Financial Accounting

This document provides comprehensive study material and solved assignments on financial accounting. It covers topics such as financial statement disclosures, accounting for share capital, accounting for income tax, revaluation of property, plant and equipment, and impairment of assets. The document also includes references for further reading.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
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Name of the University:
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1FINANCIAL ACCOUNTING
Table of Contents
Question 1: Financial statement disclosures....................................................................................2
Requirement i:.............................................................................................................................2
Requirement ii:............................................................................................................................4
Question 2: Accounting for share capital........................................................................................6
Question 3: Accounting for income tax...........................................................................................8
Requirement i:.............................................................................................................................8
Requirement ii:............................................................................................................................9
Question 4: Revaluation of property, plant and equipment...........................................................10
Question 5: Impairment of assets..................................................................................................12
References:....................................................................................................................................15

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Question 1: Financial statement disclosures
Requirement i:
Situation 1:
According to the provided information, Superstore Limited gives warranties on goods
sold for a year from the selling date. In the past, the organisation has realised a provision for
warranties, which is equivalent to 5% of sales incurred in the year. However, the warranty costs
are observed to be on the increasing scale and similar trend could be observed in sales returns as
well. This has necessitated the directors of the organisation to raise the provision to 8% of the
sales made during the year. This situation denotes change in accounting estimate.
“Paragraph 34 of AASB 108 Accounting Policies, Changes in Accounting Estimates
and Errors” states that revision is needed for an estimate when there is a change in the
prevailing situation on which the estimate was developed or it occurred due to more experience
or new information. Moreover, in accordance with “Paragraph 36 of AASB 108”, when any
accounting estimate is changed, it needs to be recognised prospectively in the income statement
from the date of change (Aasb.gov.au, 2019). Therefore, this situation demands adjustments in
the financial statements of 2017-2018 as well as other future financials.
Situation 2:
From the provided information, it has been identified that two big debtors of Superstore
Limited has filed for bankruptcy in July 2018. The amount to be received from these customers
has totalled $420,000 and the organisation has recognised allowance for doubtful debts of
$40,000. This situation relates to the event after the reporting date. More specifically, in this

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case, it is the filing of bankruptcy after the date of reporting along with non-recoverability of
receivables.
According to “AASB 110 Events after Reporting Date”, events are mainly categorised
into adjusting events and non-adjusting events (Aasb.gov.au, 2019). Adjusting events are
identified as those events, whose evidence of occurrence would be available on the date of
reporting. On the other hand, non-adjusting events are those events, whose evidence of
occurrence is not apparent on the date of reporting. The provided case is associated with
adjusting event and hence, it is necessary to be recorded. Therefore, this situation demands
adjustments in the financial statements of 2017-2018.
Situation 3:
This situation falls under events after reporting date, especially, the change in tax rate. In
accordance with AASB 110, events are mainly categorised into adjusting events and non-
adjusting events (Aasb.gov.au, 2019). Adjusting events are identified as those events, whose
evidence of occurrence would be available on the date of reporting. On the other hand, non-
adjusting events are those events, whose evidence of occurrence is not apparent on the date of
reporting. The current case is an instance of non-adjusting event, since there was no evidence of
tax rate change at the date of reporting (Hoyle, Schaefer & Doupnik, 2015). Therefore, this
situation demands adjustments in the financial statements of 2017-2018.
Situation 4:
This situation could be related with the identification of errors in the prior year
adjustments in terms of record of repair expense under asset along with charge of depreciation on
the same. In accordance with “Paragraph 42 of AASB 108”, it is necessary for an organisation

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to rectify the material errors of the previous period retrospectively in the initial financial
statement set authorised for issue after their identification by the following
 Restatement of the comparative amounts for the prior year where the error took place
 In case; the error happened before the earliest presented previous period, the beginning
balances of liabilities, equity and assets have to be restated for the same presented period
(Kimmel et al., 2016)
The provided case falls under the above-stated criteria, which mandates the need for
rectification. Hence, the financial statements of 2017-18 and comparative figures represented in
the financial statements of 2016-17 depicted in 2017-18 have to be adjusted (Kieso, Weygandt &
Warfield, 2016).
Requirement ii:
Situation 1:
At present, the organisation has provision for warranty balance of $19,000, while it has
realised revenue amounting to $430,000 in the year 2018. Therefore, the adjusting journal entry
to be passed in this case is depicted as follows:
Warranty Expense Account............................................................Dr $15,400
To Provision for Warranty Account $15,400
(Record of warranty expense)
The warranty expense is calculated as follows:
Particulars Details Units
Sales for the period A $430,000

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Provision to be made @8% B=Ax8% $34,400
Less: Provision already made C ($19,000)
Provision to be created in the existing year D=B+C $15,400
Situation 2:
In this case, adjusting journal entry has to be passed, which is stated as follows:
Doubtful Debt Expense Account...........................................Dr $380,000
To Allowance for Doubtful Debt Account $380,000
(To record allowance for doubtful debt) $420,000 - $40,000
Situation 3:
“Paragraph 21 of AASB 110” states that the organisation needs to make the below
disclosure in relation to the nature of event and financial effect. The statement would be “The
change in tax rate by the government from 30% to 20% after the date of reporting resulted in
decline in current tax amount”.
Situation 4:
The adjusting journal entries in this case would be the following:
Retained Earnings Account..........................................Dr $21,000
Accumulated Depreciation Account.............................Dr $1,000

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To Assets Account $22,000
(To rectify error of the previous period)
Income Tax Receivable Account..................................Dr $6,300
To Retained Earnings Account $6,300
(To record tax reversal)
Question 2: Accounting for share capital

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Working Note 1:
Working Note 2:

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Question 3: Accounting for income tax
Requirement i:

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Requirement ii:

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Question 4: Revaluation of property, plant and equipment

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Working Note:

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Question 5: Impairment of assets
Working Note 1: Computation of impairment loss and revised carrying amounts of assets for
the period ended 30 June 2018
In accordance with AASB 136, an organisation is needed to gauge their assets at fair
values (Aasb.gov.au, 2019). This mandates the need for the organisation to compare the carrying
values of their assets with the recoverable amount and any carrying value surplus beyond the
recoverable amount is treated in the form of impairment loss, which is computed as follows:
Allocation of impairment loss:

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At the initial stage, the loss, which could be allocated directly to assets, is assigned to the
respective assets and goodwill carrying amount in the books (Gassen, 2014).
“Paragraph 104 of AASB 136” states the remaining impairment loss amounting to
$51,000 is apportioned to goodwill and then the remaining loss of $21,000 ($51,000 - $30,000)
is apportioned to the leftover assets in proportion of their carrying values.
Carrying amounts of assets:

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Working Note 2: Computation of impairment loss and revised carrying amounts of assets for
the period ended 30 June 2019
The above impairment loss reversal is assigned to assets depending on their carrying
amounts. In addition, as per “Paragraph 124 of AASB 136”, it is not possible to reverse the
impairment loss realised for goodwill. Therefore, the above-stated impairment loss reversal is
assigned to plant and equipment, since the other assets are already at recoverable amounts
(Henderson et al., 2015).

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References:
Aasb.gov.au. (2019). Retrieved 7 May 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-
15.pdf
Aasb.gov.au. (2019). Retrieved 7 May 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB110_07-04_COMPjan15_07-
15.pdf
Aasb.gov.au. (2019). Retrieved 7 May 2019, from
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-
09.pdf
Gassen, J. (2014). Causal inference in empirical archival financial accounting
research. Accounting, Organizations and Society, 39(7), 535-544.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting.
Pearson Higher Education AU.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Kimmel, P. D., Weygandt, J. J., Kieso, D. E., & Trenholm, B. (2016). Financial Accounting.
Wiley Custom Learning Solutions.