Financial Accounting: Provisions, Contingent Liabilities, and Contingent Assets

This document discusses the appropriate accounting treatment for provisions, contingent liabilities, and contingent assets in financial accounting. It also provides examples of note disclosures and journal entries for financial statements. The document covers topics such as Australian Accounting Standard 137, provisions, contingent liabilities, and more.

Financial accounting

Table of Contents
Question 1........................................................................................................................................3
i) Appropriate Accounting treatment...........................................................................................3
ii) Note Disclosures and Journal Entries for the financial statement ended on 2018 in each
situation........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................6
Question 4........................................................................................................................................7
Question 5........................................................................................................................................9
References......................................................................................................................................11

QUESTION 1
i) Appropriate Accounting treatment
Australian Accounting Standard 137 is related to Provisions, Contingent Liabilities, and
Contingent Asset. The main objective of this asset is to recognize and measure the provisions,
Contingent Assets, and Contingent Liabilities. It also states that adequate information should be
disclosed; by which user get the knowledge about timing, nature, and amount (Adhariani, Sciulli,
& Clift, 2017). Provisions are the liabilities which does not have certainty regarding the amount
and time. On the other hand, contingent liabilities are the possible obligation which depends on
the happening or non-happening of any event. Therefore it is not recognized in the books
(Hudson, 2016).
ii) Note Disclosures and Journal Entries for the financial statement ended in 2018 in each
situation
Table 1: Journal of Super Store Limited
Date Particulars Debit Credit
Situation
1
30/6/20
18 Warranty Expense Dr.
$
34,400.00
To Provision of Warranty Related
Liability
$
34,400.00
(Being Provision for Warranty at the rate
of 8%)
Situation
2 Bad Debt Dr.
$
380,000.00
Provision for Bad & Doubtful Debts Dr
$
40,000.00
To Debtors
$
420,000.00

(Being Amount recognized as Bad Debt
for the Debtors bankrupted)
Situation
3
No entry is required to be passed in this
case.
Situation
4 Repairs Dr.
$
21,000.00
To Trailer (Equipment)
$
21,000.00
$
475,400.00
$
454,400.00
The company should disclose, for every class of provision the following amount –
 The carrying amount of provision at the starting of the year (Jeyaretnam, 2017).
 Any enhancement in current provision and any additional provision made during the
year.
 Any amount charged against the provision (Tran, 2015).
QUESTION 2
Table 2 Journal of Funland Limited
Date Particulars Debit Credit
3/31/2019 Bank Dr. $ 10,400,000.00
To Preference Share Application $ 1,600,000.00
To Equity Share Application $ 8,800,000.00
(being amount received on 800000
Preference Shares at the rate of
2/Share)
4/15/2019 Preference Share Application Dr. $ 1,600,000.00
To Preference Share Paid-up Capital $ 1,600,000.00
(being Preference Share Capital
raised of $1600000)

4/15/2019 Equity Share Application Dr. $ 8,000,000.00
To Equity Share Paid-up Capital $ 8,000,000.00
(Being Equity Share Capital Raised)
5/15/2019 Bank Dr. $ 2,200,000.00
To Equity Share Allotment $ 2,200,000.00
(Being Amount Received at the
time of Allotment)
5/15/2019 Equity Share Allotment Dr. $ 2,200,000.00
Equity Share Application Dr. $ 800,000.00
To Equity Share Paid-up Capital $ 3,000,000.00
(Being Equity Share Capital Raised)
9/1/2019 Bank Dr. $ 980,000.00
Calls in Arrear Dr. $ 20,000.00
To Equity Share on Call $ 1,000,000.00
(Being amount received at the time
of Call)
9/1/2019 Equity Share on Call Dr. $ 1,000,000.00
To Equity Share Capital $ 1,000,000.00
(Being Equity Share Capital Raised)
9/15/2019 Equity Share Capital Dr. $ 240,000.00
To Share Forfeiture $ 220,000.00
To Calls in Arrears $ 20,000.00
(Being 40000 Shares of $6 forfeited
for non-payment of Call $0.5 per
Share)
9/15/2019 Bank Dr. $ 224,000.00
Share Forfeiture Dr. $ 16,000.00
To Equity Share Capital $ 240,000.00
(Being 400000 Shares of $ 6.00
Reissued at $ 5.6 per share fully
paid up)
9/15/2019 Share Forfeiture Dr. $ 7,000.00
To Bank $ 7,000.00

(Being Expenditure incurred on
Share forfeiture paid)
9/15/2019 Share Forfeiture Dr. $ 197,000.00
To Capital Reserve $ 197,000.00
(Being Balance in the Share
Forfeiture Account transferred to
Capital Reserve Account)
$ 27,884,000.00 $ 27,884,000.00
Working Notes
Table 3 Statement of allotment
Particulars Amount
Equity Shares Offered 2000000 Shares
Equity Shares Applied 2200000 Shares
Basis for Allotment
Pro Rata Basis that is 10 Shares for 11
Applied
Amount Received at the time of Application $ 8,800,000.00
Amount adjusted at the Time of Application $ 8,000,000.00
Excess Money Received at the time of
Application $ 800,000.00
Amount to be received at the time of Allotment $ 2,200,000.00
QUESTION 3
Table 4 Statement of DTA/DTL
Particulars For Book For Tax Difference DTA/DTL
Profit 714000 714000
Add/Less Timing differences
Impairment Loss Goodwill 0 14000 14000 DTA
Entertainment Expenses 0 3500 3500 DTA
Doubtful debt 0 22800 22800 DTA
Interest Revenue 0 11000 11000 DTA

Annual Leave 0 13200 13200 DTA
Warranty 0 37400 37400 DTA
Insurance 0 23000 23000 DTA
Depreciation for plant 146250 195000 48750 DTL
Depreciation for motor vehicle 0 46875 46875 DTL
567750 597025 29275 DTA
Table 5 Statement of Journal Entry
Profit and Loss A/c Dr. 179107.5
To Taxation 179107.5
DTA A/c Dr. 8782.5
To Profit and Loss A/c 8782.5
Working Notes
Current Tax Liability = 597025*30% = 179107.5
Deferred Tax Asset = 29275*30% = 8782.5
QUESTION 4
Table 6 Journal of Firefly Limited
Date Particulars Debit Credit
7/1/2016 Equipment Dr. $ 800,000.00
To Bank $ 800,000.00
(Being Equipment acquired at the
Cost of $800000)
6/30/2017 Depreciation Dr. $ 152,000.00
To Equipment $ 152,000.00
(Being Equipment depreciated by
Straight Line Method)

6/30/2017 Revenue Dr. $ 152,000.00
To Depreciation $ 152,000.00
(Being Depreciation transferred to
Revenue Account)
7/1/2017 Loss on Revaluation Dr. $ 38,000.00
To Equipment $ 38,000.00
(Being Asset revalued at $610000)
6/30/2018 Depreciation Dr. $ 34,666.67
To Equipment $ 34,666.67
(Being Equipment depreciated by
Straight Line Method)
6/30/2018 Revenue Dr. $ 34,666.67
To Depreciation $ 34,666.67
(Being Depreciation transferred to
Revenue Account)
6/30/2019 Depreciation Dr. $ 93,333.33
To Equipment $ 93,333.33
(Being Equipment depreciated by
Straight Line Method)
6/30/2019 Equipment Dr. $ 68,000.00
To Revaluation Reserve $ 68,000.00
(Being Equipment revalued at
$550000)
12/31/2019 Depreciation Dr. $ 86,666.67
To Equipment $ 86,666.67
(Being Depreciation till the date of
Disposal of Equipment)
12/31/2019 Equipment Dr. $ 463,333.33
Revaluation Reserve Dr. $ 68,000.00
To Bank $ 490,000.00
To Revenue Account $ 41,333.33
$ 1,990,666.66 $ 1,990,666.66

QUESTION 5
Impairment Loss on 30 June 2018
Table 7 Statement Showing calculation of impairment loss
Asset carried at book value 1446000
Less Recoverable amount 1360000
Impairment Loss 86000
*As per the accounting standard, the recoverable amount is the higher of value in use or fair
value less cost.
Table 8 Statement Showing apportionment of impairment loss to the assets in the cash-
generating unit
Impairment loss 86000
Less goodwill 30000
Less Patent 5000
Less Land 30000
21000
Loss of 21000 should be allocated to Plant and Machinery.
Journal Entries for the impairment loss for the year 30 June 2018
Particulars Amount Amount
Impairment loss Dr. 86000
To Goodwill 30000
To Accumulated Losses for
amortization and Impairment
(Patent) 5000
To Accumulated Losses for
amortization and Impairment
(Land) 30000

To Accumulated Losses for
amortization and Impairment
(Plant and machinery) 21000
Profit and Loss Account A/c Dr. 86000
To Impairment loss 86000
Journal Entries for the impairment loss for the year 30 June 2019
Table 9 Journal Entry
Goodwill A/c Dr. 30000
To Profit and Loss A/c 30000

REFERENCES
Adhariani, D., Sciulli, N., & Clift, R. (2017). Quantitative Optimisation Model, Results and
Discussion. In Financial Management and Corporate Governance from the Feminist Ethics
of Care Perspective (pp. 209-284). Palgrave Macmillan, Cham.
Hudson, M. (2016). No setting off unfair preferences. Australian Restructuring Insolvency &
Turnaround Association Journal, 28(3), 34.
Jeyaretnam, T. (2017). Emerging risk: Mine closure and rehabilitation. AusIMM Bulletin, (Dec
2017), 24(1). 25-26
Tran, A. (2015). Can taxable income be estimated from financial reports of listed companies in
Australia. Austl. Tax F., 30(1), 569.