HW 3 -1
Included in depreciation expense above was depreciation on certain machinery that was purchased on 2 Jan 2014 for $450,000 and which had been depreciated on a straight-line basis over its useful life of 15 years with zero salvage value. During the review, the company decided that, as from 2019, the useful life of the machinery should be revised to 10 years (i.e. 10 years from purchase date) because of rapid technological obsolescence. At the same review, the company also discovered that certain office equipment purchased on 2 Jan 2017 for $150,000 had been erroneously expensed entirely in 2017 as operating expenses when it should instead have been depreciated on a straight-line basis over 5 years with zero salvage value.
QUESTION 1 KGB Ltd. is currently reviewing the following financial results for 2019 to be released shortly: Income Statement for the year ended 31 Dec 2019 2018 $ $ Turnover 1,900,000 1,750,000 Operating expenses (1, 100,000) (900,000) Depreciation expense (110,000) (98,000) Net profit 690,000 752,000 Statement of Changes in Retained Earnings for the year ended 31 Dec 2019 2018 $ $ Beginning retained earnings 1, 152,000 400,000 Net profit for the year 690,000 752,000 Ending retained earnings 1,842,000 1, 152,000QUESTION 2 MLC Ltd is a telecommunications operator that started operations in early 2015 to provide mobile phone services to its subscribers. As part of its efforts to increase market share, MLC (like many other mobile phone operators) spends heavily on advertising and promotion as well as gives hefty subsidies on mobile handsets to attract new customers to subscribe to its service. These advertising and promotion costs as well as handset subsidy costs are known in industry parlance as subscriber acquisition costs. Since its inception, MLC's policy has been to capitalize such subscriber acquisition costs on its balance sheet, and thereafter to amortize them on a straight line basis over three years, with the first amortization being charged in the year the costs were incurred. The following were the subscriber acquisition costs and associated amortization expenses incurred by MLC during each of the past five years: Year ended 31 Dec ($'000) 2019 2018 2017 2016 2015 Subscriber acquisition costs 870 900 720 480 240 Amortization expenses: 2015 costs 80 80 80 2016 costs 160 160 160 2017 costs 240 240 240 2018 costs 300 300 2019 costs 290 Total amortization expenses 830 700 480 240 80 The following are summary financial statement information of MLC for the year ended 31 Dec 2019 (with comparative numbers for 2018): Year ended 31 Dec ($'000) 2019 2018 Net Profit before subscriber acquisition costs 2.410 1,760 Amortization of subscriber acquisition costs (830 (700) Net Profit before tax 1.580 1,060 Tax (25%) (395) (265) Net Profit after tax 1,185 795 Beginning retained earnings 1,520 725 Ending retained earnings 2.705 1,520 Net Profit before tax above is shown after deducting related amortization of subscriber acquisition costs under the current accounting policy. MLC's income tax rate was 25% for all years. In February 2020, MLC decided to change its accounting policy from capitalizing and amortizing subscriber acquisition costs to expensing them in full in the year those costs were incurred. The auditors of MLC have approved the change and have deemed this change as a change in accounting policy under IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors)
