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ACT B332F Company Accounting II

HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Tutorial Exercises

Question 1

Distinguish and contrast change in accounting policy and change in accounting estimates.

Question 2 (HKICPA Module A Sept 2006)

Discuss the following statement:

“All errors in prior years’ financial statements must be corrected in the current year’s financial statements.”

Question 3 (HKICPA Module A June 2011)

In the preparation of the financial statements for the year ended 30 June 2010 of XYZ Paper Group Limited, the financial controller identifies the following events:

(a) The cost model was adopted to measure its office building after recognition in the prior year, the management determined to change to the revaluation model from current year.

(b) The entity obtained a three year interest-free loan from the government of HK$10 million (“Loan B”) on 1 April 2010. At 30 June 2009, the entity had another loan of HK$8 million received from the government on 1 January 2009 with the same terms (“Loan A”) outstanding and this will be repaid at 31 December 2011. Loan A had not been accounted for imputation of interest in the prior year’s financial statements as the former HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance did not have such requirement. According to HKAS 20.43, the newly introduced accounting requirement on government loan at a below-market rate of interest shall be applied prospectively from the effective date of the amendment.

(c) The entity has depreciated a production line over an estimated useful life of 15 years since 1 January 2008. A fire accident happened at the factory in late December 2009 which did not result in serious damage, but the remaining expected life of the asset has been shortened to 8 years.

(d) Two shipments of finished goods which were in transit from the Zhuhai factory to the Hong Kong warehouse at 30 June 2009 have been excluded from the closing inventory balance.

Required:

Explain the appropriate accounting treatment for the above events in accordance with the relevant financial reporting standards.

Question 4

In relation to the following two transactions, briefly outline what the correct accounting treatment should be under HKAS 8:

(i)  A Ltd has decided to change its allocation of overhead costs in arriving at its inventory valuation - from product A 50%, B 30% and C 20% to A 40%, B 40% and C 20% as it believes this is a fairer allocation of the costs incurred in manufacturing the goods.

(ii)  B Ltd has decided to change its presentation of certain properties from being included as current assets to non-current assets as the company has no intention of selling on the properties in the foreseeable future.

Question 5

At the beginning of Year 1, Glory Limited (“Glory”) acquired a machine at cost of $220,000. At that time the estimated life of the machine was 10 years, with estimated residual value of $20,000. Glory uses straight-line depreciation.  Consider the following independent situations:

Situation 1:

At end of Year 3, the management revised the estimated remaining life of the machine for 4 years with no residual value.  How should these revisions be reflected in the statement of profit or loss and comprehensive income for the year ended 31 December Year 3?

Situation 2:

At the end of Year 3, the management discovered although the machine can be used 7 more years the usefulness of the machine has been deteriorated substantially.  The management decided to reflect the change in the pattern of the usefulness of the machine by adopting reducing balance method of depreciation charging annual depreciation at 30% on book value.  How should this discovery be reflected in the profit or loss for the year ended 31 December Year 3?

Situation 3:

At the end of Year 3, the management discovered an expenditure of $80,000 incurred in January Year 1 in the installation of the machine was charged as repair expense in the financial statement for the year ended 31 December Year 3.  Such expenditure should be capitalized as part of the cost of the machine.  How should this discovery be reflected in the profit or loss for the year ended 31 December Year 3?