Financial Accounting Solutions for Disclosure, Shares, Taxes, Revaluation and Impairment

This article provides solutions for various financial accounting topics such as disclosure in financial statements, accounting in case of issues of shares, accounting of taxes, revaluation of property, plant and equipment, and impairment of assets. It includes journal entries and reporting requirements as per IAS. The content is relevant for students pursuing financial accounting courses in colleges and universities.

Financial Accounting
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Contents
SOLUTION 1:- DISCLOSURE IN THE FINANCIAL STATEMENTS................................................................3
SOLUTION 2:- ACCOUNTING IN CASE OF ISSUES OF SHARES.................................................................5
SOLUTION 3:- ACCOUNTING OF TAXES..................................................................................................7
SOLUTION 4:- REVALUATION OF PROPERTY, PLANT AND EQUIPMENT.................................................8
SOLUTION 5:- IMPAIRMENT OF ASSETS...............................................................................................11
REFERENCES:.......................................................................................................................................13
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SOLUTION 1:- DISCLOSURE IN THE FINANCIAL
STATEMENTS
i) How to account for the revision in useful terms of an asset: The IAS 16 deals with
the accounting of property, plant and equipments. According to this IAS, no
separate accounting treatment is done. The revised useful life is taken into
consideration for the calculation of depreciation. Also, there is no need to amend
the financial statements of previous years.
Accounting treatment is as follows:
Cost of Purchase as on 1 July 2015 $ 800000
Estimated useful Life 10 Year
Residual Value Nil
Revision in useful life
Remaining useful life as on 1 July 2017 6 Years
Residual Value Nil
Amount of Depreciation already
charged
$ 800000 / 10 = $ 80000 per annum
i.e. $ 80000*2 = $ 160000 depreciation charged in last two years
Depreciation to be booked from the year 2018 onwards
800000
(WDV as on 1 July 2017)/ Remaining useful Life 160000
640000
i.e. ($ 800000 - $ 160000) / 6 = $ 1,06,667 per annum 106666.667
Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2018
Depreciation Dr. 1,06,667
Equipment Cr. 1,06,667
(Being Depreciation booked
with the revised useful life)
Reporting:
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As per IAS 18, where estimated life of the asset is revised it results in the
accounting estimates has been changed. Thus, any accounting estimates which has
been revised or changed and impact of such revision should be disclosed
separately in the financial statements of an organization.
ii) Treatment of the Prior Period Items: In the present case, in the year 2018, it is
noticed that an invoice of repair was not booked in earlier year and due to this, tax
deducted could not be claimed. These types of mistakes are called as prior period
items.
As per IAS 8, prior period items should be recorded in the books of accounts of
the year in which they would have actually been occurred. In other words,
previous year figures are reinstated with the corresponding changes of these items
(Deloitte, n.d.).
Journal Entries of the transaction will be made as under:
Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2017
Repair Expense Dr. 20,000
Accounts Payable Cr. 20,000
(Being repair expense booked
as prior period item)
2 30-066-
2017
Tax Receivable Dr. 6,000
Provision for Tax Cr. 6,000
(Being tax liability reduced on
repair amount)
2 12-07-
2018
Accounts Payable Dr. 20,000
Bank Cr. 20,000
(Being repair expense paid)
Reporting:
IAS 8 also provides the disclosure of the prior period items in the financial
statements separately. Company should disclose the effects of repair expenses in
the year 2017 and also disclose the impact thereof in the financial statements.
iii) Impact of revision in investment: In instant case, value in market for investments
made in ABC Ltd. is $ 600000 as on 30 June 2018. But, as on July 2018 major fall
in the share market notices and the market value of the investment go down to $
250000.
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IAS 39 deals with the ‘Financial Instruments’. It describes that financial
instruments should be recognized at market value on reporting date.
IAS 10 deals with the ‘Events after reporting periods’. It describes the recording
of those transactions in the books of the company, any conditions thereof are
exists on reporting date. If, no such condition exists on that date, these
transactions should be reported separately in the books of the company (Deloitte,
n.d.).
In present case, as on reporting date there was no condition exists for the major
fall in the share market. As such, company should record the investment in shares
of ABC Ltd. at fair market value of $ 600000 and it should report the major fall in
the notes to accounts.
iv) Accounting of fraudulent cases: In the given case, person expenditure of
accountant has been booked as advertisement expenses on 20 April 2018. This
case of fraud has been noticed on 21 July 2018.
IAS 8 will be applicable in this case because IAS 8 includes the accounting
treatment of prior period events. Prior period events mean any omission and
misstatement in the financial statement of the earlier years. IAS 8 describes that
such errors should be recognized in the year in which they would have been
recorded (Deloitte, n.d.).
In the present case, fraud will be accounted for according to the IAS 8 and
financial statement of the year 2018 needs to be amended accordingly. Disclosure
thereof requires to be reported in the financial statements.
SOLUTION 2:- ACCOUNTING IN CASE OF ISSUES OF
SHARES
i) Accounting in the books of Rippa Ltd. for the issue of shares shall be as under:
Journal Entries
Sr. No. Date Entries Amount ($)
1 10-08-
2017
Bank Dr.
1,25,00,00
0
Share Application Account Cr.
1,25,00,00
0
(Being share application amount
recorded)
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2 10-08-
2017
Share Application Account Dr.
1,25,00,00
0
Share Capital Account Cr.
1,25,00,00
0
(Being share application recognized as
capital)
3 10-08-
2017
Share Allotment Account Dr. 50,00,000
Share Capital Account Cr. 50,00,000
(Being share allotment due)
4 12-08-
2017
Underwriting Commission Dr. 12,000
Bank Cr. 12,000
(being Underwriting commission paid)
5 10-09-
2017
Bank Dr. 50,00,000
Share Allotment Account Cr. 50,00,000
(Being amount due on allotment
received)
6 01-02-
2018
Share Call Dr. 25,00,000
Share Capital Account Cr. 25,00,000
(Being amount due on call)
7 28-02-
2018
Bank Dr. 24,80,000
Share Call Cr. 24,80,000
(Being share call money received)
8 20-03-
2018
Share Capital Dr. 1,60,000
Share Forfeited Cr. 1,40,000
Share Call Cr. 20,000
(Being share forfeited)
9 20-03-
2018
Bank Dr. 1,28,000
Share Forfeited Dr. 32,000
Share Capital Cr. 1,60,000
(Being share
reissued)
10 20-03-
2018
Expenditure on Issue of Shares Dr. 4,000
Bank Cr. 4,000
(Being expenditure on reissue of
share)
11 25-03-
2018
Share Capital Dr. 32,000
Share Forfeited Cr. 32,000
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(Being share forfeited balance returned
to shareholder)
ii) Refund of Forfeiture Share Account: The Company had forfeited the shares of the
shareholders, who did not pay the calls money within the due date. All these
happen as per agreements between the company and shareholders. In the instant
case, share was forfeited at $ 3.5 per share. But share refunded at $ 2.7 per share
($ 108000/40000). Difference of $ 0.8 per share amounting to $ 32,000 has not
been paid. Reason thereof is that due to default made by the former shareholders
new share were issued at only $ 3.2 per share. If the default is not made the
company would be receiving the amount at the rate of $ 4 per share. As such, this
loss to company will not be borne by it and company had paid to the former
shareholder at $ 3.2 per instead of $ 3.5 per share.
SOLUTION 3:- ACCOUNTING OF TAXES
i) Calculation of current tax liability and deferred tax assets:
1 Calculation of current tax liabilities
Amount ($)
Accounting profit before tax 555800
Less: Government Grant (not taxable) 50000
Add: Entertainment Expenses 4500
Current taxable accounting profit 510300
Tax rate is 30%
Current Tax Liability ($ 510300 * 30%) 153090
2 Calculation of Deferred tax liability
Current Accounting profit 510300
Add: Depreciation (Equipment) debited to Profit & Loss Account 70000
Add: Depreciation (Vehicle) debited to Profit & Loss Account 30000
Add: Doubtful Debts not written off 34000
Add: Annual leave not paid 25000
Add: Warranty not paid 18500
Less: Annual Leave actually paid ($ 25000 - $ 21000) 4000
Less: Warranty actually paid ($ 18500 - $ 16500) 2000
Less: Prepaid insurance 7000
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Less: Bad debt actually written off ($ 34000 - $ 32000) 2000
Less: Depreciation (Equipment) ($ 700000 / 7) 100000
Less: Depreciation (Vehicle) ($ 120000 / 6) 20000
Taxable income 552800
Tax Rate 30%
Tax liability ($ 552800 * 30%) 165840
Taxable income is greater than the accounting profit thus in this case deferred tax assets
would arise (Michael, 2017):
Accounting Profit $ 510300
Taxable Income $ 552800
$ 42500
Tax Rate 30%
Deferred Tax Assets ($ 42500 * 30%) $ 12750
ii) Journal entries of Deferred tax assets would be as follows:
Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2018
Deferred Tax Assets Dr. 12,750
Deferred Tax Expenses Cr. 12,750
(Being Deferred tax assets
booked)
SOLUTION 4:- REVALUATION OF PROPERTY, PLANT AND
EQUIPMENT
i) Equipment 1
Year 2016
Amoun
t ($)
Carrying amount in the year
2016 60000
Revalued 70000
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amount
Less:
Depreciation on revalued
amount 15000
Carrying amount for the year
2017 55000
Year 2017
Carrying amount for the year
2017 55000
Revalued
amount 55000
Less:
Depreciation on revalued
amount 15000
Carrying amount for the year
2018 40000
Year 2018
Carrying amount for the year
2018 40000
Revalued
amount 44000
Less:
Depreciation on revalued
amount** 17000
Carrying amount for the year
2018 27000
**
Depreciation on revalued
amount
Revalued
amount 44000
Remaining
useful life 2
Residual value 10000
Depreciation [(44000-10000)/2] 17000
Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2016
Equipment Dr 10,000
Revaluation Reserve Cr. 10,000
(Being revaluation considered)
2 30-06- Depreciation Dr. 15,000
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2016
Equipment Cr. 15,000
(Being Depreciation charged on
equipment)
3 30-06-
2017
Depreciation Dr. 15,000
Equipment Cr. 15,000
(Being Depreciation charged on
equipment)
4 30-06-
2018
Equipment Dr 4,000
Revaluation Reserve Cr. 4,000
(Being revaluation considered)
5 30-06-
2018
Depreciation Dr. 17,000
Equipment Cr. 17,000
(Being Depreciation charged on
equipment)
ii) Equipment 2
Working:
Year 2016
Amount
($)
Carrying amount in the year 2016 20000
Revalued amount 19000
Less: Depreciation on revalued amount [(19000-4000)/5] 3000
Carrying amount for the year 2017 16000
Year 2017
Carrying amount for the year 2017 16000
Revalued amount 18000
Less: Depreciation on revalued amount [(18000-6000)/4] 3000
Carrying amount for the year 2018 15000
Year 2018
Carrying amount for the year 2018 15000
Revalued amount 13000
Less: Depreciation on revalued amount** 17000
Carrying amount for the year 2018 27000
** Depreciation on revalued amount
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Revalued amount 13000
Remaining useful life 3
Residual value 6000
Depreciation [(13000-6000)/3] 2333
SOLUTION 5:- IMPAIRMENT OF ASSETS
IAS 36 deals with the impairment of the assets. It describes that assets should not be
recognized more than its recoverable amount. Where carrying amount exceeds the
recoverable amount, it results in the Impairment loss. Loss on impairment of an asset should
be recognized as expenses in the statement of income and expenses (Randall, 2002).
In instant case, impairment loss has been calculated as follows:
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Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2016
Revaluation Reserve Dr. 1,000
Equipment Cr. 1,000
(Being revaluation considered)
2 30-06-
2016
Depreciation Dr. 3,000
Equipment Cr. 3,000
(Being Depreciation charged on
equipment)
3 30-06-
2017
Equipment Dr 2,000
Revaluation Reserve Cr. 2,000
(Being revaluation considered)
4 30-06-
2017
Depreciation Dr. 3,000
Equipment Cr. 3,000
(Being Depreciation charged on
equipment)
5 30-06-
2018
Revaluation Reserves Dr. 2,000
Equipment Cr. 2,000
(Being revaluation considered)
6 30-06-
2018
Depreciation Dr. 2,333
Equipment Cr. 2,333
(Being Depreciation charged on
equipment)

Calculation of impairment
loss
Particular
Fizzy Drinks
(Amount $)
Ice
Creamery
(Amount $)
Fair value less cost to sales 750000 260000
Value in use 810000 240000
Recoverable Amount (Higher of
both) 810000 260000
Less: Carrying Amount 872000 268000
Impairment Expenses 62000 8000
Journal Entries
Sr. No. Date Entries Amount ($)
1 30-06-
2018
Impairment Expenses Dr. 70,000
Accumulated Loss on
Impairment Cr. 70,000
(Being Impairment loss
recognized)
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REFERENCES:
Michael, L. (2017). Computation of Deferred Tax Liabilities. Retrieved from
https://ag.purdue.edu/commercialag/Pages/Resources/Finance/Financial-Analysis/
Computation-of-Deferred-Tax-Liabilities.aspx
Randall, W. (2002). Asset Impairment and Disposal. Retrieved from:
https://www.journalofaccountancy.com/issues/2002/mar/assetimpairmentanddisposal.html
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