Topic03 Solutions - AF3110 Intermediate Accounting 1...

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1 AF3110 Intermediate Accounting 1 2009/10 Semester 2 Topic 3 Suggested Solutions Question 1 (Chapter 5 Q5) (a) Triathlon Limited Statement of Retained Profits/Reserves For the year ended 31 March 20X3 20X2 $000 $000 Retained profit at the beginning of the year As previously reported 500 150 Adjustment for a prior period error 95 40 As restated 595 190 Retained profit for the year 400 405 Retained profit at the end of the year 995 595 (b) (i) To comply with a new HKFRS is regarded as a sufficient reason for changing accounting policy. When the transition arrangement requires retrospective adjustment, the previous year s profit and the beginning balance of retained profit have to be adjusted to reflect the new accounting policy and to achieve consistency between current year s and last year s operating results. Sometimes, prospective adjustment is recommended. In that case, only the current and future period will be affected. (ii) An error in the valuation of the closing stock two years previously would not be accounted for by adjusting the beginning balance of the current year s retained profit. This is because the error, over a two-year period, would correct itself as the closing stock of one year is the opening stock of the next. However, for comparative figures, both the beginning balance of retained profit and profit for last year have to be amended to correct the
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2 error. (iii) The decision of directors to provide for the loss on long-term construction contract is considered as a normal recurring correction of an estimate made in a previous year. There would be no need to adjust the prior year s profit. (iv) The loss on disposal of computer is a normal correction of under-estimate in depreciation. As such, it should be reflected in the current year s profit and not prior year s. (v) It is quite common in the case of a lease that the tenant pays for the repairs to the premises all at once at the end of the lease. It may have been prudent for the company to have done the repair during the lease period and paid for the same. However, in this case, the fact is that the company did not incur any
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This note was uploaded on 10/20/2010 for the course AD abc123 taught by Professor Cat during the Summer '09 term at City University of Hong Kong.

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Topic03 Solutions - AF3110 Intermediate Accounting 1...

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