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LECTURE 7: EXERCISES

LECTURE 7: EXERCISES. CHANGES IN ACCOUNTING POLICIES, ESTIMATES AND ERRORS. Changes in Accounting Policies. Example 1

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LECTURE 7: EXERCISES

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  1. LECTURE 7:EXERCISES CHANGES IN ACCOUNTING POLICIES, ESTIMATES AND ERRORS

  2. Changes in Accounting Policies Example 1 Dinamik Bhd adopted an accounting policy to capitalise its borrowing costs on all qualifying assets under construction. Correspondingly, the following amounts were capitalised, In Year 4, it incurred borrowing costs of RM2.5 Mil that could be capitalised. However, in this year it changed its accounting policy on borrowing costs, which to write them off when incurred. PBIT for years X4 and X3 were RM12.5Mil and RM11 Mil respectively (b4 change in actg policy). Retained profits b/f in year X4 and X3 were RM28.25Mil and RM20 Mil (b4 change in actg policy). Asset under construction as at 31/12/x3 was RM3.9Mil including capitalisation of borrowing costs. Tax rate is 25% Required: Discuss the effects of the change in accounting policy on the items in the income statement

  3. Solution…. In Year 4, the RM5 Mil would be written off as finance cost. The cumulative cost of RM 8 Mil less tax of 25%, RM 6 Mil would be adjusted against the opening of the retained profits of X4 (closing bal as at 31/12/x3). In the comparative financial statements (which would be year x3), the retained profits b/f (closing balance as at 31/12/x2) should be adjusted by RM4 Mil less tax 25%, RM3 Mil. The note to the accounts should include info. Explaining the reasons for and consequences of the changes in accounting policy Solution Example 1.doc

  4. Change in Accounting Estimates Example 2 On 1/3/x3, Charm Bhd acquired a plant costing RM 5 Mil. The economic life was to be 10 yrs with no scrap value at the end of its useful life. On 1/3/x7 the remaining life was estimated to be 2 years and the estimated scrap value estimated to be RM250K. Discuss the accounting treatment in year x5 Answer The change in the estimated life is a change in actg estimate. The plant would have been depreciated by at 500K (RM5 Mil/10 yrs) per annum from x1 to x4. Carrying value at 1/3/x8 would be RM3 Mil. Depreciation expense for year x5 would be (3000 -250)/2 = 1375K. No change is to be made wrt dep charge in x1 to x4.

  5. Errors Example 3: On 1/5/x4, Batik Bhd purchased a building costing RM165 Mil. The company decided not to depreciate it in year x4. This was discovered when the fin stat for year X5 were being finalised. Assume tax rate to be 25%. Retained profits b/f was RM280Mil Required Discuss the accounting treatment Answer: Building is a depreciable asset and has to be depreciated. In year x5, a material error was discovered. The depreciation for year x4 has to be provided for. Assuming an economic life of 25 years and scrap value of RM 5 Mil, dep. charge for year x4 should be RM6.4 [(165 - 5)/25]. The retained profits b/f reduced by after tax effect which will be 4.8 (RM6.4 Mil x 75%). Tax provision need to be adjusted too. The building will be disclosed at year end X5 as follows X2 (Mil) X1 (Mil) Non Current Assets Building (cost) 165 165 Less: Accumulated depreciation (12.8)(6.4) 152.2 158.6

  6. Prospective Application Example 4 Techno Bhd has in issue RM 5 million ord. shares of RM 1 each. During year x2 , Techno Bhd discovered that some products costing RM 500K that had been sold in year 1 were incorrectly included in closing inventory of year x1. Techno’s actg records for yr X2 show sales of RM2.5 Mil, cost of sales of RM 1.8Mil (including the error in opening inventory) and expenses of RM150K. Current and previous yr tax rate was 25%. In year x1, Techno’s summarised income statement was Required: Prepare the extract of fin stat and comparatives. Opening Retained Profits was RM230,000

  7. Answer…. Solution Example 4.doc

  8. Exercises Discuss the accounting treatment and disclosure for each of the following independent event and transactions. Assume the tax rate is 25% where applicable (1) The company acquired a large asset for RM12 million. Effective year x6 the accounting standard requires the cost of the asset to be allocated to its various components and depreciated accordingly. The company has lost the records and is unable to assign the costs to the various components….(Change in accounting policies, Retrospective Adjustment, record loss, carried out the adj for current year and prospective year) (2) An entity entered into a contract to hire a plant on 1/1/x2 on the following terms. The rental of RM200K per annum is payable at the beginning of the year for 5 yrs. The fair value of the asset was RM1.2Mil. In year 4, when finalising the financial statements for the yr ended 31/12/x3, it was discovered that it was a finance lease and not an operatg lease. The entity had accounted the rental payment as an expense. (Material errors? Retrospective Adjustment)

  9. Continue…. (iii) An entity constructed structures in its tin mines to extract tin. It estimated that the cost of dismantling and landscaping in 10yrs will be RM2 Mil. After 3 yrs it was estimated that the dismantling and landscaping costs will be RM3 Mil and not RM2 Mil. Assume discount rate of 10%.. Change in Estimation, Current and Prospective Adjustment,

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