Solutions Tutorial Questions 02 BUSN7050

BUSN 7050 Tutorial questions 02 (For Discussion Week 3) AAAE Exercise 16.2 Materiality and aggregation State whether each of the following statements is true or false: (a) A material item is determined solely on the basis of its size. (b) A class of assets or liabilities is determined by reference to items of a similar nature or function. (c) Inventories and trade accounts receivable may be aggregated in the statement of financial position. (d) Cash and cash equivalents may be aggregated in the statement of financial position. a) b) c) d)

False – size or nature, or combination of both (AASB 101/IAS 1 para. 7) True – AASB 101/IAS 1 para. 29 False –AASB 101/IAS 1 para. 29, 54 True – AASB 101/IAS 1 para. 29, 54

AAAE Exercise 18.4 Events after the reporting period In relation to the operations of Cat Ltd, the following events took place after the 30 June 2016 reporting period end but before 15 September 2016, the date the accounts were authorised: •

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On 17 July 2016, Cat Ltd’s main fishing fleet was sunk during a freak storm. Insurance will cover the replacement of the vessels but lost sales representing $550 000 in profits are not covered. On 19 July 2016 Cat Ltd took delivery of a fishing net for its prawn trawler. The net was purchased from a UK manufacturer on delivered duty paid shipping terms and was in transit at the end of the reporting period. An inspection of the net revealed significant structural flaws and the net was returned to the supplier on 28 July 2016. Cat Ltd is to receive a full refund of the $650 000 purchase price which had been paid in advance on 29 June 2016. On 29 August 2016 a lawsuit was lodged against the company by the families of crew members drowned in the 17 July storm, alleging negligence, and claiming $4 million in damages. No date has as yet been set for the court hearing.

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On 1 September 2016 the directors resolved to issue to the public 10 000 5% debentures of $10 each, payable $5 on application and $5 on allotment.

Required Classify the above events into adjusting and non-adjusting events after the end of the reporting period, justifying your choice.

Classification of after reporting period events Assuming all events are material by reason of size and nature: Date 17 July 2016

Classification Non-Adjusting

Justification The storm which caused the loss of the fishing fleet and the uninsured loss of profits occurred after the end of the reporting period and impacts on future conditions.

19 July 2016

Adjusting

The receipt and subsequent return of the fishing net provides new information about the assets owned by Cat Ltd as at the end of the reporting period.

29 August 2016

Non-Adjusting

The lawsuit arose as a consequence of an event after the end of the reporting period (the storm on 17 July) and it may have material effects on future cash flows or operations if the company has to pay the $4 million damages claim.

1 September 2016

Non-Adjusting

The issue of $100 000 5% debentures to the public does not relate to conditions existing at the end of the reporting period but will have a material impact on future cash flows.

Exercise 18.6 Materiality and events after the reporting period The following information has been made available to you to assist in the preparation of the financial statements of Ant Ltd for the year ended 30 June 2018: 1. The company has been involved in a dispute with a government environment agency relating to the release of noxious gases from its manufacturing plant in early June 2018. An expert investigation was conducted to determine if the company was at fault. The draft financial report already discloses contingent liability in the notes detailing the investigation and estimating the potential damages at $1.25 million. The investigator’s report, released on 1 August 2018, found Ant Ltd to be responsible for the release and damages amounting to $1 500 000 were payable by the company. Page 2 of 5

2. On 9 July 2018, the sales manager raised credit notes worth $30 000 relating to sales of faulty goods in the last 2 weeks of June 2018. 3. On 25 September 2018, the company received notification that a customer owing $130 000 had gone into liquidation. The liquidator advised that unsecured creditors are likely to receive a distribution of only 20c in the dollar. The liquidation was caused by a flood in July 2018 which destroyed the customer’s operating plant and warehouse. The damage was not covered by insurance. Assume that Ant Ltd’s draft profit for the year ended 30 June 2018 is $720 000. Required In relation to the above events or transactions, prepare the necessary notes or general journal entries to comply with applicable accounting standards. 1.

Release of investigator’s report on 1 August 2018

The release of the report and the decision that damages were payable by Ant Ltd provide new information about conditions existing at the end of the reporting period given that the release of the noxious gases occurred in June 2018. Assuming a profit before tax of $720 000, at the amount of $1 500 000 is clearly material and the following adjustment should be made: June 30

2.

Damages expense Dr 1 500 000 Damages payable Cr (Recognition of damages liability)

1 500 000

Credit notes raised on 9 July 2018

As these credit notes relate to sales which occurred prior to the end of the reporting period this provides more information about conditions existing at 30 June 2018 and will (or may, depending on materiality) require adjustment by journal entry. However, as the credit notes represent only approximately 4% of profit before tax ($30 000/$720 000), it could be argued that no adjustment is necessary on the grounds of immateriality. The journal entry (ignoring materiality considerations) is shown below: June 30

3.

Sales returns and allowances Dr Accounts receivable Cr (Credit notes relating to June sales)

30 000 30 000

Liquidation of debtor

As the liquidation was caused by an event after the end of the reporting period no adjustment will be made as this information does not change the situation that existed at 30 June 2018. However, the $104 000 loss (80 cents in the dollar x $130 000) will be material to next year’s profits based on the current year’s profit before tax ($104 000/$720 000 = 14%), and must be disclosed by note. Page 3 of 5

Ant Ltd Notes to the financial statements year ended 30 June 2018 Note X: Events occurring after the end of the reporting period In September 2018, a debtor owing $130 000 went into liquidation. The company expects to recover only 20% of the amount owing. Note that the question did not indicate the date on which financial statements are authorised for issue. If the authorisation date was before September 25 then this event would not be disclosed in the 2018 Financial Statements.

Exercise 18.10 Accounting policies, accounting estimates and errors In order to comply with AASB 108/IAS 8, determine whether the following changes should be accounted for prospectively or retrospectively: 1. A change in accounting estimate. 2. A voluntary change in an accounting policy. 3. A change in accounting policy required by a new or revised accounting standard. 4. An immaterial error discovered in the current year, relating to a transaction recorded three years ago. 5. In the current year, a material error was discovered relating to a transaction recorded three years ago. Management determines that retrospective application would cause undue cost and effort. (a) (b) (c) (d) (e)

prospective retrospective as required by the transitional provisions of that Standard; if not specified then retrospective the amount is immaterial and so may either be ignored or corrected in the current year. retrospective application is required unless impracticable to do so, but the definition of impracticable does not include undue cost and effort (AASB 108 paragraph 5).

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AAAE Exercise 21.2 Sonia Goodall is a newly appointed director of Proserpine Ltd, a listed company that organises major sporting events. Sonia has provided consultancy services to Proserpine Ltd for the past 10 years. In the most recent financial year these services amounted to $500 000. Required Determine whether the consultancy service provided by Sonia is a related party transaction that should be disclosed in the financial statements of Proserpine Ltd. Explain your answer. As Sonia is a director of the entity Proserpine Ltd, AASB 124/IAS 124, paragraph 9 regards any transactions between her and the entity to be as related party transactions. This related party transaction must be disclosed in the financial statements of Proserpine Ltd. Exercise 21.6 Determining whether transactions are related party transactions Which of the following is a related party transaction and, under AASB 124/IAS 24, requires disclosure in the annual financial statements? (a) An annual cash bonus amount paid to factory workers employed by the entity. (b) A performance-related amount paid to the directors of the entity. (c) A loan of $15  000 advanced to the chief financial officer of an entity and which is outstanding at the end of the reporting period. (d) A loan for $60 000 that was made to a retired director of an entity, and which was written off as an uncollectible debt during the current financial year. (a) Not regarded as a related party transaction. The cash bonus occurred in an arm’s length transaction and the factory workers would not be considered as key management personnel. (b) Yes; directors of the entity, whether they are executive or non-executive, are regarded as related parties of the entity, and transactions between them must be disclosed. (c) Yes; the chief financial officer would usually be regarded as a member of key management personnel as that person would have the authority and responsibility to plan, direct and control the activities of the entity. (d) Yes; the loan was made to a retired director, and the debt written-off can be regarded as a post-employment benefit.

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