QUESTION FOUR for Part A The cases below are independent from each other: erns E
ID: 2587019 • Letter: Q
Question
QUESTION FOUR for Part A The cases below are independent from each other: erns Enterprise is in operation, but its owner values the entity's assets on liquidation basis. a) O'H Australian Taxation Office (ATO) has launched a major tax audit investigation on Superior Trans r Ltd. It is possible that Superior Trans Ltd would have to pay a erable fine to ATO. However, ATO advised the company that the outcome of not be known until the end of next financial year. Superior Trans Ltd recognise any liability for this unresolved tax audit and did not disclose the b) The the tax a did not event in the current financial year annual report REQUIRED dentity the accounting concept or principle violated in each of the above cases. Explain your answer fully by making reference to the cases Part B On 1 January 2015, Narita Ltd had a balance of $25,000 in (Retained Earnings) $10,000 in General Reserve and $60,000 in Share Capital account During the year, the following transactions occurred: · The company declared a 10% share-dividend (i.e. bonus shares) on its 10 shares on 2June 2015. The market price of Narita Ltd shares was13 per share on 2 June 2015 and this was determined to be the amount at which the dividend shares would be issued The share dividend was paid (i.e. bonus shares issued) on 31 July 2015. . Narita Ltd decided to transfer $5,000 from Retained Earnings to General Reserve on 12 August 2015. .Profit after income tax of Narita Ltd for the financial year ending 31 December 2015 was $12,000. page . 612, REQUIRED: On the basis of above information, prepare the equity section of the Statement of Financial Position of Narita Ltd as at 31 December 2015.Explanation / Answer
PART A
a. The owner of the company are valuing the assets on liquidation basis which is in violation of the Going concern concept of the accounting. As per the going concern, an entity is assumed to be continue it's business for the foreseeable future and is not assumed to be wind down in the long run. It is seemed to be indefinitely continued in business. By valuing the assets on liquidation basis, owners are indirectly seeing the entity as not lon lasting and therefore violating going concern concept or principle.
b. As per the accounting principles, a company is required to be provide for all the future losses or expenses but should not provide for the potential gains. Such principle is known as "Principle of conservatism". Moreover, even accounting standards require the companies to disclose the major liabilities or provisions which are yet to be materailised. As per Standards, if the company is able to estimate the amount of losses or expenses with reasonable certainity and it is probable that such losses will be incurred then the same are required to be account for as the liabilities in the balance sheet. For example: a law suit which is probable to be lost and amount is estimated should be provided for in accounts. Moreover, if the amount cannot be ascertained then the event should be disclosed in the footnotes to the financial statements as contingent liabilities.
In the given case, Superior Trans is required to disclose the event of major tax audit investigation in the footnotes to financial statements and should be regarded as contingent liability. Hence, the company has violated the principles of conservatism.
NOTE: Dear Student, as per Chegg Guidelines we are required to do only first question if more than one question is given. Hence, the PART B is not solved in the answer.