The directors of a company are considering the company’s draft financial stateme
ID: 2526196 • Letter: T
Question
The directors of a company are considering the company’s draft financial statements for the year ended 31 December 2017. The following financial information has been summarized from the books of the company on 31 December 2017:
The above financial data has not taken into consideration the following issues:
1 From past experience, the management estimated that 6% of trade receivables were uncollectible.
2 Land is measured using the revaluation model. In February 2018, the company received confirmation that land has a fair value increase of $10, 500 million at 31 December 2017. Land is not subject to depreciation.
3 The balance on current tax in the trial balance represents the under/over provision of tax liability of the previous year. Current tax expense amount is estimated to be $2,700 million. The tax consultant advised that the deferred tax liability balance (including the tax effects of item 2) should be $7,400 million at 31 December 2017. Corporate tax rate is 20%
4 The financial statements were to be published on 15 April 2018.
Required (work to the nearest thousand dollars; Notes to the accounts are not required)
With reference to relevant international accounting standards,
Explain whether each of the above items (1) to (3) should be included in the financial statements for the year ended 31 Decem ber 2017. If the answer is yes, what should be the adjustment /amount that would appear in the financial statements? (Note: the items do not carry equal weighting).
Debit Credit $m $m Revenue 635,000 Cost of sales 435,900 Distribution costs 50,250 Administrative expenses 55,200 Loan note interest and dividends paid 17,190 Bank interest 1,350 20-year leased property at cost 150,000 Freehold land 200,000 Property, plant and equipment at cost 133,250 Accumulated depreciation at 31 December 2017: Leased property 67,500 Plant and equipment 65,250 Inventory at 31 December 2017 73,600 Trade receivables 84,500 Provision for bad debts 3,600 Trade payables 88,300 Bank balance 5,370 Paid-up ordinary share capital 222,500 Retained profits at 1 January 2017 38,920 5% loan note 75,000 Current tax 4,800 Deferred tax 4,600 1,206,040 1,206,040Explanation / Answer
yes items 1-3 should be included in the financial statements adjustment entries Dr Cr 1) 6% 0f 84500 =5070 bad debts expense 1470 Provision for bad debts 1470 new balance = 5070 2) Freehold land 10500 new balance = 210500 revaluation surplus 10500 3) Current tax 2800 Deferred tax 2800 new balance = 7400 7400- 4600=2800