BKAR 3033 FINANCIAL ACCOUNTING AND REPORTING 3 MINICASE 4: MFRS 108 & MFRS 110

DUE DATE: 28/12/2020

QUESTION 1

A. MTy Bhd operates a fast food restaurant in Changlun, Kedah since year 2015. The classes of property, plant and equipment in MTy Bhd accounts are building, machinery, furniture and fittings and office equipment. In year 2015, MTy Bhd purchased machinery for the operation of the business at cost of RM3,250,000 with useful life of 10 year and residual value of RM100,000. The company retained earnings as follows:

2017 2016 RM RM

Retained Earnings 2,827,421

2,134,356

The newly appointed auditor of the company Encik Salim identified that no depreciation was provided for the machinery in year 2015 nonetheless the asset was in used to generate revenue. Encik Salim has reported the errors incurred in year 2015 where the depreciation for machinery was computed for only 2 years since year 2016 instead of three years to the Chief Executive Officer (CEO) of the MTy Bhd. Thus, for year 2017 Encik Salim has advised the necessary accounting treatment required for the missing depreciation amount to MTy Bhd. Assume the tax rate is 25%.

REQUIRED:

(a) Define errors in accordance with MFRS 108 Accounting Policies, Changes in

Accounting Estimates and Errors.

(b) State THREE (3) disclosure for correction of errors in accordance with MFRS

108 Accounting Policies, Changes in Accounting Estimates and Errors.

(c) Demonstrate the accounting treatment for the missing depreciation amount and

the impact to retained earnings in year 2017.

B. MTy Bhd has two issues identified by auditors relevant to events after the reporting period for the year ended 31 December 2017 as follows:

1. During the audit, the auditor has discovered a material fraud committed by the companys Accounts Officer. Investigations revealed that a total of RM250,000 of the trade receivables as shown in the statement of financial position at 31 December 2017 was paid and the money has been embezzled by the Accounts Officer. The auditor revealed that RM105,000 was embezzled in the year to 31 December 2016 and the balance in the current year. MTy Bhd has not covered insurance for the loss, thus, the amount of RM250,000 is not recoverable.

2. MTy Bhd is being sued by an employee who lost a hand in an accident while at work on 1 June 2017. The company is contesting the claim as the employee was not following the safety procedures. Accordingly, the financial statements include a note of a contingent liability of RM103,000 for personal injury damages. On 10 January, a decided case involving another company where a

similar injury was sustained, a settlement figure of RM300,000 was awarded by the court. Although the injury was similar, the circumstances of the accident in the decided case are different from those of MTy Bhds case.

REQUIRED:

Explain how the TWO (2) issues above should be dealt in accordance with MFRS 110

Events After the Reporting Period. Prepare required journal entries if necessary.

QUESTION 2

MLM Bhd started operations on 1 January 2015 and has used the FIFO method of inventory valuation since its operation. In 2018, the company decides to switch to the average cost method. The following table presents the effects of the change in inventory valuation method:

Net Income Retained Earnings (ending balance)

Year FIFO Average Cost FIFO RM RM RM

2015 175,000 157,000 2016 205,000 210,000 2017 300,000 293,000 2018 305,000 620,000

REQUIRED:

260,000 575,000 590,000 780,000

Restate the

Explain the accounting treatment for prior period errors in accordance to MFRS

108 Accounting Policies, Changes in Accounting Estimates and Errors.

Briefly explain the accounting treatment for adjusting events and non-adjusting events after the reporting period in accordance to MFRS 110 Events After the Reporting Period.

(a) (b)

(c)

beginning retained earnings balance as at 1 January 2018.

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