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Accounting policies, estimates and errors part 1B

Accounting policies, estimates and errors part 1B

CORRECTION OF ERRORS

Eg 1: correction of a material / immaterial error During the year 2010 it was discovered that the purchase of equipment had been expensed as repairs (cost: 400 000). The company depreciates at 25% pa SL (not reduced for part of a year). are deductible for tax purposes. The tax rate has always been 30%. Assume that the equipment was purchased in: A) 2010 (error: material / immaterial) B) 2009 (error: immaterial) C) 2009 (error: material) D) 2007 (error: material) The wear and tear allowed by the tax authorities is the same. Repairs

Errors made in the current period

immaterial and material errors fix in the

current year but dont disclose

Errors made in the prior period/s

immaterial errors fix in the current year but

dont disclose

material errors fix the prior years and

disclose fully

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Accounting policies, estimates and errors part 1B

Accounting policies, estimates and errors part 1B

The draft financial stms of this co. are as follows: Statement of financial position As at 31 December 2010 DRAFT 2010 ASSETS Property, plant and equipment EQUITY AND LIABILITIES Retained earnings Deferred taxation Current tax payable NET EQUITY 270 000 150 000 40 000 60 000 200 000 170 000 (10 000) 220 000 500 000 600 000 2009

Statement of comprehensive income

For year ended 31 December 2010 DRAFT 2010 200 000 160 000 80 000 120 000 100 000 0 120 000 100 000 0 60 000 2009

Profit before tax

Taxation

Profit for the period

Other comprehensive income

Total comprehensive income

Statement of changes in equity REs 50 000 100 000 150 000 120 000 270 000

For year ended 31 December 2010 DRAFT

These balances in the SOFP at 31 December 2008 were as follows: PPE: 400 000 DT: 30 000 (credit balance) CTP: 250 000 (credit balance)

Opening ret earnings 1 Jan 2009

TCI 2009

Opening ret earnings 1 Jan 2010

TCI 2010

Closing ret earnings 31 Dec 2010

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Accounting policies, estimates and errors part 1B

Accounting policies, estimates and errors part 1B

Eg 2: correction of MATERIAL PRIOR period error

Eg 2: MATERIAL PRIOR period error cont Statement of comp income (DRAFT) For the year ended 31 December 2010 2010 2009 C C Gross Revenue 1 200 000 900 000 Cost of Sales Gross Profit 400 000 800 000 200 000 600 000 250 000 350 000 0 Total comp income 350 000 350 000 550 000 200 000 350 000 150 000 200 000 0 200 000 Purchases of inventory: Since incorporation to 2007 = R300 000 During 2008 = C200 000 Opening retained earnings at 1/1/2009 = 50 000

Error Ltd. has recently discovered that inventory has been incorrectly valued using the weighted average method (WAM) instead of the first-in-firstout method (FIFO) for the past 4 years. The effect of this error is as follows: 2009 Other costs Profit before tax Taxation Profit for the period 40 000 Other comp income 2008

Year-end Inventory balances WAM

Since incorp. to C C C 2007 150 000 140 000 120 000 100 000

2010

(wrong)

FIFO

180 000 150 000 140 000

(right)

The tax authorities will not be re-opening any of the tax assessments before the current year but has agreed to use the FIFO method for the closing balance in 2010 onwards.

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Accounting policies, estimates and errors part 1B

Accounting policies, estimates and errors part 1B

Eg 2: MATERIAL PRIOR period error cont Changes in Accounting Policy and Correction of Material Errors

Statement of financial position (DRAFT)

As at 31 December 2010 2009 C 140 000 120 000 2008 C

2010 C

How do I approach these questions? 1. Prepare the journal entries or workings or both 2. Prepare note disclosure (based on (1) above) 3. Prepare the SOCI (based on (2) above) 4. Prepare SOCIE (based on (2) and (3) above)

ASSETS

Inventory

150 000

EQ & LIABS 250 000 300 000 250 000 100 000 150 000 Tip! 50 000

Ret earnings

600 000

5. Prepare the SOFP (based on (2) and (4))

Def taxation

200 000

CTP

400 000

Figures in your note (or your jnls, if you are not asked for the note) must equal adjs made to the: SOCI, SOCIE; and SOFP!

Net equity

(1 050 000) (660 000) (180 000)

Required: Prepare the journal entries and disclose the above information in the financial statements in accordance with IFRSs.

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Accounting policies, estimates and errors part 1B

Changes in accounting estimate prospective

SUMMARY OF CALCULATIONS

Changes in accounting policy retrospective Correction of material errors retrospective

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