Financial statement disclosures

Question 1 [15 marks]
Financial statement disclosures
One of the projects that the International Accounting Standards Board (IASB) is currently undertaking is the Disclosure Initiative project, with the aim of improving communication in financial reports.
The IASB has identified three main concerns about disclosures in financial statements, namely: there is not enough relevant information in the notes, there is irrelevant information in the notes, and there is ineffective communication of the information provided.
The IASB released a discussion paper in March 2017, DP 2017/1 ‘Disclosure Initiative – Principles of Disclosure’ and is currently seeking feedback on the disclosure issues identified and on the Board’s preliminary views on how to address them.
You are an investor who, for years, has struggled to work through and understand all of the note disclosures when analysing and comparing the financial reports of companies that you are considering investing in.
You are currently considering investing in either CBA or NAB. After reviewing and comparing the note disclosures provided in their 2017 annual reports, you plan to make a submission in response to the IASB’s discussion paper. In your submission, you plan to provide feedback in response to ‘Section 2 – Principles of Effective Communication’ of the discussion paper, given the difficulties that you have faced due to ineffective communication in financial reports.
In section 2 of the Discussion Paper, the IASB has proposed that a set of principles of effective communication be developed. The seven principles identified in the Discussion Paper are that information in the financial reports should be:
• Entity specific;
• Clear and simple;
• Organised to highlight important matters;
• Linked to related information;
• Free from unnecessary duplication;
• Comparable; and
• In an appropriate format.

• Discuss which of the seven principles of effective communication you feel are lacking the most in the note disclosures contained in the 2017 financial reports of CBA and NAB (and hence which principles you think that the IASB needs to put the most work into, in order to improve communication in financial reports).
• Suggest two specific changes that you think will make the biggest improvement to the effectiveness of note disclosures for investors like yourself, given the issues discussed above.

Question 2 [16 marks]
Accounting for share issues
On 1 February 2017, Beach Supplies Ltd was registered and issued a prospectus inviting applications for 2,000,000 shares, at an issue price of $3.50, payable as follows:
$1.00 on application
$1.50 on allotment (payment due within 1 month of allotment)
$0.60 on first call
$0.40 on final call
The issue is underwritten at a commission of $30,000.
By 28 February 2017, applications had been received for 1,900,000 shares. On 3 March, shares are allotted, and the underwriter forwarded the application and allotment money due on the 100,000 shares less their commission. All remaining allotment money is received by 3 April. Legal costs re company formation are $5,000 and are paid on 5 April. Share issue costs of $3,000 are also paid on the same date.
The first call is made on 10 April 2017, with money due by 10 May 2017. The final call is made on 15 May 2017, with money due by 15 June 2017. All money owing in relation to the two calls is received by the due dates except for the holders of 40,000 shares who did not pay either call, and the holder of another 10,000 shares who did not pay the second call. On 20 June 2017, as provided in the company’s constitution, the directors forfeited these 50,000 shares.
On 25 June 2017, the forfeited shares are reissued as fully paid for a consideration of $3.10 per share. Costs of forfeiture and reissue amounted to $10,000, and are paid. The constitution allows for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 30 June 2017.
Prepare the journal entries to record the transactions of Beach Supplies Ltd up to and including that which took place on 30 June 2017. Show all relevant dates, narrations and workings.
Marking Guide – Question 2 Max. marks awarded
Journal entries 12
Dates 2
Narrations and workings 2

Question 3 [18 marks]

Accounting for income tax

The accounting profit before tax for the year ended 30 June 2017 for Aldee Ltd amounted to $235,000. It included the following income and expense items:

Royalties (exempt income) 15,000 CR
Interest revenue 16,000 CR
Annual leave expense 9,000 DR
Doubtful debts expense 3,800 DR
Depreciation – plant (15% per year, straight-line) 47,250 DR
Depreciation – motor vehicles (20% per year, straight-line) 20,000 DR
Insurance expense 14,000 DR
Rent expense 42,000 DR
Warranty expense 5,600 DR
Entertainment expense (not tax deductible) 4,000 DR

The draft statement of financial position at 30 June 2017 contained the following assets and liabilities:
Cash 46,000 22,500
Trade receivables 88,000 45,800
Less Allowance for doubtful debts (4,000) (2,200)
Inventory 57,100 54,300
Interest receivable 2,000 1,000
Prepaid insurance 4,000 1,000
Plant – cost 315,000 315,000
Less Accumulated depreciation (113,250) (66,000)
Motor vehicles – cost 100,000 100,000
Less Accumulated depreciation (70,000) (50,000)
Deferred tax asset ? 17,190

Trade payables 66,200 43,600
Provision for annual leave 15,600 11,000
Provision for warranties 14,200 11,600
Bank loan 130,000 150,000
Deferred tax liability ? 7,200

Additional information:
• The tax depreciation rate for plant is 20% per year, and motor vehicles is 15% per year, using the straight-line method.
• Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
• Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• Interest revenue is only taxable when amounts are actually received, and not as amounts are accrued.
• The deferred tax asset (DTA) balance at 30 June 2016 comprised:
– DTA’s relating to temporary differences: $11,190
– DTA’s relating to carried forward tax losses: $6,000
• Taxation legislation allows tax losses to be offset against future taxable profit.
• The tax rate is 30%.
i) Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.
ii) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and deferred tax liabilities.

Question 4 [16 marks]
Revaluation of property, plant and equipment
Sunshine Ltd reported the following information for plant and equipment in its statement of financial position at 1 July 2016:
Plant and equipment – at cost 1,000,000
Less: accumulated depreciation (305,000)
The records of Sunshine Ltd as at 1 July 2016 showed that the plant and equipment consisted of two items:
Plant X Plant Y
$ $
Cost 800,000 200,000
Carrying amount 575,000 120,000
Both items of plant are depreciated on a straight-line basis over 10 years. Plant X has an estimated residual value of $50,000, and Plant Y has an estimated residual value of nil.
On 1 July 2017, the directors of Sunshine Ltd decide to change from the cost model to the revaluation model. The following information applies:
1 July 2017 1 July 2018
Plant X Plant Y Plant X Plant Y
Fair value $460,000 $110,000 $410,000 $90,000
Remaining useful life 6 years 5 years 5 years 4 years
Estimated residual value $40,000 nil $40,000 nil
Assume a tax rate of 30%.
Prepare all relevant journal entries for Sunshine Ltd’s plant and equipment for the period 1 July 2016 to 30 June 2019 (including entries for depreciation and all necessary revaluation entries). Show narrations and all relevant workings.
Marking Guide – Question 4 Max. marks awarded
Journal entries 13
Workings 3

Question 5 [15 marks]

Impairment of assets
Gadgets Ltd has a division that represents a separate cash generating unit. At 30 June 2016, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:
Assets: $
Cash 242,000
Plant and equipment 600,000
Less: accumulated depreciation (200,000)
Land 800,000
Inventory 190,000
Accounts receivable 67,000
Patent 200,000
Goodwill 10,000
Carrying amount of cash generating unit 1,909,000

The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $180,000, and the land has a fair value less costs to sell of $780,000.
The directors of Gadgets estimate that, at 30 June 2016, the fair value less costs to sell of the division amounts to $1,750,000, while the value in use of the division is $1,840,000.
As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2017.
By 30 June 2017, the recoverable amount of the cash generating unit was calculated to be $20,000 greater than the carrying amount of the assets of the unit.
Determine how Gadgets Ltd should account for the results of the impairment test at 30 June 2016 and 30 June 2017, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.
Marking Guide – Question 5 Max. marks awarded
Journal entries, calculations and workings for 2016 7.5
Journal entries, calculations and workings for 2017 7.5




Sample Solution