Question
ou are the newly appointed senior accountant of Fast Motion Ltd, a masks manufacturing company and provided with the following trial balance for the year
ou are the newly appointed senior accountant of Fast Motion Ltd, a masks manufacturing company and provided with the following trial balance for the year ended 30 June 2020:
Fast Motion Ltd Trial balance as at 30 June 2020 | ||||
|
| Debit ($) |
| Credit ($) |
Sales of N99 surgical masks |
| 1,275,000 | ||
Sales of R100 masks |
| 1,600,000 | ||
Cost of goods sold | 920,500 |
|
| |
Advertising expense |
| 118,000 |
|
|
Salaries and wages | 228,000 |
|
| |
Annual leave expense | 15,500 |
|
| |
Doubtful debts expense | 4,400 |
|
| |
Depreciation expense | 200,000 |
|
| |
Interest expense | 26,000 |
|
| |
Interest income |
| 15,000 | ||
Rental income |
|
|
| 22,000 |
Warranty expense |
| 27,500 |
|
|
Other expenses | 19,000 |
|
| |
Income tax expense | 312,000 |
|
| |
Goodwill |
| 150,000 |
|
|
Cash on hand | 156,000 |
|
| |
Cash on deposit, at call | 185,000 |
|
| |
Trade debtors | 220,000 |
|
| |
Allowance for doubtful debts |
| 3,500 | ||
Raw material inventory | 135,000 |
|
| |
Finished goods inventory |
| 362,000 |
|
|
Land | 800,000 |
|
| |
Buildings | 500,000 |
|
| |
Accumulated depreciation buildings |
| 50,000 | ||
Plant and equipment | 750,000 |
|
| |
Accumulated depreciation plant and equipment |
| 150,000 | ||
Investment property, 10 years | 732,000 |
|
| |
Patents, 5 years | 245,000 |
|
| |
Deferred tax asset | 7,200 |
|
| |
Deferred tax liability |
| 9,500 | ||
Bank loan |
| 159,000 | ||
Trade creditors |
| 77,200 | ||
Provision for annual leave |
|
| 8,900 | |
Provision for warranty |
|
|
| 26,000 |
Current tax liability |
| 295,000 | ||
Accrued expenses |
|
|
| 22,000 |
Retained earnings, 1 July 2019 |
| 0 | ||
Dividends paid | 100,000 |
|
| |
Share capital |
|
| 2,500,000 | |
|
| 6,213,100 |
| 6,213,100 |
Additional information:
- Fast Motion Ltd is a reporting entity in accordance with the requirements of Australians Conceptual Framework.
- Raw materials used during the year is $1,282,500.
- 20% of the bank loan is repayable within the next 12 months.
- Half of the provision for annual leave is expected to be payable within the next 12 months.
- The provision for warranty is in relation to a 12-month warranty given on all N99 surgical masks sold.
- Amortization is not required, and no impairment loss occurred for goodwill and patents.
- There were no new shares issued during the financial year.
- Fast Motion Ltd uses the single statement format for the statement of profit or loss and other comprehensive income although the directors are unsure if they should present the expenses by function or nature on the statement. The following expenses are allocated for administrative expenses and distribution costs for the purposes of analysis of expenses by function:
| Administrative expenses |
| Distribution costs |
Salaries and wages | 30% |
| 70% |
Annual leave expense | 40% |
| 60% |
Depreciation expense | 20% |
| 80% |
Other expenses | 90% |
| 10% |
- In relation to the statement of financial position, where AASB 101 requires entities to disclose further sub-classifications of the minimum line items on the face of the statement or in the notes, the directors want to report only the minimum line items on the face of the statement, and leave the sub-classifications to be disclosed in the notes.
Part A
- Prepare a memo to the directors, explaining the methods available for classifying expenses on the statement of profit or loss and other comprehensive income and give examples of expense items for each method. Advise the directors which method of classification the company should opt for and any other factors that need to be considered when selecting between the available methods. Support your answers by making references to specific paragraphs from AASB 101. For the purpose of illustrating the differences in the methods discussed, prepare the statements of profit or loss and other comprehensive income using each of the available methods, for the year ended 30 June 2020, in accordance with AASB 101.
- Prepare the statement of financial position of Fast Motion Ltd as at 30 June 2020, in accordance with AASB 101. Notes and comparative figures are not required.
Tips for completing Part A:
- Use the line items that a listed company is likely to use and refer to paragraphs 54, 82, 82A, 102 and 103 of AASB 101 in determining the line items to be presented;
- Show all relevant workings, for example, how amounts in the financial statements have been calculated to support the figures presented in the statements;
- Disclosure notes (Notes to the accounts) and comparative figures are not required; and
- Information given in Part B below should be ignored while completing Part A.
Part B
The following events occurred after the preparation of statements were completed in Part A above.
Event 1
On 1 July 2020, the directors are reviewing the depreciation policy of a plant specially designed to produce R100 masks. The plant is currently depreciated at 20% on a straight-line basis. After reviewing the development of COVID-19 lately, the directors think that the plant would best be depreciated at 35% on a reducing-balance basis. This change is considered material in Fast Motion Ltds case.
Required:
- Advise the directors if the above situation would constitute a change in accounting policy or a change in accounting estimate. Explain and support your answers by making references to specific paragraphs in AASB108 and/or AASB 116.
- Explain to the directors the relevant adjustments and/or disclosure notes required as a result of this change for the financial years ended 30 June 2020 and 30 June 2021. Note: you are not required to show any adjustments and/or prepare any disclosure notes.
Event 2
Snow Ltd is a customer of Fast Motion Ltd and owed $100,000 in accounts for the year ended 30 June 2020 (included in the trade debtors provided in Part A). On 18 July 2020, the directors received a letter from a liquidator advising the bankruptcy of Snow Ltd and confirmed that it had ceased trading on 5 July 2020. Fast Motion Ltd is to receive a liquidation distribution of 20 cents in every dollar. The amount of doubtful debts allowed for in relation to Snow Ltds debt amounts to $1,590 (included in the allowance for doubtful debts in Part A).
The financial statements for the year ended 30 June 2020 were authorised for issue by the directors on 28 August 2020.
Required:
- Classify the above event as either an adjusting or non-adjusting event after the end of the reporting period. Justify your answer by making references to specific paragraphs in AASB 110.
- Consistent with your answer above, prepare the adjusting entries and disclosure notes required to comply with the requirements of AASB110.
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