset revaluation
reserve)
Deferred Tax Assets A/c. $3,450
Income Tax Expense A/c. $3,450
(Deferred tax recorded for the asset revaluation)
31-12-2017 Depreciation Expense A/c. $2,000
Accum. Dep. - Equipment 2 A/c. $2,000
(Depreciation charged on Equipment 2)
Bank A/c. $13,000
Accum. Dep. - Equipment 2 A/c. $2,000
Loss on Sale of Assets A/c. $3,000
Equipment 2 A/c. $18,000
(Equipment 2 sold at loss)
30-06-2018 Depreciation Expense A/c. $15,000
Accum. Dep. - Equipment 1 A/c. $15,000
(Depreciation charged on equipment 1)
Accum. Dep. - Equipment 1 A/c. $15,000
Gain on Revaluation A/c. $4,000
Equipment 1 A/c. $11,000
(Equipment 1 revalued at fair value and gain on
revaluation recorded)
Deferred Tax Assets A/c. $1,200
Income Tax Expense A/c. $1,200
(Deferred tax recorded for the asset revaluation)
Gain on Revaluation A/c. $4,000
Asset Revaluation Reserve A/c. $4,000
(Gain on revaluation transferred to asset revaluation
reserve)

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ADVANCE FINANCIAL ACCOUNTING
Year
Opening
Balance
Estimated
Life (in years)
Residual
Value
Depreciation
p.a.
Closing
Value Fair Value
Revaluation
Gain/(Loss)
Deferred Tax
Assets/
(Liabilities)
A B C D=(A-C)/B E=A-D F G=F-E H=Gx30%
30-06-2017 $60,000 4 $10,000 $12,500 $47,500 $55,000 $7,500 $2,250
30-06-2018 $55,000 3 $10,000 $15,000 $40,000 $44,000 $4,000 $1,200
30-06-2017 $20,000 4 $4,000 $4,000 $16,000 $18,000 $2,000 $600
31-12-2017 $18,000 3 $6,000 $2,000 $16,000 $13,000 ($3,000)
Equipment 1:
Equipment 2:
Computation of Revaluation Gain/(Loss) & Deferred Tax:
Question 5:
Dr. Cr.
Date Particulars Amount Amount
30-06-2018 Impairment Loss A/c. $70,000
Goodwill A/c. $48,000
Patent A/c. $5,000
Land & Buildings A/c. $5,000
Fixture & Fittings A/c. $1,846
Equipment A/c. $10,154
(Being assets under the specific cash generating
unit impaired)
Profit & Loss A/c. $70,000
$70,000
(Being impairment loss transferred to P/L A/c.)
In the books of Foodie Ltd.
Journal Entries

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ADVANCE FINANCIAL ACCOUNTING
Particulars Fizzy Drinks Ice Creamery
Fair Value,less, Cost to Sell $7,50,000 $2,60,000
Value in Use $8,10,000 $2,40,000
Recoverable Amount $8,10,000 $2,60,000
(Higher of Fair Value & Value in use)
Less: Carrying Amount of CGU $8,72,000 $2,68,000
Total Impairment Gain/(Loss) ($62,000) ($8,000)
Calculation of Impairment Loss:
Particulars
Carrying
Amount Fair Value
Impairment
Loss
Carrying
Amount Fair Value
Impairment
Loss TOTAL
Total Impairment Loss $62,000 $8,000 $0
Less:
Goodwill $40,000 $0 $40,000 $15,000 $7,000 $8,000 $48,000
Patent $25,000 $20,000 $5,000 $32,000 $5,000
Land & Buildings $6,25,000 $6,20,000 $5,000 $6,00,000 $5,000
Balance Impairment Loss $12,000 $0
Particulars
Carrying
Amount
Net Carrying
Amount Weightage
Impairment
Loss
Balance Impairment Loss $12,000
Fixture & Fittings $25,000
Less: Accum. Depreciation ($5,000) $20,000 15% $1,846
Equipment $1,65,000
Less: Accum. Depreciation ($55,000) $1,10,000 85% $10,154
Total $1,30,000 $1,30,000 100% $12,000
Impairment Loss Allocation as per Weightage:
Allocation of Specified Impairment Loss:
Fizzy Drinks Ice Creamery

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Reference
Barbu, E. M., Dumontier, P., Feleagă, N., & Feleagă, L. (2014). Mandatory environmental
disclosures by companies complying with IASs/IFRSs: The cases of France, Germany,
and the UK. The International Journal of Accounting, 49(2), 231-247.
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on earnings
management (smoothing): A closer look at competing explanations. Journal of
Accounting and Public Policy, 35(4), 352-394.
Das, S. C. (2013). Business accounting and financial management. PHI Learning Pvt. Ltd..