IAS 8 Question 1

QUESTION 1: IAS 8 POLICIES, ESTIMATES & ERRORS

Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery. Following are
the draft extracts of the statement of financial position and the statement of profit or loss for the
year ended 30 June 2015:

Statement of Financial Position

2015 2014
$m $m
Property, plant and equipment 189 130
Retained earnings 166 108
Deferred tax liability 45 27

Statement of profit or loss

2015 2014
$m $m
Profit before taxation 90 120
Taxation 32 42
Profit after taxation 58 78

Following additional information has not been taken into account in the preparation of the above
financial statements:
(i) Cost of repairs amounting to $20 million was erroneously debited to the machinery account
on 1 October 2013. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2014, WL reviewed the estimated useful life of its plant and revised it from 5
years to 8 years. The plant was purchased on 1 July 2013 at a cost of $70 million.

Depreciation is provided under the straight line method. Applicable tax rate is 30%.

Required
Prepare relevant extracts (including comparative figures) for the year ended 30 June 2015 related
to the following:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
(d) Correction of error note

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IAS 8 Question 1

ANSWER – QUESTION1: IAS 8 POLICIES, ESTIMATES & ERRORS

Wonder Limited
Statement of Financial Position (Extracts) as at June 30, 2015
2014
2015
$m
$m
(Restated)
PPE [189 – 20 + 1.5 + 2 + 6] ; [130 – 20 + 1.5] 178.5 111.5
Retained Earnings [See SCE] 158.65 95.05
Deferred tax Liability [45 – 5.55 + 2.4] ; [27 – 5.55] 41.85 21.45

Statement of Profit or Loss (Extracts) for the year ended June 30, 2015
2014
2015
$m
$m
(Restated)
Profit before taxation [90 + 2 + 6] ; [120 – 20 – 1.5] 98 101.5
Taxation [32 + 2.4] ; [42 – 5.55] (34.4) (36.45)
Profit after taxation 63.6 65.05

Statement of Changes in Equity (Extracts) for the year ended June 30, 2015
$m
Balance as at July 01, 2013 [108 – 78] 30
Profit for the year ended June 30, 2014 [Restated] 65.05
Balance as at June 30, 2014 95.05
Profit for the year ended June 30, 2015 63.6
Balance as at June 30, 2015 158.65

Notes to the Financial Statements for the year ended June 30, 2015
Note X: Correction of error: During the year ended June 30, 2013, the repair work was
erroneously debited to machine account. The effect of this error is as follows:
2014
Effect on the statement of Profit or Loss
$m
Repairs and maintenance (20)
Depreciation (20 × 10% × 9 ÷ 12) 1.5
Tax expenses (30% × (20-1.5)) 5.55
Decrease in profit for the year (12.95)

2014
Effect on the statement of Financial position
$m
Property, plant and equipment (20 – 1.5) (18.55)
Deferred tax liability ($18.5 × 30%) 5.55
Retained earnings (18.50 - 5.55) (12.95)

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IAS 8 Question 1

Working for understanding 2014 2015

Correction of error 2014 PPE - PPE -
Dr. Repairs Cr. PPE 20 Profit -
Depreciation reversal impact 2014 [20 / 10 years x 9/12] PPE+ PPE+
Dr. PPE Cr. Dep exp 1.5 Profit +
Deferred tax impact 2014 [profit – 20 + 1.5 = 18.5 x 30%] DTL - DTL -
Dr. DTL Cr. Tax exp 5.55 Tax exp -
Depreciation reversal impact 2015 [20 / 10 years x 12/12] PPE+
Dr. PPE Cr. Dep exp 2 Profit +
Depreciation reversal estimate change 2015 [56/5 years – 56/7 PPE+
years] Profit +
Dr. PPE Cr. Dep exp 6
Deferred tax impact 2015 [profit + 2 + 6 = 8 x 30%] DTL +
Dr. Tax exp Cr. DTL 2.4

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