Financial Accounting: Assets
Question 1 (15 marks)
In this question, you will need to prepare and “post” transactions that occurred during the
month of November for Mutianyu & Badaling (M&B) Engineers Assoc. Ltd. The
company’s fiscal year is October 1 to September 30.
Problem description
The following transactions took place in November 20X5:
November 1
November 1
November 1
November 9
November 15
November 18
November 25
November 30
November 30
November 30
November 30
John Mutianyu and Mary Badaling each invested €9,000 in the
company and each received 9,000 no par value ordinary shares in
return. Share certificate numbers 3 and 4 were issued.
Issued cheque #169 to pay for one month’s rent of €1,800 for
furnished office space.
Paid the premium on a one-year insurance policy of €1,250 with
cheque #170. The term of the policy runs from December 1, 20X5,
to November 30, 20X6.
Purchased a computer for €3,500 with cheque #171.
Paid the semimonthly salary of €950 to an administrative assistant
with cheque #172.
Purchased computer supplies of €450 with cheque #173. Assume
these supplies will be used up by the end of the month.
Completed a consulting project and collected €5,237 as a
consulting fee from a client. Sales invoice #301 was issued.
Paid the semimonthly salary of €950 to an administrative assistant
with cheque #174.
Paid €1,250 for the month of November’s security/alarm
protection with cheque #175.
Paid €300 for November utilities with cheque #176.
Recorded monthly depreciation of €500 for computers.
The trial balance as of November 1, 20X5, follows:
Trial balance
As at November 1, 20X5
Bank
Accounts receivable
Prepaid expenses
Office equipment
Accumulated depreciation — office equip.
Accounts payable
Accruals
Miscellaneous payable
Shareholders’ loans
Ordinary shares
Retained earnings
Consulting fees
Accounting and legal expense
€8,050
26,421
5,000
53,271
€11,000
22,349
3,260
376
22,000
5,000
24,246
26,550
905
Depreciation expense
Computer supplies expense
Insurance expense
Office and general expense
Rent expense
Salaries expense
Utilities expense
Income tax expense
1,000
880
1,000
202
4,600
9,950
1,200
1,550
114,405
114,405
Required
Submit a trial balance as of November 30, 20X5.
Note: To properly answer the question, you need to first create the appropriate journal
entries. The second step is to “post” them to T-accounts. The third step is to generate the
trial balance.
Question 2 (29 marks)
Multiple choice (1 mark each)
a. Which of the following best describes accounting income?
1)
2)
3)
4)
Income is measured as the amount of “real wealth” that an entity could
consume during a period and be as well off at the end of that period as it was
at the beginning.
Market values adjusted for the effects of inflation or deflation are used to
calculate real wealth.
Income is calculated as a function of the revenue and matching principles.
Income equals the change in market value of the firm’s outstanding ordinary
stock for the period.
b. Which of the following would be true if a functional approach is used in the
preparation of an income statement?
1)
2)
3)
4)
Expenses are presented based on their nature or character.
Extraordinary items are included separately from profit from ordinary
activities.
Expenses are presented based on the purpose within the organization.
All expenses are presented as a one-line item.
c. A textile manufacturer with only one plant sustained a loss when it moved to another
location. It has not relocated in 20 years and has no plans to do so again in the
foreseeable future. How should this loss be treated?
1)
2)
3)
4)
As an extraordinary item
As part of normal operations
As a loss from continuing operations
As an unusual expense
d. Which of the following defines the initial disclosure event for the disposal of a
component of an enterprise?
1)
2)
3)
4)
The date that operations cease (if disposal is by abandonment)
The date that the enterprise makes a formal commitment to dispose of the
component
The last day of the fiscal year in which the decision to dispose is made
The date that the assets are sold
e. An enterprise failed to record deprecation on a piece of equipment for two years. The
oversight was discovered in the current period. How should the company account for
the depreciation expense for the two missed years?
1)
2)
3)
4)
As an adjustment to opening retained earnings
As a loss of the current period
As part of depreciation expense for the current year
As a direct adjustment to shareholders’ equity
f. How should a change in accounting estimate related to the useful life of a building be
accounted for?
1)
2)
3)
4)
By retroactive application with restatement of prior periods
Retroactive application with no restatement of prior periods
As an adjustment to income in the year of the change in estimate
As an adjustment to income in the current and future years
g. An enterprise made a decision to change from the straight-line method to the double
declining method of accounting for depreciation on its equipment as this would
present depreciation in a more relevant manner. This change would be accounted for
in which of the following ways?
1)
2)
3)
4)
Record as an adjustment to opening retained earnings for the impact of the
change in depreciation on prior years’ profit.
Record the impact of the change on prior year’s depreciation expense in
depreciation expense of the current year.
Ignore the impact of the change on prior year’s depreciation expense and
account for the change for the current and future years only.
An enterprise cannot change accounting policies, as it will then be in
contravention of the consistency principle.
h. Which of the following is normally included in the current asset section of a balance
sheet?
1)
2)
3)
4)
Investments in which the enterprise exerts significant control over the investee
Patents that have a remaining useful life of ten years
Amount receivable on a loan receivable that is in arrears
A receivable from a customer not collectible for over one year
i. Which of the following statements is true with respect to the net asset format of
financial statement presentation?
1)
2)
The balance sheet is presented in a manner which focuses on the accounting
equation in the form A = L + OE
The balance sheet is presented in a manner which focuses on the accounting
equation in the form A – L = OE
3)
4)
The balance sheet is presented in a manner which focuses on the accounting
equation in the form A – OE = L
The balance sheet is presented in a manner which focuses on the accounting
equation in the format A = L – OE
j. Which of the following is not one of the purposes of the notes to the financial
statements?
1)
2)
3)
4)
To provide further information about items included in the financial
statements
To provide information about items which do not qualify for recognition but
for which failure to disclose would be misleading
To provide information about accounting policies and measurement bases
To provide information about the future plans of the enterprise
k. Which of the following would usually be classified in a different major section of the
balance sheet than the other items?
1)
2)
3)
4)
Share investment in another enterprise
Stock dividend issuable
Share capital
Accumulated profits
l. Which of the following would give rise to a discontinuing operation?
1)
2)
3)
4)
The decision to sell an unprofitable plant
The decision to close a plant destroyed by fire
The expropriation of a enterprise’s operations in a foreign jurisdiction
The decision to sell an unprofitable division
m. A company receives an advance payment for special order goods that are to be
manufactured and delivered within six months. The advance payment should be
reported in the company’s balance sheet as which of the following?
1)
2)
3)
4)
Deferred charge
Contra asset account
Current liability
Current asset
n. Certain items on the financial statements must be presented net of tax. Which of the
following items should not be presented net of tax?
1)
2)
3)
4)
Changes in accounting estimates
Errors
Discontinuing operations
Changes in accounting policy
o. How should the account receivable of an individual customer with a credit balance of
a material amount be reported?
1)
2)
It should be included in the liability section of the balance sheet.
It should be deducted from the debit balances in other customers’ accounts on
the balance sheet.
3)
4)
It should be shown under “credit balances of customers’ accounts” in the
current asset section of the balance sheet.
It should be omitted from assets or liabilities on the balance sheet.
(2 marks each)
p. A company that lost part of its accounting system in a fire is having trouble
determining what its profit is for the current year. The following correct adjusted
balances and additional information for the current year are available:
Balances at Jan. 1
Balances at Dec. 31
€ 10,000
3,000
€ 27,000
8,000
Total assets
Total liabilities
Additional information for the year:
Correction of profit of a prior year (profit was
understated)
Cash dividends declared and distributed
2,000
7,000
Other than the events listed above, no other events or transactions affected owners’
equity in the current year. What was the profit for the current year?
1)
2)
3)
4)
€3,000
€15,000
€17,000
€19,000
q. A review of the December 31, 20X6, financial statements of a corporation revealed a
separate line item in the income statement in the amount of €130,000. Further
analysis revealed that the €130,000 in losses was comprised of the following items:
i. A loss of €25,000 was incurred in the abandonment of equipment formerly
used in the business.
ii. A loss of €37,500 was sustained as a result of damage to a warehouse by a
falling meteorite.
iii. During 20X6, several factories were shut down during a major strike by
employees. Shutdown expenses totalled €60,000.
iv. Uncollectible accounts receivable of €7,500 were written off as uncollectible.
Ignoring income taxes, what would be the total of the items that should have separate
disclosure on the 20X6 income statement?
1)
2)
3)
4)
€25,000
€37,500
€67,500
€130,000
r. On May 1, 20X5, a company with a year end of December 31 purchased insurance,
covering the next three years, for €10,800. The entire amount was debited to
insurance expense at that time. On January 10, 20X7, the error was discovered. The
average income tax rate was 40%. Which of the following should be the adjustment
to retained earnings at the beginning of 20X7 (including its tax effect)?
1)
2)
3)
4)
A credit of €2,880
A debit of €2,880
A debit of €3,240
A credit of €3,240
s. The following items relate to Scents 4 Cents Ltd. for the year ending
December 31, 20X7:
i. Corrected an error in the amount of €40,000; the error correction was to expense
an amount incorrectly treated as an asset
ii. Recorded a change in accounting principles which increased prior years income
by €50,000
iii. Declared €30,000 of dividends to its shareholders
iv. Changed accounting estimates relating to the depreciation of several of its assets;
if these estimates had been used from the beginning, previous years’ income
would have been lower by €30,000
v. Earned €80,000 after income taxes
By what amount did the firm’s total retained earnings change for the year?
1)
2)
3)
4)
Increased €10,000
Increased €30,000
Increased €60,000
Increased €90,000
t. ABC Corporation prepared the following balance sheet:
ABC CORPORATION
Balance Sheet
as at December 31, Year 1
Shareholder’s Equity
Assets
Equipment (net)
Accounts receivable
Allowance for
doubtful accounts
Cash
Total assets
€ 16,000
18,000
?
4,000
€
?
Ordinary shares
Retained earnings
€ 26,000
4,000
Liabilities
Notes payable
Accounts payable
Total equities
2,000
2,000
€ 34,000
What was the balance in the allowance for doubtful accounts?
1)
2)
3)
4)
A credit of €4,000
A debit of €4,000
A credit of €12,000
A debit of €12,000
u. A corporation had the following account balances as at December 31, 20X4:
Ordinary shares ..................................................................................
Preference shares ...............................................................................
Bonds payable....................................................................................
Retained earnings...............................................................................
Bond sinking fund .............................................................................
€1,000,000
760,000
500,000
250,000
80,000
Additional information:
The above accounts do not reflect a €50,000 cash dividend on preference shares and a
€50,000 stock dividend on ordinary shares that were declared and paid during the
year.
What was the total shareholders’ equity at December 31, 20X4?
1)
2)
3)
4)
€1,910,000
€1,960,000
€2,040,000
€2,590,000
v. In January 20X5, Fashion Enterprise acquired some equipment on the second hand
market for €60,000. The company thought they got a great deal on the equipment and
recorded the purchase as €80,000 which is what they felt they would have had to pay
if they had made the purchase from a more knowledgeable seller. They depreciated
the equipment using a useful life of five years and zero salvage value. In January of
20X6, the company felt that they had made an error in estimating salvage value as
zero and changed the estimate to €5,000. The company’s tax rate is 40%.
What adjustment, if any, would be required to January 1, 20X6, retained earnings?
1)
2)
3)
4)
€
0
€2,400
€4,000
€5,000
Question 3 (21 marks)
The following Income Statement and Accumulated Profit Statement was prepared by
Rorre Enterprise’s accountant.
RORRE ENTERPRISE
Income Statement
December 31, 20X5
€ 620,000
30,000
650,000
Revenue income
Gain on sale of silk contracts (Note 1)
Expenses
Depreciation (Note 2)
Cost of sales (Note 3)
Other (Note 4)
€ 100,000
220,000
300,000
Dividends
Income (Note 5)
60,000
(580,000)
€ 70,000
RORRE ENTERPRISE
Accumulated Profit Statement
December 31, 20X5
Balance beginning of year
Profit
Loss from flood damage (Note 6)
Error in estimating bad debt expense (Note 7)
Balance end of year
€ 780,000
70,000
€ 60,000
40,000
(100,000)
€ 750,000
Notes:
1. In June of 20X5, the company, a textile manufacturer, entered into irrevocable fixed
price contracts to purchase enough silk to meet production needs for 20X6. The price
of silk increased dramatically over the summer due to a shortage on world markets. In
September the company’s designers decided to make last minute changes to next
year’s product line with the result that less silk will be required than originally
anticipated. In October the company sold its excess silk contracts to other
manufacturers, realizing a gain of €30,000 on the sale. This is the third time in the
last four years that Rorre Enterprises has been able to sell excess contracts at a profit.
2. In December the bookkeeper noticed that he had failed to record depreciation on the
company’s vehicles and certain production equipment for the three-year period 20X3
to 20X5. The vehicles and equipment were being depreciated over eight years using a
straight-line rate of €15,000 per year. The bookkeeper added the €45,000 to
depreciation expense for the current year.
3. In late December 20X4, Rorre sold Pag Retail goods costing €30,000 for €60,000.
The sale was appropriately recorded in 20X4 but the goods were included in the
inventory count at December 31, 20X4, because they had not yet been delivered to
the customer.
4. Included in other expenses is a loss of €30,000 on closure of operations. The
company had operations in Canada, which it closed in September 20X5. The sales
and operating expenses for the Canadian operation up to the date of closure were as
follows:
Sales
Less:
Cost of sales
Depreciation
Other expenses
Loss
€ 160,000
55,000
16,000
119,000
190,000
€ (30,000)
5. The accountant failed to consider taxes. The company’s tax rate is 40%.
6. A freak spring flood caused a great deal of damage to the company’s manufacturing
facilities and inventory. This is the first flood the area has experienced since records
started to be maintained. The company’s insurance covered all of the loss except for
€60,000.
7. The company uses the allowance method to determine bad debt expense. During
20X5, the accountant performed a study and determined that the company should
have been providing for bad debts at a rate of 4% of sales instead of 3%. As a result,
the company had underprovided for bad debts by a total of €40,000 in prior years.
Required
1. (16 marks)
Prepare, in good form, the income statement for Rorre Enterprise. The company had
20,000 ordinary shares outstanding for the entire year.
2. (5 marks)
Prepare, in good form, the statement of changes in shareholders’ equity for Rorre
Enterprise as it relates to accumulated profits.
Question 4 (22 marks)
Each of the following describes situations that a company may encounter.
1. A company experienced a €250,000 loss due to a fire caused by a lightning strike.
The company is in an area subject to lightning strikes.
2. A company’s major supplier of raw materials experienced a prolonged strike. As a
result, the company could not obtain the materials necessary to manufacture its
product and had to write off €100,000 of inventory. This is the first time the company
has incurred a loss due to raw material shortages. However, strikes are not unusual in
the industry.
3. A company purchased machinery that cost €90,000 three years ago. The estimated
useful life was 12 years, and the estimated residual value was €80,000. The
straight-line method of depreciation has been used. At the end of the current year, the
company’s accountant decided that the machine should be depreciated over a 16-year
total life and the estimated residual value should be €10,000.
4. Six months into the fiscal year, a company decided to discontinue the operations of
its retail division, which qualifies as an identifiable business segment. The division
was sold three months before the end of the year for €312,000 cash. The book value
of the assets of this division equalled €360,000. The division had a before tax
operating loss of €40,000 for the current year to the date of sale.
5. During the year a company laid off five workers who no longer had the skills
required to work for the company. In order to avoid a wrongful dismissal lawsuit, the
company paid the employees €80,000 as severance pay. In turn, the employees
agreed not to take any legal action against the company.
6. A company’s accountant failed to record depreciation expense on the company’s fleet
of delivery vehicles for the last two years.
7. A parcel of company land with a cost of €200,000 was expropriated by the local
government for use in the construction of a new highway. The company received
€500,000 for land.
Required
1. Briefly define and describe the accounting treatment for each of the following:
i.
ii.
iii.
iv.
v.
Error
Change in accounting policy
Change in accounting estimate
Income or expenses not part of ordinary operations
Discontinued operations
2. For each situation described above state whether it would be found in the income
statement, the statement of changes in shareholders’ equity or that it would not be
found in either statement. In addition, state the specific classification that would be
used if the item would be included in the income statement or the statement of
changes in shareholders’ equity.
(8 marks for requirement 1; 14 marks for requirement 2. Of the 8 marks for
requirement 1, 2 marks will be awarded for writing skills — that is, proper sentence
structure, grammar, spelling, and so on.)
Question 5 (13 marks)
The following alphabetical adjusted trial balance is available for Goquick Delivery
Services for the year ended December 31, 20X5.
GOQUICK DELIVERY SERVICES
Adjusted Trial Balance
December 31, 20X5
DR
Accounts payable
Accounts receivable
€ 294,900
Accumulated depreciation — Property, plant & equipment
Accumulated profits, January 1, 20X5
Cash
83,400
Depreciation expense
137,100
Dividends
40,000
Correction of error
120,000
Income tax on ordinary activities
31,350
Income tax on error correction
Income tax payable
Interest expense
42,000
Interest payable
Note payable (due June 20X9)
Other operating expenses
248,400
Prepaid rent
13,500
Property, plant & equipment
1,179,900
Salary expense
628,000
CR
€
136,000
409,100
244,000
36,000
67,350
21,300
400,000
Salaries payable
Rent expense
Revenue
Share capital
Supplies
Unearned revenue
Utilities expense
Totals
9,300
120,000
1,317,700
300,000
9,700
45,200
37,700
€ 2,985,950
€ 2,985,950
Additional information:
1. During the year the company’s accountant noted that €120,000 of 20X5 revenue had
been recorded as revenue in 20X4 instead of being treated as unearned revenue for
that year. A retroactive correction was made to deal with the error.
2. The company will make principal payments, on the note payable, in the amount of
€100,000 during 20X6.
Required
Prepare the following statements, in good form, for Goquick Delivery Services for 20X5.
1. (6 marks)
Statement of changes in shareholders’ equity, accumulated profits section.
2. (7 marks)
Balance sheet, using the current/non-current format.
100
Suggested solutions
Question 1 (3/4 mark each, maximum 15 marks)
Trial balance
As at November 30, 20X5
Bank
Accounts receivable
Prepaid expenses
Office equipment
Accumulated depreciation – office equip.
Accounts payable
Accruals
Miscellaneous payable
Shareholders’ loans
Ordinary shares
€20,837
26,421
6,250
56,771
€11,500
22,349
3,260
376
22,000
23,000
Retained earnings
Consulting fees
Accounting and legal expense
Depreciation expense
Computer supplies expense
Insurance expense
Office and general expense
Rent expense
Salaries expense
Utilities expense
Income tax expense
24,246
31,787
905
1,500
1,330
1,000
1,452
6,400
11,850
1,500
1,550
138,142
138,142
Note:
Students may set up a separate asset account for the computer purchase or include it in Office
equipment as shown in the solution. November’s security/alarm protection expense has been
included in Office and general expense but some students may create a separate account for this
expense.
Question 2 (29 marks)
Multiple choice (1 mark each)
a. 3)
In accounting, revenue is recognized using the revenue principle and expenses are
recognized using the matching principle.
b. 3)
The functional approach presents operating expenses based on their purpose within the
organization.
c. 2)
The relocation is part of normal operations (however infrequent) and as such, this
relocation would be shown as part of ongoing activities. Note that extraordinary items no
longer exist according to IAS 1.
d. 2)
It may take some time after the decision is made until all assets are sold and the
operations cease. Income from discontinued operations is disclosed separately from the
initial disclosure event onwards.
e. 1)
The enterprise should have recorded depreciation for the two years. This would qualify as
an error, which would be accounted for by an adjustment to opening retained earnings.
f. 4)
Since the change relates to a building, depreciation expense will be adjusted over the
remaining life of the building. Therefore income will be adjusted for the current and
future years.
g. 1)
Changes in accounting policy are treated retroactively. Therefore, any change to prior
years’ depreciation expense would be treated as an adjustment to opening retained
earnings.
h. 3)
The loan receivable is in arrears; therefore it would be treated as a current asset because it
is already past due.
i. 2)
The net asset form of preparing the balance sheet focuses on the accounting equation in
the form A – L = OE.
j. 4)
The management discussion and analysis may make reference to future plans but this
would not be contained in the notes to the financial statements.
k. 1)
The investment is an asset while the other items are all components of shareholders’
equity.
l. 4)
The sale of a division would represent a separate line of business.
m. 3)
The advance payment is in respect of goods that will be delivered with in six months; it
therefore represents a current liability.
n. 1)
Changes in accounting estimates are included as a part of operating profit from normal
activities and as such are not presented net of tax.
o. 1)
A credit balance in accounts receivable represents a liability to the customer.
(2 marks each)
p. 3)
(€27,000 – €8,000) – €2,000 – (€10,000 – €3,000) + €7,000
q. 2)
Items (i) and (iii) and (iv) are not clearly distinct from ordinary operations. However, one
would not expect to be hit by a meteorite as a normal course of events. As such, it is the
only item that should have separate disclosure — although items (i) and (iii) might if they
are material.
r. 1)
[€10,800 – (€10,800/36  20)]  (1 – 0.4)
s. 3)
– €40,000 + €50,000 – €30,000 + €80,000. The change in accounting estimate is only
reflected in current and future earnings.
t. 1)
(€16,000 + €18,000 + €4,000) – €34,000
u. 2)
€1,000,000 + €760,000 + €250,000 – 50,000
v. 2)
(€80,000 – €60,000)  5 × 0.6. They would have to correct for the excess depreciation net
of tax.
Question 3 (21 marks)
Requirement 1 (16 marks)
RORRE ENTERPRISE
Income Statement
for the year ended December 31, 20X5
Continuing operations (excluding Canadian operation)
Sales
Cost of sales 1
Gross profit
Other operating income
Depreciation expense 2
Other expenses 3
Profit from operations
Income tax expense (40%)
Profit from ordinary activities
Discontinued operations (Canadian operation)
Sales
Cost of sales
Gross profit
Depreciation expense
Other expenses
Loss from operations
Income tax expense (40%)
€ 620,000
(190,000)
430,000
30,000
(55,000)
(250,000)
35,000
(14,000)
€ 21,000
160,000
(55,000)
105,000
(16,000)
(119,000)
(30,000)
12,000
Loss after tax
(18,000)
Profit
€ 3,000
1
2
3
Earnings per share before discontinued operations
€
1.05
Earnings per share after discontinued operations
€
0.15
€220,000 – €30,000 = €190,000
€100,000 – €45,000 = €55,000
€300,000 – €30,000 + €40,000 – 60,000 = €250,000
Requirement 2 (5 marks)
RORRE ENTERPRISE
Statement of Changes in Shareholders’ Equity (Accumulated Profits)
for the year ended December 31, 20X5
Balance at 31 December 20X4
Error:
Record unrecorded depreciation for 3 years, net
of tax of €18,000 1
Error in December 31, 20X4 ending inventory, net
of tax of €12,000 2
€ 780,000
Balance at 31 December 20X4, as restated
Profit
Dividends
Balance at 31 December 20X5
735,000
3,000
(60,000)
€ 678,000
1
2
(27,000)
(18,000)
€45,000 – €18,000(€45,000 × 0.4) = €27,000
€30,000 – €12,000(€30,000 × 0.4) = €18,000
Question 4 (22 marks)
Requirement 1 (8 marks)
i. Errors result from many sources including miscalculations, oversight, omissions,
fraud, and misinterpretation or misapplication of accounting principles and methods.
Errors must be given retroactive correction with restatement of prior period financial
statements.
ii. Changes in accounting policy result from changes in the accounting treatment
accorded transactions or events from one period to the next. Changes in accounting
policy are given retroactive treatment with the restatement of prior period financial
statements — as long as the change in policy will provide more relevant information.
iii. Changes in accounting estimates are part of the normal activity of a business and as
such are given prospective treatment.
iv. Income or expenses that are unusual and material may occur infrequently, but
essentially, they are related to normal business activity. These gains and losses are
included as part of income from operating activities but are may be given separate
disclosure if they are material.
v. A discontinued operation is a separate component of an enterprise for which there is a
formal plan of disposal. Separate disclosure is provided of operating income of the
discontinued operation and any gain or loss realized as a result of the disposal of the
operation.
Requirement 2 (14 marks)
1. The loss would be treated as an operating expense as part of profit from operating
activities. The size of the loss may justify separate disclosure of the event in the
income statement or the notes to the financial statements.
2. The loss would be treated as an operating expense as part of profit from operating
activities. The size of the loss may justify separate disclosure in income statement or
the notes to the financial statements.
3. The change in useful life and residual value of the machine are changes in estimates
resulting from new information. The changes should be accounted for prospectively.
4. The operating loss for the year is disclosed separately, providing disclosure of
revenues and expenses for the operation for the period. Separate disclosure is also
provided of the loss on disposal of the operation.
5. The payment would be treated as an operating expense as part of profit from
operating activities. The size of the expense may justify separate disclosure in income
statement or the notes to the financial statements.
6. Failure to record depreciation represents an error which would result in retroactive
correction to prior period financial statements.
7. The gain would likely be shown separately from ordinary activities in the income
statement due to materiality.
Question 5 (13 marks)
Requirement 1 (6 marks)
GOQUICK DELIVERY SERVICES
Statement of Changes in Equity (Accumulated Profits)
for the year ending December 31, 20X5
Balance at 31 December 20X4
Correction of error: 20X5 revenue recorded in 20X4,
net of tax of € 36,000
Balance at 31 December 20X4, as restated
Profit
Dividends
Balance at 31 December 20X5
€ 244,000
(84,000)
160,000
73,150 1
(40,000)
€ 193,150
1
From trial balance: €1,317,700 – €137,100 – €31,350 – €42,000 – €248,400 –
€628,000 – €120,000 – €37,700 = € 73,150
Requirement 2 (7 marks)
GOQUICK DELIVERY SERVICES
Balance Sheet
as at December 31, 20X5
ASSETS
Non-current assets
Property, plant & equipment
Accumulated depreciation — Property, plant & equipment
Current assets
Accounts receivable
Prepaid rent
Supplies
Cash & cash equivalents
Total assets
EQUITY AND LIABILITIES
Capital and reserves
Issued capital
Accumulated profits (losses)
Non current liabilities
Note payable (€400,000 – €100,000)
Current liabilities
Unearned revenue
Income tax payable
Current portion of long-term note payable
Interest payable
Salaries payable
Accounts payable
Total equity and liabilities
100
€ 1,179,900
(409,100)
€
770,800
294,900
13,500
9,700
83,400
401,500
€ 1,172,300
€
300,000
193,150
493,150
300,000
45,200
67,350
100,000
21,300
9,300
136,000
379,150
€ 1,172,300