Financial Accounting II

Answers to Tutorial Questions

Answers are based on those found in the solutions manual prepared by Hong Nee Ang to accompany
Loftus, Leo, Daniliuc, Boys, Luke, Ang and Byrnes (2018) Financial reporting 2 nd Edition John Wiley
& Sons Australia, Ltd 2018

Chapter 18:Accounting policies and other disclosures

Exercise 18.3 Tutorial
Accounting estimates and errors
Young Ltd estimates its future liability for repairs to products sold with a 12-month
warranty as a percentage of its net credit sales. Warranty expense and actual repair costs
for the last 2 years ending 30 June were as follows.

Required
Comment on Young Ltd’s accounting method for warranty liabilities. What action should
be taken with respect to the accounting estimates? If an investigation during 2021–22
finds that the figure for warranty expense was incorrectly calculated for 2020–21 and
should have been $70,000, what action is required under AASB 108/IAS 8?
The significant variances between the provision for warranty and the actual repairs in the two
years indicate that either the policy of estimating warranty costs using a percentage of net credit
sales is not appropriate, or the percentage used to estimate the amount to be expensed each year
is not adequate. The company needs to look at changing either its policy for estimating
warranty costs (ie the basis of measurement as per AASB 108 para 35) or amounts used to
estimate of warranty expense (i.e. by simply increasing the percentage used to estimate the
warranty expense). Past claims as a percentage of past net credit sales should provide a reliable
measure.
If a new percentage is adopted, this will be considered to be a change in estimate and, according
to AASB 108 paragraph 36, should be applied prospectively (from 2021-22 on).
If the variance for 2020-21 was due to an error in calculation then, providing it is material, the
figures for 2020-21 should be retrospectively corrected (according to AASB 108 paragraph 42)
by the following entry:
Retained earnings (1 July 2021) Dr 26,000
Provision for Warranty Cr 26,000
Such a correction would suggest that the variance between the warranties that would have been
provided for had the error not occurred ($70,000) and the actual warranties incurred ($73,000)
were not material (i.e. only $3,000 or only 4%) which indicates that the revised level of
warranty provision is appropriate.
 Chapter18: Accounting policies and other disclosures

Exercise 18.4

Events after the reporting period

In relation to the operations of Cat Ltd. The following events took place after the end of
the reporting period, 30 June 2019, but before the date the accounts were authorised, 15
September 2019.

(a) On 17 July 2019, Cat Ltd’s main fishing fleet was sunk during a freak storm.
Insurance will cover the replacement of the vessels but lost sales representing
$550,000 in profits are not covered.
(b) On 19 July 2019 Cat Ltd took delivery of a fishing net for its prawn trawler. The net
was purchased from a UK manufacturer on delivered duty paid shipping terms and
was in transit at the end of the reporting period. An inspection of the net revealed
significant structural flaws and the net was returned to the supplier on 28 July 2019.
Cat Ltd is to receive a full refund of the $650,000 purchase price which had been
paid in advance on 29 June 2019.
(c) On 29 August 2019 a lawsuit was lodged against the company by the families of crew
members drowned in the 17 July storm, alleging negligence, and claiming $4 million
in damages. No date has as yet been set for the court hearing.
(d) On 1 September 2019 the directors resolved to issue to the public 10,000 5%
debentures of $10 each, payable $5 on application and $5 on allotment.

Required
Classify the above events into adjusting and non-adjusting events after the end of the
reporting period, justifying your choice. (LO6)

Classification of after reporting period events

Assuming all events are material by reason of size and nature:

Refer to AASB 110, paragraph 3 for the definitions of adjusting and non-adjusting events.

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

(a)

Date of Event Date and Possible Condition at

after details description of implications 30 June 2019
Classific
reporting underlying
ation
period condition
event
17 Jul 2019 Storm Fishing fleet Uninsured Fishing fleet Non-
occurred was sunk on losses was in-tact adjusting
17 July 2019 $550,000 event
Position:
This is a non-adjusting event after the reporting period.
Evidence:
The storm that sunk the fishing fleet occurred on 17 July 2019. The event occurred after the
end of the reporting period (30 June 2019) but before the date of finalisation of the accounts
(15 September 2019). In accordance with AASB 110 paragraph 3, therefore, this is an event
that occurred after the reporting period and must be classified as either adjusting or non-
adjusting.
The event is a non-adjusting event as the storm (the condition that resulted in the sinking of
the fleet) occurred after the end of the reporting period. The fleet was still in-tact at the end of
the reporting period (30 June 2019) therefore as per AASB 110, para 10, the financial
statements for Cat Ltd do not need to be adjusted to reflect the sinking of the fleet and loss of
uninsured profits for the year ended 30 June 2019.
It is expected that the damage is material, therefore as per AASB 110 para 21, the storm
damage to the fleet and loss of uninsured profits should be disclosed in the notes to the
financial statements.

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 Chapter18: Accounting policies and other disclosures

(b)

Date of Event details Date and Possible Condition at 30 Classifica

after description of implicatio June 2019 tion
reporting underlying ns
period condition
event
19 Jul Delivery and The fishing net The net The asset that Adjusting
2019 inspection of had significant was faulty had been event
the fishing flaws which and recognised at 30
net. would have returned to June 2019 was
been in the overstated and
existence supplier should be
before 30 June written down.
2019

Position:
This is an adjusting event after the reporting period.
Evidence:
The delivery of the fishing net occurred on 19 July 2019, which is after the end of the
reporting period (30 June 2019) and before the date of finalisation of the accounts (15
September 2019). In accordance with AASB 110 paragraph 3, the discovery of the faulty
fishing net is therefore an event after the reporting period and must be classified as either an
adjusting or non-adjusting event.
The net had been recognised as an asset in the financial statements at 30 June. The event that
occurred after the reporting period (delivery of the fishing net) provides evidence that the net
was faulty, and thus the amount it had been recognised for was overstated. The faulty fishing
net is a condition that existed at the end of the reporting period (30 June 2019) therefore the
financial statements for Cat Ltd must be adjusted to reflect the value of the net at 30 June
2019.

© John Wiley and Sons Australia Ltd, 2018 18.4

Solutions manual to accompany Financial reporting 2e by Loftus et al.

(c)

Date of Event Date and Possible Condition

after details description of implication at 30 June
Classifica
reporting underlying s 2019
tion
period condition
event
29 Aug Lawsuit The lawsuit relates Payment of Fishing Non-
2019 was lodged to the sinking of damages of fleet was in- adjusting
against the the fishing fleet $4million tact event
company which happened on
17 July 2019
Position:
This is a non-adjusting event after the reporting period.
Evidence:
The lawsuit was lodged against the company on 29 August 2019, which is after the end of the
reporting period (30 June 2019) but before the date of finalisation of the accounts (15
September 2019). In accordance with AASB 110 paragraph 3, the lawsuit is therefore an
event after the reporting period and must be classified as either an adjusting or non-adjusting
event.
The event is a non-adjusting event as it relates to the storm which occurred on 17 July 2019,
which is after the end of the reporting period. The fleet was still in-tact at the end of the
reporting period (30 June 2019) therefore as per AASB 110, para 10, the financial statements
for Cat Ltd do not need to be adjusted to reflect any damages that might ultimately be
payable as a result of the law suit.
It is expected that the damage is material, therefore as per AASB 110 para 21, the law suit
and potential for damages payable should be disclosed in the notes to the financial
statements.

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 Chapter18: Accounting policies and other disclosures

(d)

Date of Event Date and Possible Condition at

after details description implications 30 June 2019
reporting of Classification
period underlying
event condition
1 Sept Directors The issue Issue of No debentures Non-adjusting
2019 resolved of debentures had been issued event
to issue debentures and receipt of
debentures on issue money
date
Position:
This is a non-adjusting event after the reporting period.
Evidence:
The resolution to issue debentures occurred on 1 Sept 2019, which is after the end of the
reporting period (30 June 2019) but before the date of finalisation of the accounts (15
September 2019). In accordance with AASB 110 paragraph 3, the resolution to issue
debentures is therefore an event after the reporting period.
The event is a non-adjusting event as it provides evidence of the issue of debentures will
occur after 1 Sept 2019, which is after the end of the reporting period. No debentures had
been issued at 30 June 2019 therefore as per AASB 110, para 10, the financial statements for
Cat Ltd do not need to be adjusted to reflect the issue of debentures.
It is expected that the issue of debentures is material, therefore as per AASB 110 para 21, the
resolution to issue debentures should be disclosed in the notes to the financial statements.

© John Wiley and Sons Australia Ltd, 2018 18.6