BUSN 7050 Tutorial questions 02

(For Discussion Week 3)

AAAE
Exercise 16.2
Materiality and aggregation
State whether each of the following statements is true or false:
(a) A material item is determined solely on the basis of its size.
(b) A class of assets or liabilities is determined by reference to items of a similar nature or
function.
(c) Inventories and trade accounts receivable may be aggregated in the statement of
financial position.
(d) Cash and cash equivalents may be aggregated in the statement of financial position.
a)
b)
c)
d)

False size or nature, or combination of both (AASB 101/IAS 1 para. 7)

True AASB 101/IAS 1 para. 29
False AASB 101/IAS 1 para. 29, 54
True AASB 101/IAS 1 para. 29, 54

AAAE
Exercise 18.4
Events after the reporting period
In relation to the operations of Cat Ltd, the following events took place after the 30
June 2016 reporting period end but before 15 September 2016, the date the accounts
were authorised:

On 17 July 2016, Cat Ltds main fishing fleet was sunk during a freak storm.
Insurance will cover the replacement of the vessels but lost sales representing $550
000 in profits are not covered.
On 19 July 2016 Cat Ltd took delivery of a fishing net for its prawn trawler. The net
was purchased from a UK manufacturer on delivered duty paid shipping terms and
was in transit at the end of the reporting period. An inspection of the net revealed
significant structural flaws and the net was returned to the supplier on 28 July 2016.
Cat Ltd is to receive a full refund of the $650 000 purchase price which had been
paid in advance on 29 June 2016.
On 29 August 2016 a lawsuit was lodged against the company by the families of
crew members drowned in the 17 July storm, alleging negligence, and claiming $4
million in damages. No date has as yet been set for the court hearing.

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On 1 September 2016 the directors resolved to issue to the public 10 000 5%

debentures of $10 each, payable $5 on application and $5 on allotment.

Required
Classify the above events into adjusting and non-adjusting events after the end of the
reporting period, justifying your choice.

Classification of after reporting period events

Assuming all events are material by reason of size and nature:
Date
17 July 2016

Classification
Non-Adjusting

Justification
The storm which caused the loss of the fishing fleet and the
uninsured loss of profits occurred after the end of the
reporting period and impacts on future conditions.

19 July 2016

Adjusting

The receipt and subsequent return of the fishing net

provides new information about the assets owned by Cat
Ltd as at the end of the reporting period.

29 August 2016

Non-Adjusting

The lawsuit arose as a consequence of an event after the end

of the reporting period (the storm on 17 July) and it may
have material effects on future cash flows or operations if
the company has to pay the $4 million damages claim.

1 September 2016

Non-Adjusting

The issue of $100 000 5% debentures to the public does not

relate to conditions existing at the end of the reporting
period but will have a material impact on future cash flows.

Exercise 18.6
Materiality and events after the reporting period
The following information has been made available to you to assist in the preparation of
the financial statements of Ant Ltd for the year ended 30 June 2018:
1. The company has been involved in a dispute with a government environment agency
relating to the release of noxious gases from its manufacturing plant in early June 2018.
An expert investigation was conducted to determine if the company was at fault. The
draft financial report already discloses contingent liability in the notes detailing the
investigation and estimating the potential damages at $1.25 million. The investigators
report, released on 1 August 2018, found Ant Ltd to be responsible for the release and
damages amounting to $1 500 000 were payable by the company.
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2. On 9 July 2018, the sales manager raised credit notes worth $30 000 relating to sales
of faulty goods in the last 2 weeks of June 2018.
3. On 25 September 2018, the company received notification that a customer owing
$130 000 had gone into liquidation. The liquidator advised that unsecured creditors are
likely to receive a distribution of only 20c in the dollar. The liquidation was caused by a
flood in July 2018 which destroyed the customers operating plant and warehouse. The
damage was not covered by insurance.
Assume that Ant Ltds draft profit for the year ended 30 June 2018 is $720 000.
Required
In relation to the above events or transactions, prepare the necessary notes or general
journal entries to comply with applicable accounting standards.
1.

Release of investigators report on 1 August 2018

The release of the report and the decision that damages were payable by Ant Ltd provide new
information about conditions existing at the end of the reporting period given that the release of
the noxious gases occurred in June 2018. Assuming a profit before tax of $720 000, at the amount
of $1 500 000 is clearly material and the following adjustment should be made:
June 30

2.

Damages expense
Dr 1 500 000
Damages payable
Cr
(Recognition of damages liability)

1 500 000

Credit notes raised on 9 July 2018

As these credit notes relate to sales which occurred prior to the end of the reporting period this
provides more information about conditions existing at 30 June 2018 and will (or may, depending
on materiality) require adjustment by journal entry. However, as the credit notes represent only
approximately 4% of profit before tax ($30 000/$720 000), it could be argued that no adjustment
is necessary on the grounds of immateriality. The journal entry (ignoring materiality
considerations) is shown below:
June 30

3.

Sales returns and allowances

Dr
Accounts receivable
Cr
(Credit notes relating to June sales)

30 000
30 000

Liquidation of debtor

As the liquidation was caused by an event after the end of the reporting period no adjustment will
be made as this information does not change the situation that existed at 30 June 2018. However,
the $104 000 loss (80 cents in the dollar x $130 000) will be material to next years profits based
on the current years profit before tax ($104 000/$720 000 = 14%), and must be disclosed by note.
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Ant Ltd
Notes to the financial statements year ended 30 June 2018
Note X:
Events occurring after the end of the reporting period
In September 2018, a debtor owing $130 000 went into liquidation. The company expects to
recover only 20% of the amount owing.
Note that the question did not indicate the date on which financial statements are authorised for
issue. If the authorisation date was before September 25 then this event would not be disclosed in
the 2018 Financial Statements.

Exercise 18.10
Accounting policies, accounting estimates and errors
In order to comply with AASB 108/IAS 8, determine whether the following changes
should be accounted for prospectively or retrospectively:
1. A change in accounting estimate.
2. A voluntary change in an accounting policy.
3. A change in accounting policy required by a new or revised accounting standard.
4. An immaterial error discovered in the current year, relating to a transaction
recorded three years ago.
5. In the current year, a material error was discovered relating to a transaction
recorded three years ago. Management determines that retrospective application would
cause undue cost and effort.
(a)
(b)
(c)
(d)
(e)

prospective
retrospective
as required by the transitional provisions of that Standard; if not specified then retrospective
the amount is immaterial and so may either be ignored or corrected in the current year.
retrospective application is required unless impracticable to do so, but the definition of
impracticable does not include undue cost and effort (AASB 108 paragraph 5).

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AAAE
Exercise 21.2
Sonia Goodall is a newly appointed director of Proserpine Ltd, a listed company that
organises major sporting events. Sonia has provided consultancy services to Proserpine Ltd
for the past 10 years. In the most recent financial year these services amounted to $500000.
Required
Determine whether the consultancy service provided by Sonia is a related party transaction
that should be disclosed in the financial statements of Proserpine Ltd. Explain your
answer.
As Sonia is a director of the entity Proserpine Ltd, AASB 124/IAS 124, paragraph 9 regards any
transactions between her and the entity to be as related party transactions. This related party
transaction must be disclosed in the financial statements of Proserpine Ltd.
Exercise 21.6
Determining whether transactions are related party transactions
Which of the following is a related party transaction and, under AASB 124/IAS 24,
requires disclosure in the annual financial statements?
(a) An annual cash bonus amount paid to factory workers employed by the entity.
(b) A performance-related amount paid to the directors of the entity.
(c) A loan of $15 000 advanced to the chief financial officer of an entity and which is
outstanding at the end of the reporting period.
(d) A loan for $60000 that was made to a retired director of an entity, and which was
written off as an uncollectible debt during the current financial year.
(a) Not regarded as a related party transaction. The cash bonus occurred in an arms length
transaction and the factory workers would not be considered as key management personnel.
(b) Yes; directors of the entity, whether they are executive or non-executive, are regarded as
related parties of the entity, and transactions between them must be disclosed.
(c) Yes; the chief financial officer would usually be regarded as a member of key management
personnel as that person would have the authority and responsibility to plan, direct and control
the activities of the entity.
(d) Yes; the loan was made to a retired director, and the debt written-off can be regarded as a
post-employment benefit.

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