Question

ou are the financial accountant for Superstore Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2018. Whilst preparing the financial statements, you become aware of the following situations:

1. Superstore Ltd provides a warranty on goods sold for a period of 12 months from the date of sale. The company has, in the past, always recognised a provision for warranties equal to 5% of sales made during the year. Due to increasing warranty costs and the number of goods returned under warranty in previous years, the directors met during the financial year (ended 30 June 2018), and decided to increase the provision to 8% of sales made during the year. The provision for warranties account currently has a balance of $19,000, which is the balance carried forward from 30 June 2017. Sales for the year ended 30 June 2018 amounted to $430,000.
2. Two of Superstore Ltd’s major debtors filed for bankruptcy in July 2018. The amounts owing from these two customers totals $420,000, and in the draft financial statements (prior to Superstore Ltd being aware of the bankruptcies), an allowance for doubtful debts of $40,000 had been recognised. The directors of Superstore Ltd met with the liquidators of the two debtors on 28 July 2018 (prior to the 2018 financial statements being finalised), and it appears that no amount will be recovered from in respect of either debt.
3. On 5 July 2018 the Commonwealth Government enacted legislation altering the company income tax rate from 30% to 28%, applicable from the financial year commencing on 1 July 2018.
4. On 30 June 2018, when reviewing the plant and equipment, the reports showed that there was a ‘Trailer’ purchased on 1 July 2016 for $22,000. You looked into this further and discovered that the invoice was actually for repairs to one of the company’s trailers, not the purchase of a new trailer. The $22,000 should have been recognised as an expense, not as an asset. Depreciation of $1,000 was recognised in the 2017 financial statements, and no depreciation has been recognised as yet in the 2018 draft financial statements. The accountant responsible for preparing the company’s income tax returns will amend the 2017 tax return, and the company will receive a tax refund of $6,300 as a result. No journal entries have been recorded as yet in the accounting records, as the directors are unsure how to account for this situation, and what period adjustments need to be made in.

Assume that each event/situation is material.

Required:

i) State the appropriate accounting treatment for each situation. Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. Where adjustments to Superstore Ltd’s financial statements are required, explain which financial statements need to be adjusted (ie. 2016, 2017, 2018 or 2019).

ii) Prepare any note disclosures and adjusting journal entries that are needed in the 2018 financial statements for each situation.

Answer 1

i. Increase in provision for warranty :-

30.06.2018- Warranty expense a/c Dr 34400

To Provision for warranty 34400

(Being warranty 430000*8%= 34400$ recorded in books)

Provision for warranty a/c
Particulars	amount ($)	Particulars	amount ($)
		Balance b/d as on 30.06.2017	19000
Balance c/d as on 30.06.2018	53400	Warranty expense	34400
	53400		53400

AS 29- Provisions, Contingent Liabilities and Contingent Assets applicable in above case.

A provision should be recognized when:
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognized.

ii. 420000$ not receivable from debtors (information received prior to finalization of a/cs for 2018)

Allowance for doubtful debts of $ 40,000 has been made in books prior to receipt of information about debtors insolvency.

30.06.2018 Allowance for doubtful debtors Dr. 380000$

To Debtors account 380000$

(Being the difference of 420000 and 40000 recognized in books as allowance for doubtful debts)

As per IAS 10 Events after the reporting date (balance sheet date):- This standard provides guidance as to which events should lead to adjustment in financial statements and which events should be disclosed in notes to financial statements.In above case the bankcrupty was declared after the reporting date i.e. 30.06.2018, but it provides evidence of impairment on reporting date itself. In such a case, the debtors will be reduced in books as on 30.06.2018 from receivable to recoverable amount.

iii. Tax rate changed from 30% to 28% on 01.07.2018:- This will impact financial statement of 2019. It will reduce the tax liability of the company.

iv. Trailer (22000$) repaired on 01.07.2016 recorded as an asset (new purchase) Depreciation of 1000$ recorded in books of 2017. Rectification entries:-

2018- Repair & Maintenance account Dr. 22000$

To Trailer (asset) account 22000$

2018- Repair & Maintenance account Dr. 1000$

To depreciation account 1000$

Ind AS 8 “Accounting Policies, Changes in Accounting Estimates” requires retrospective adjustment of prior period errors and omissions. In above case the expense was recorded as an asset and information about this error was received after the reporting date but prior to issuance of financial statements for issue. The opening balances will be restated as if the error has not occured.

v. Tax refund of 6300$ received on revision of tax return of 2017

2018 Cash/bank account Dr. 6300$

to Income tax refund receivable account 6300$

Kindly revert for queries, if any.