Financial Accounting: Problem Questions and Solutions, RMIT University

This document presents a comprehensive solution to a financial accounting assignment, addressing a variety of accounting problems. The solution covers several key areas including the application of IAS 8, IFRS 13, and AASB 108. It includes detailed journal entries for share capital transactions, depreciation calculations, tax computations, and impairment analysis. The assignment also delves into the measurement of fair values and the treatment of errors in financial statements. The solutions provide step-by-step explanations, calculations, and financial statement disclosures, providing a valuable resource for students studying financial accounting. Furthermore, the assignment incorporates real-world scenarios such as fraudulent activities, and guides the reader on how to handle such events within the accounting framework.

FINANCIAL ACCOUNTING 1
FINANCIAL
ACCOUNTING

FINANCIAL ACCOUNTING 2
Contents
Answer 1:...................................................................................................................................3
Answer 2:...................................................................................................................................6
Answer 3:.................................................................................................................................11
Answer 4:.................................................................................................................................17
Answer 5:.................................................................................................................................21
References:...............................................................................................................................26

FINANCIAL ACCOUNTING 3
Answer 1:
Part 1:
This case deals with the IAS 8 which pertains to Accounting Policies, changes in the
Accounting estimates and errors. This standard states that the accounting estimates can be
changed on the basis of the judgement of the management of the company. This standard
further states that the changes in the accounting policies have to be applied from retrospective
basis whereas the change in the accounting estimates will have to be applied form prospective
basis. Hence in the given case, the number of useful years of life of the equipment has
changed and therefore, the deprecation charged on it shall be based upon that new piece of
information.
As per the accounting standard, the following are the disclosures in respect of the same:
 The effect of that change in the accounting estimate shall be applied prospectively and
the same shall be charged in the profit or loss account.
 The period of change, in the given case, it would be 2017 year
 Or the period of the change, in case the change affects that period only
The carrying value of that asset shall be changed accordingly.
Also, the nature and the amount of the change in that estimate shall be disclosed in the given
period or in the expected future periods
In case, the amount of the effect on the future periods are not disclosed, then the estimating
would not be change and the company shall disclose in the stated fact (IAS plus, 2018).
Value of equipment= $(800,000-160,000)=$640,000

FINANCIAL ACCOUNTING 4
Which means if the useful life of the equipment reduces to 6, then the following would be its
entry:
Depreciation expense Dr 106,667
To Accumulated depreciation 106,667
Part 2:
The AASB 108 deals with the period errors. Such are the errors that affects the financial
statements and also there could be errors that are due to the mistakes done in the applying of
the accounting policies, oversights or the misinterpretations of the facts and the frauds.
In case, any such error takes place, then an adjustment shall be made for each one of the
financial statement line that has been affected and the amount of the adjustment which relates
in with that specific adjustment.
On the discovery of such information, the company must restate in the comparative amounts
that have bene presented in the financial statements.
The company shall disclose in the nature of the error that took place in the prior period, the
amount of the correction, the basic and the diluted earnings per share. The financial
statements of the subsequent period shall not disclose in these notes in the financial
statements (AASB, 2018).
In the given case, the company found out about an expense which pertained to an earlier
period and which was tax deductible. Since that expense is subject to tax, hence, the same
shall have to be disclosed in the financial statements, the prior period books have been
closed, so, the company would report this expense in the current year’s financial statements
as an expense which relates to the previous year. In the subsequent year, the comparative

FINANCIAL ACCOUNTING 5
figures shall be changed and the changed basic and the diluted earnings per share shall be
shown.
The following entry would be passed:
Repairs on equipment expense Dr 20,000
To Profit and Loss A/c 20,000
Part 3:
IFRS 13 deals with the measurement of the fair values. This standard requires in the
reporting of the fair values. This standard defines the term fair value as the basis of an exit
price and also uses the hierarchy of the fair value which is more like market based rather than
being specific to any particular company. The main aim of this standard is the estimation of
the price at which the asset could be sold in the market or the liability could be transferred on
to another or be sold in the open market as on the date of the measurement and under some
market conditions. The concept of measurement of the fair value determine as the following:
 That particular asset or the liability which is to be reported at its fair value
 In respect of the non-financial assets, the most apt technique of measurement shall be
evaluated.
 The most advantageous market for that asset or the liability
 The techniques of valuation that would be the most apt for the purposes of
measurement and this would consider in the availability of the data for the purposes of
developing in the inputs that would show in some assumptions that the market
participants would use when it comes to the pricing of that asset or the liability
In respect of the disclosure requirements, the company would disclose in the information in
the financial statements so that the users of these financial statements are able to assess in the

FINANCIAL ACCOUNTING 6
assets and the liabilities that are capable of being measured at their fair values and they could
be measured after these have been recognised initially along with the techniques that are used
for the purposes of valuing in the same and the inputs that have bene used for the purposes of
developing these. For the purposes of fair value measurements, the most unobservable inputs
should be considered and their effect of the measurement in the profit and loss account shall
be disclosed (IFRS, 2018).
In the given case, the shares were initially disclosed at their cost and so, now, the same shall
be disclosed at its fair value which is $250,000.
Hence, the following entry
Profit and Loss Dr 350,000
To Investment 350,000
Part 4:
This transaction seems to be a fraudulent activity and so, an investigation has to be done in
respect of the same. But in the meantime, the company is duty bound to correct their financial
statements and write back this transaction to the profit and loss A/c which shall be done
through the below entry:
The following would be its entry:
Profit and Loss A/c Dr 20,000
To Advertising expense 20,000

FINANCIAL ACCOUNTING 7
If this transaction is not written back, then that would report the earnings of the company in
wrong amounts. Also, the fact that such a transaction took place will have to be reported in
the notes to accounts in the financial statements.
Answer 2:
Part 1:
Date Particulars Debit Credit
31.07.2017 Bank
150,00,000.
00
To Share Application
150,00,
00
(being money received for the shares)
10.08.2017 Share Application
150,00,000.
00
To Share Capital
150,00,
00
(being shares applied)
12.08.2017 Shares underwriting commission
12,000.
00
To Bank
12,
00
(being underwriting commission paid)

FINANCIAL ACCOUNTING 8
10.09.2018 Bank
25,00,000.
00
To Share Capital
25,00,
00
(being share allotment money received)
01.02.2018 Bank
24,80,000.
00
To Share Capital
24,80,
00
(being final call made)
Equity share capital
1,40,000.
00
To share first call
1,00,
00
To share second call
40,
00
To Calls in arrear
(being the accounting for the share
forfeiture)
20.03.2018 Equity share capital
1,60,000.
00

FINANCIAL ACCOUNTING 9
To Calls in Arrear
20,
00
To Forfeited shares
1,40,
00
(being the accounting for the share
forfeiture)
20.03.2018 Cash
1,28,000.
00
Shares reissue expenses
4,000.
00
Discount on shares
12,000.
00
To shares forfeited
1,40,
00
To discount on shares
4,
00
( being the share forfeiture and reissue)
Part 2:
The following table shows in the calculations:
Amounts paid
1,40,000.0
0
Less; discount 32,000.0

FINANCIAL ACCOUNTING 10
0
Less: reissue expenses
4,000.0
0
1,04,000.0
0
40,000.0
0
Amount to be paid to
each shareholders
2.6
0
The following would be the journal entry:
Share forfeiture Dr 104000
To bank 104000
(Being amount returned to shareholders)
Answer 3:
Part a:
a) Statement of Taxable Income $
Accounting Profit Before Tax 5,55,80
0.00

FINANCIAL ACCOUNTING 11
Add: 5,10,30
0.00
1,53,09
0.00
Book Depreciation -
equipment
70,00
0.00
Book Depreciation - motor
vehicles
30,00
0.00
Doubtful Debts expense 34,00
0.00
Entertainment Expense 4,50
0.00
Annual Leave 25,00
0.00
Warranty Expenses 18,50
0.00
Insurance 18,00
0.00
2,00,00
0.00
Less:
Government Grant 50,00
0.00
Depreciation for Tax Purposes
- equipment
1,00,00
0.00
Depreciation for Tax Purposes
– motor vehicles
20,00
0.00
Bad debts written off 2,00

FINANCIAL ACCOUNTING 12
0.00
Annual Leave actually paid 4,00
0.00
Warranty expenses actually
paid
2,00
0.00
Insurance expenses actually
paid
25,00
0.00
2,03,00
0.00
Taxable Income 5,52,80
0.00
Current Tax
0.30
1,65,84
0.00
Part b:
Item Carryi
ng
amount
Tax
Base
Deductibl
e
Temporar
y
Difference
Taxable
Tempor
ary
Differen
ce
Incom
e Tax
Expen
se
Reval
uation
Surpl
us
Tax
Paya
ble
$ $ $ $ $ $ $
Assets
Cash 40
,000.00
4
0,000.00 - - -