Advanced Financial Accounting Assignment: Solution and Analysis, 2018

This document provides a comprehensive solution to an Advanced Financial Accounting assignment. The assignment covers five key questions, including financial statement disclosures, accounting for share capital, accounting for income tax (including deferred tax calculations), revaluation of property, plant, and equipment, and impairment of assets. The solution includes detailed explanations, journal entries, and calculations, referencing relevant Australian Accounting Standards (AASB) such as AASB 108, AASB 110, and AASB 136. The financial statement disclosures section analyzes scenarios involving warranty provisions, bad debts, changes in tax rates, and error corrections. The share capital section includes notes on allotment amounts and refunds. The income tax section provides worksheets for deferred tax calculations. The revaluation and impairment sections detail the accounting treatment for asset valuation changes and impairment losses, including the allocation of impairment losses to goodwill and other assets. The document is a valuable resource for students studying advanced financial accounting, offering a practical application of accounting principles.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Question 1: Financial statement disclosures....................................................................................2
Question 2: Accounting for share capital........................................................................................6
Question 3: Accounting for income tax...........................................................................................7
Requirement (i):...........................................................................................................................7
Requirement (ii):..........................................................................................................................8
Question 4: Revaluation of property, plant and equipment.............................................................9
Question 5: Impairment of assets..................................................................................................12
References and Bibliographies:.....................................................................................................16

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Question 1: Financial statement disclosures
Scenario 1:
It is clearly apparent from the provided information that Superstore Limited is involved
in providing warranties on products on products sold for a year from the date at which the sale is
made. In the prior periods, the company is observed to recognise provision in relation to
warranties constituting of 5% of the total sales incurred in the period. However, it has been found
that there is considerable increase in warranty expenses and the trend is found to be identical for
sales returns as well. As a result, the company needs to increase its provision for warranties to
8% of the total sales generated in a period and therefore, this scenario reveals that an alteration is
made in accounting estimate.
AASB 108 is deemed to be dealing with accounting policies, changes in errors and
accounting assumptions and it could be seen from Paragraph 34 of the standard that an estimate
requires revision when there is alteration in the current situation based on which the estimate was
formed or it happened owing to new information or more experience. Along with this, it is
evident from Paragraph 36 of the standard that any change in accounting assumption has to be
realised prospective in the consolidated statement of profit and loss from the date at which the
change occurred (Aasb.gov.au, 2019). As a result, adjustments are required in the financial
statements of 2017 along with the future financial statements as well.
In the current period of 2018, Superstore Limited has revenue of $430,000 and provision
for warranty amounting to $19,000 and thus, there needs to be an adjusting journal entry in this
case. The warranty expense is to be debited by $15,400 and provision for warranty is to be
credited by the same amount as well so that warranty expense could be recorded appropriately.

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The current provision to be made would be 8% of sales, which is $34,400 ($430,000 x 8%) from
which the provision already made of $19,000 has to be deducted resulting in provision to be
created in the current year of $15,400.
Scenario 2:
The case information clearly states that Superstore Limited has two big debtors and they
are seen to file for insolvency in July 2018. The organisation has obtained customers amounting
to $420,000, in which it has realised bad debt allowance of $40,000. Hence, this situation has
taken place after the date of reporting. In this scenario, bankruptcy is filed by the debtors after
the reporting date of Superstore Limited and thus, the receivables could not be recovered by the
organisation.
AASB 110 is observed to deal with events that take place after the date of reporting. This
standard classified events into two types, which include adjusting events and non-adjusting
events. Adjusting events could be considered as those events, in which any occurrence identified
would be present on the reporting date. However, those events having no apparent occurrence on
the reporting date are deemed to be non-adjusting events (Beams et al., 2016). The scenario
could be classified under adjusting event, which needs to be recorded with precision in the form
of financial statement adjustments in the period 2017. For this scenario, it is necessary to create
an adjusting journal entry. Debit would be made to bad debt expense and credit would be made
to allowance for bad debt amounting to $380,000 so that the same could be recorded
appropriately. The allowance for bad debt is calculated by subtracting $40,000 from $420,000.
Scenario 3:

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From the provided information, it has been identified that the Common Government has
passed legislation on 5th July 2018, in which it was declared the corporate tax rate would fall
from 30% to 28%. This rule is deemed to be applicable from the financial period starting from 1st
July 2018. Therefore, this scenario could be classified as events that do not fall within the
reporting date. It is mentioned in AASB 110 that the classification of events is made into
adjusting events and non-adjusting events. Adjusting events could be considered as those events,
in which any occurrence identified would be present on the reporting date (Gippel, Smith & Zhu,
2015). However, those events having no apparent occurrence on the reporting date are deemed to
be non-adjusting events. Hence, the scenario is an indicator of no-adjusting event, since the
government has changed the tax rate policy after the reporting date of Superstore Limited. As a
result, there is no need to pass any adjusting journal entries in this situation; however, the
organisation needs to include a note disclosure in its financial statements of 2017 (Hoyle,
Schaefer & Doupnik, 2018). “AASB 110, Para 21” clearly guides that any organisation has to
make disclosures based on the nature of event and financial impact (Aasb.gov.au, 2019). The
note disclosure in case of Superstore Limited would be in the form of the following statement:
“Due to the modification in the corporate tax rate that the government has made from
30% to 28% after 1st July 2018, there is downfall in current liability amount from …… to ……”.
Scenario 4:
It has been identified from the case information that Superstore Limited has purchased a
trailer amounting to $22,000 on 1st July 2016. However, it has been found later that this purchase
has been recorded in the form of repairs expense rather than purchase of the trailer. This amount
has to be realised in the form of expense, instead of asset. Moreover, depreciation expense of
$1,000 has been charged on the financial statements in 2017; however, in the draft financial

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statements of 2018, it has not been recognised. Therefore, the accountant bearing the
responsibility to prepare the income tax return of the organisation would amend the tax return in
2017, for which tax refund of $6,300 would be obtained by Superstore Limited. However, no
journal entries are yet to recorded in the books of accounts of the organisation.
This scenario could be categorised under detection of errors in the adjustments in the
prior year, as there has been incorrect recording of repairs expense and depreciation expense on
the purchase of the new trailer. As per “Paragraph 42 of AASB 108”, material errors related to
the prior periods are to be corrected prospectively in the first set of financial statements, which is
authorised for issuance after they have been detected by the following:
 At the time the error happened, the comparative amounts of the previous period need to
be restated.
 If the error happened before the represented prior period, the opening asset, liability and
equity balances require restatement in the identical presented period (Aasb.gov.au, 2019).
This scenario is deemed to have relevance with the above-stated aspects and therefore,
corrections are required immediately. The financial statements that would be affected in this
situation include those of 2017 along with the comparative figures of 2016 and 2017 financial
statements (Kieso, Weygandt & Warfield, 2016). For rectifying this error, there is need for
passing two adjusting journal entries. Firstly, debit and credit would be made to retained earnings
and accumulated depreciation and asset amounting to $21,000, $1,000 and $22,000 respectively
for correcting prior period errors. Secondly, it is necessary to debit tax receivable and credit
retained earnings by $6,300 so that tax reversal could be recorded appropriately.

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Question 2: Accounting for share capital
Note 1: Allotment amount brought forward
Note 2: Amount refunded to shareholder

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Question 3: Accounting for income tax
Requirement (i):
Tax payable in June 2018:
Worksheet for deferred tax in June 2018:

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Requirement (ii):

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Question 4: Revaluation of property, plant and equipment

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Note 1: Loss or surplus on revaluation on sale of equipment

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Question 5: Impairment of assets
Note 1:
It is compulsory under AASB 136 that all assets should be gauged at fair values and
therefore, it is necessary to contrast the carrying values of assets with the recoverable amounts
(Aasb.gov.au, 2019). If the recoverable amount falls below the carrying amount, the difference
amount would be considered as impairment loss (Jeter & Chaney, 2014). The detailed
calculation is shown below:

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Firstly, the loss that is be apportioned directly to the assets, is apportioned to the carrying
values of goodwill and individual assets in the accounting books of Flash Limited.

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“AASB 136, Para 34” cites that any amount left as impairment loss has to be assigned to
goodwill and any leftover loss would be allocated to the remaining assets based on their carrying
amounts (Aasb.gov.au, 2019).
Note 2:

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“AASB 136, Para 24” assigns reversal of impairment loss to the assets based on their
carrying values; however, it prohibits the same in case of goodwill. Hence, the reversal of
impairment loss in the above table is apportioned to plant and equipment of Flash Limited. This
is because the other assets are observed to be at their recoverable values (Nilsson &
Stockenstrand, 2015).

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References and Bibliographies:
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
Beams, F. A., Anthony, J. H., Bettinghaus, B., & Smith, K. A. (2016). Advanced accounting.
Pearson Education Limited.
Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2-3), 339-383.
Gippel, J., Smith, T., & Zhu, Y. (2015). Endogeneity in accounting and finance research: natural
experiments as a state‐of‐the‐art solution. Abacus, 51(2), 143-168.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective.
Wiley Global Education.
Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2018). Fundamentals of advanced accounting.
McGraw-Hill Education.

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Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Jeter, D. C., & Chaney, P. K. (2014). Advanced accounting. Wiley Global Education.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Loughran, T., & McDonald, B. (2016). Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), 1187-1230.
Nilsson, F., & Stockenstrand, A. K. (2015). Financial accounting and management control. The
tensions and conflicts between uniformity and uniqueness. Springer, Cham.