Provisions for Depreciation Computation and Disclosure
Describe about the Events after the Reporting Period for Financial Reporting.
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The provisions as regards computation and discloser of deprecation are contained in the AASB 1021. In respect of the change in the rates and method of depreciation, the provisions of paragraph 6.3 this standard require that effect of such change must be given in the current year financial statements and the depreciation for the future years must be computed considering such changes (AASB 1021, 1997). Further, the standard also provides that the prior period financial statements should not be given any effect in respect of the changes in the rate and method of deprecation (AASB 1021, 1997). Applying these provisions to the current case of Rainyday Ltd, the depreciation for the financial year 2015-16 would change as has been worked out below:
|
S.No.
|
Description
|
Amount ($)
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|
|
A
|
Cost of manufacturing equipment
|
500,000.00
|
|
B
|
Life
|
10
|
|
C
|
Residual value
|
0
|
|
D
|
Depreciation per year (A-C/B)
|
50,000.00
|
|
E
|
Depreciation for 2013-14 and 2014-15 (D*2)
|
100,000.00
|
|
F
|
Written down value on 01.07.2015 (A-E)
|
400,000.00
|
|
G
|
Revised life
|
6
|
|
H
|
Revised depreciation from 2015-16 and onwards (F/G)
|
66,666.67
|
Thus, it can be observed from the above that the depreciation for the financial year has changed from $50,000 to $66,666.67 as a result of change in the effective useful life of the equipment. The change in the depreciation is non-adjusting item for the previous financial years; therefore, the directors of Rainyday Ltd are advised not to make any adjustments in the accounts for this change for the previous financial years 2013-14 and 2014-15.
1(b) As per the provisions of the AASB 108, the adjustment for the errors and omissions of the previous periods is given in the current financial statements by restating the assets, liabilities, and the equity. Further, tax effect of such adjustment is accounted for in accordance with the provisions of AASB 112, “Income Taxes” (AASB 108, 2013). In the case of Rainyday Ltd, the repair expense of $25,000, which remained unaccounted in the year 2015, need to be adjusted in the books in the year 2016. The adjusting journal entries for Rainyday Ltd are given below:
|
Journal for Prior Period Adjustments: Rainyday Ltd 2015-16
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
5-Jul-16
|
Repair expense
|
25000
|
|
|
|
Cash
|
|
25000
|
|
|
|
|
|
|
30-Jun-16
|
Retained earnings
|
25000
|
|
|
|
Deferred tax
|
|
7500
|
|
|
Repair expense
|
|
25000
|
As per the provisions AASB 9, the measure fall in the fair value of the equity instrument is recognized in the financial statements (AASB 9, 2010). Further, the provisions of the AASB 110 entail that the events taking place after the closer of the financial year but before the finalization of the financial statements, should be adjusted (AASB 110, 2011). Therefore, Rainyday Ltd should adjust the loss of $350,000 ($800,000-$450,000) in the profit and loss account for the financial year 2015-16 by passing the following journal entry:
|
Journal: Rainyday Ltd 2015-16
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
30-June-16
|
Profit and loss account
|
350000
|
|
|
|
Equity investment account
|
|
350000
|
1(d) In the current situation, the since the debtor of the company has gone bankrupt before the finalization of the financial statements, the event is adjusting nature as per the AASB 110 (AASB 110, 2011). Therefore, the RainydayLtd should write off the remaining amount $450,000 as well in the financial year 2015-16 itself by passing the following journal entry:
|
Journal: Rainyday Ltd 2015-16
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
30-June-16
|
Profit and loss account
|
450000
|
|
|
|
Bad debts
|
|
450000
|
2.
|
Journal for share issue: Sunny Ltd
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
|
|
|
|
|
31-Jan-16
|
Cash Trust
|
1,890,000.00
|
|
|
|
Application
|
|
1,890,000.00
|
|
|
(For application money on ordinary shares received)
|
|
|
|
|
|
|
|
|
31-Jan-16
|
Cash
|
30,000.00
|
|
|
|
Share options
|
|
30,000.00
|
|
|
(Issue of 60000 share options
at 50c each)
|
|
|
|
12-Feb-16
|
Application
|
1,890,000.00
|
|
|
|
Share capital
|
|
1,800,000.00
|
|
|
Share allotment
|
|
90,000.00
|
|
|
(For shares allotted and excess money received on application adjusted toward allotment)
|
|
|
|
12-Mar-16
|
Cash
|
1,890,000.00
|
|
|
|
Cash Trust
|
|
1,890,000.00
|
|
|
(Transfer on allotment of shares)
|
|
|
|
12-Mar-16
|
Allotment
|
600,000.00
|
|
|
|
Share capital
|
|
600,000.00
|
|
|
(Allotment money due on 600000 shares)
|
|
|
|
12-Mar-16
|
Cash
|
493,000.00
|
|
|
|
Allotment
|
|
493,000.00
|
|
|
[Allotment money received on 580000 shares=$580000-$90000)]
|
|
|
|
20-Mar-16
|
Share capital
|
80,000.00
|
|
|
|
Share forfeited (630000/600000*20000)=21000 shares*$3
|
|
63,000.00
|
|
|
Allotment
|
|
17,000.00
|
|
|
(20000 shares forfeited)
|
|
|
|
5-Apr-16
|
Cash
|
74,000.00
|
|
|
|
Share forfeited ($4-$3.70)*20000
|
6,000.00
|
|
|
|
Share capital
|
|
80,000.00
|
|
|
(20000 forfeited shares reissued @ $3.70 per share)
|
|
|
|
5-Apr-16
|
Share forfeited ($63000-$6000)
|
57,000.00
|
|
|
|
Share re-issue costs
|
|
3,600.00
|
|
|
Cash
|
|
53,400.00
|
|
|
(Balance in share forfeit after meeting reissue cost paid back)
|
|
|
|
30-Jun-16
|
Cash (50000*$4.2)
|
210,000.00
|
|
|
|
Share capital
|
|
210,000.00
|
|
|
(50000 shares issued against 50000 options allotted)
|
|
|
|
30-Jun-16
|
Share options
|
30,000.00
|
|
|
|
Share capital
|
|
25,000.00
|
|
|
Lapsed options reserve
|
|
5,000.00
|
|
|
(Write-off of options exercised, and lapsed)
|
|
|
3.
|
Computation of current tax
|
|
|
Amount ($)
|
Amount ($)
|
|
Accounting profit before tax
|
|
190,750.00
|
|
Add: Adjustments for taxation purpose
|
|
|
|
Depreciation – equipment (Accounting)
|
40,000.00
|
|
|
Depreciation – motor vehicles (Accounting)
|
15,000.00
|
|
|
Entertainment expenses (not tax deductible)
|
4,500.00
|
|
|
Provision for annual leave
|
11,000.00
|
|
|
Provision for warranties
|
6,900.00
|
|
|
Rent payable
|
6,000.00
|
|
|
|
|
83,400.00
|
|
Less: Adjustments for taxation purpose
|
|
|
|
Prepaid insurance
|
3,000.00
|
|
|
Government grant (exempt from income tax)
|
30,000.00
|
|
|
Depreciation – equipment (taxation)
|
60,000.00
|
|
|
Depreciation – motor vehicles (taxation)
|
12,000.00
|
|
|
Taxable profit
|
|
169,150.00
|
|
Tax Rate
|
|
30%
|
|
Current Tax
|
|
50,745.00
|
|
Temporary Differences
|
|
|
Tax base
|
Carrying amount
|
Taxable temporary differences (liability)
|
Deductible temporary differences (asset)
|
|
Prepaid insurance
|
–
|
3,000.00
|
3,000.00
|
|
|
Equipment
|
340,000.00
|
360,000.00
|
20,000.00
|
|
|
Motor vehicles
|
48,000.00
|
45,000.00
|
|
3,000.00
|
|
Provision for annual leave
|
–
|
11,000.00
|
|
11,000.00
|
|
Provision for warranties
|
–
|
6,900.00
|
|
6,900.00
|
|
Rent payable
|
–
|
6,000.00
|
|
6,000.00
|
|
Total
|
|
|
23,000.00
|
26,900.00
|
|
Deferred Tax Asset/ liability
|
|
|
Amount ($)
|
|
Deductible temporary differences (asset)
|
26,900.00
|
|
Less: Taxable temporary differences (liability)
|
23,000.00
|
|
|
3,900.00
|
|
Tax Rate
|
30%
|
|
Deferred Tax Asset
|
1,170.00
|
|
Journal Entries
|
|
S.No.
|
Description
|
Debit ($)
|
Credit ($)
|
|
|
|
|
|
|
1
|
Deferred tax asset
|
1,170.00
|
|
|
|
Profit and Loss
|
|
1,170.00
|
|
|
|
|
|
|
2
|
Profit and Loss
|
50,745.00
|
|
|
|
Current tax
|
|
50,745.00
|
4
|
Journal Entries
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
1-Jul-13
|
Equipment
|
800,000.00
|
|
|
|
Cash
|
|
800,000.00
|
|
30-Jun-14
|
Depreciation expense
|
152,000.00
|
|
|
|
Accumulated depreciation-equipment
|
|
152,000.00
|
|
|
[($800000-$40000)/5]
|
|
|
|
30-Jun-14
|
Accumulated depreciation-equipment
|
152,000.00
|
|
|
|
Equipment
|
|
152,000.00
|
|
30-Jun-14
|
Profit and loss
|
152,000.00
|
|
|
|
Depreciation expense
|
|
152,000.00
|
|
1-Jul-14
|
Equipment
|
82,000.00
|
|
|
|
Revaluation reserve
|
|
82,000.00
|
|
|
$800,000-$152,000=$648,000 (WDV)
|
|
|
|
|
($730,000-$648,000= Revaluation reserve)
|
|
|
|
30-Jun-15
|
Depreciation expense
|
115,000.00
|
|
|
|
Accumulated depreciation-equipment
|
|
115,000.00
|
|
|
[$730000-$40000]/6
|
|
|
|
30-Jun-15
|
Accumulated depreciation-equipment
|
115,000.00
|
|
|
|
Equipment
|
|
115,000.00
|
|
30-Jun-15
|
Profit and loss
|
115,000.00
|
|
|
|
Depreciation expense
|
|
115,000.00
|
|
30-Jun-16
|
Profit and loss
|
201,333.33
|
|
|
|
Revaluation reserve ($82000/6)
|
13,666.67
|
|
|
|
Impairment loss [($730000-$115000)-$400000]
|
|
215,000.00
|
|
30-Jun-16
|
Impairment loss
|
215,000.00
|
|
|
|
Equipment
|
|
215,000.00
|
|
30-Jun-16
|
Depreciation expense
|
72,000.00
|
|
|
|
Accumulated depreciation-equipment
|
|
72,000.00
|
|
|
[($400000-$40000)/5]
|
|
|
|
30-Jun-16
|
Accumulated depreciation-equipment
|
72,000.00
|
|
|
|
Equipment
|
|
72,000.00
|
|
30-Jun-16
|
Profit and loss
|
72,000.00
|
|
|
|
Depreciation expense
|
|
72,000.00
|
|
30-Sep-16
|
Cash
|
390,000.00
|
|
|
|
Accumulated depreciation
|
339,000.00
|
|
|
|
Loss on disposal
|
71,000.00
|
|
|
|
Equipment
|
|
800,000.00
|
|
30-Sep-16
|
Revaluation reserve ($82000-$13666.70)
|
68,333.33
|
|
|
|
Profit and loss
|
2,666.67
|
|
|
|
Loss on disposal
|
|
71,000.00
|
5. As per the provisions of the AASB 136, the allocation of the impairment loss of a cash generating unit is made first to the goodwill and then to the other assets in the proportion of their carrying amounts. However, it should be kept in mind that the allocation of the impairment loss in such a manner does not result in excess of the amount that would have been calculated considering a particular asset singly (AASB 136, 2010). In accordance with the relevant provisions of AASB 136, the computation and allocation of the impairment loss of CGUs of Movies Ltd is presented below:
|
Computation of impairment loss for cash generating units
|
|
|
Cash Generating Units
|
|
|
Cinema ($)
|
DVD Sales ($)
|
|
A. Fair value less cost to sell
|
780,000.00
|
318,000.00
|
|
B. Value in use
|
900,000.00
|
290,000.00
|
|
C. Recoverable value (higher of A and B)
|
900,000.00
|
318,000.00
|
|
D. Carrying amount of cash generating unit
|
1,019,000.00
|
326,000.00
|
|
E. Impairment loss (D-C)
|
119,000.00
|
8,000.00
|
|
Allocation of impairment loss: Cinema
|
|
|
Carrying amount ($)
|
Impairment loss allocated
|
Max limit (individual impairment)
|
|
Goodwill
|
45,000.00
|
5,301.98
|
|
|
Furniture and fittings
|
205,000.00
|
24,153.47
|
|
|
Electrical equipment
|
110,000.00
|
12,960.40
|
|
|
Land and buildings
|
625,000.00
|
73,638.61
|
75,000.00
|
|
Licence
|
25,000.00
|
2,945.54
|
1,000.00
|
|
|
1,010,000.00
|
119,000.00
|
|
|
Allocation of impairment loss: DVD Sales
|
|
|
|
Carrying amount ($)
|
Impairment loss allocated
|
Max limit (individual impairment)
|
|
|
Furniture and fittings
|
25,000.00
|
873.36
|
|
|
|
Electrical equipment
|
10,000.00
|
349.34
|
|
|
|
**Land and buildings
|
179,000.00
|
6,253.28
|
4,000.00
|
|
|
Goodwill
|
15,000.00
|
524.02
|
|
|
|
|
229,000.00
|
8,000.00
|
|
|
|
**Note: In case of land and building, the impairment loss considering land and building as single asset comes to $4,000, but the in CGU allocation it comes to $6,253.28. As per provisions of AASB 136, max amount that can be allocated would be $4000 only.
|
|
| |
| |
|
Journal Entries
|
|
Date
|
Description
|
Debit ($)
|
Credit ($)
|
|
30-Jun-16
|
Profit and loss
|
127,000.00
|
|
|
|
Impairment loss-Cinema
|
|
119,000.00
|
|
|
Impairment loss-DVD Sales
|
|
8,000.00
|
|
|
|
|
|
|
30-Jun-16
|
Impairment loss-Cinema
|
119,000.00
|
|
|
|
Goodwill
|
|
5,301.98
|
|
|
Furniture and fittings
|
|
24,153.47
|
|
|
Electrical equipment
|
|
12,960.40
|
|
|
Land and buildings
|
|
73,638.61
|
|
|
Licence
|
|
2,945.54
|
|
30-Jun-16
|
Impairment loss-DVD Sales
|
5,746.72
|
|
|
|
Furniture and fittings
|
|
873.36
|
|
|
Electrical equipment
|
|
349.34
|
|
|
**Land and buildings
|
|
4,000.00
|
|
|
Goodwill
|
|
524.02
|
References
AASB 110. (2011). Events after the Reporting Period. Retrieved September 13, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB110_07-04_COMPdec09_01-11.pdf
AASB 136. (2010). Impairment of Assets. Retrieved September 13, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
AASB 1021. (1997). Deprecation. Retrieved September 13, 2016, from https://www.aasb.gov.au/admin/file/content102/c3/AASB1021_8-97.pdf
AASB 108. (2013). Deprecation. Retrieved September 13, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPdec09_01-11.pdf
AASB 9. (2010). Financial Instruments. Retrieved September 13, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-10.pdf
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