Professional Documents
Culture Documents
Materiality
Omissions or misstatements of items are material if they could, by their size or nature,
individually or collectively, influence the economic decisions of users taken on the basis of
the financial statements.
Question # 1
All changes Co. Inc. changed its accounting policy in 2009 with respect to the valuation of
inventories. Up to 2008, inventories were valued using a weighted-average cost method.
In 2009 the method was changed to first-in, first-out (FIFO), as it was considered to more
accurately reflect the usage and flow of inventories in the economic cycle. The impact of
inventory valuation was determined to be:
At December 31, 2007 An increase of Rs. 10,000
At December 31, 2008 An increase of Rs. 15,000
At December 31, 2009 An increase of Rs. 20,000
The statements of comprehensive income prior to adjustment are:
2009(Rs.) 2008(Rs.)
Revenue 250,000 200,000
Cost of sales 100,000 80,000
Gross profit 150,000 120,000
Administration costs 60,000 50,000
Selling and distribution costs 25,000 15,000
Net profit 65,000 55,000
Retained earnings at 1 January 2008 were Rs.100,000.
Question # 2
On January 1, 2005, Robust Inc. purchased heavy -duty equipment for Rs. 400,000 on the
date of installation, it was estimated that the machine has a useful life of ten years and a
residual value of Rs. 40,000.
On January 1, 2009 after four years of using the equipment, the company decided to review
the useful life of the equipment and its residual value. Technical experts were consulted.
According to them, the remaining useful life of the equipment at January 1, 2009, was seven
years and its residual value was Rs. 46,000.
Required:
Compute the revised annual depreciation for the year 2009 and future years.
Question # 3
Machinery was purchased on 1 January 2001, on which date it was estimated to have a
useful life of 5 years and a nil residual value. The carrying amount of 31 December 2002
was as follows:
Cost (1/1/2001) Rs. 500,000
Accumulated depreciation Rs. 200,000
Net carrying amount (31/12/2002) Rs. 300,000
On the 1/1/2003, the remaining economic useful life was estimated to b 2 years.
Required:
A. Calculate the effect of the change in accounting estimate.
B. Provide the necessary journals assuming that no depreciation journal had yet been
processed for 2003.
C. Provide the necessary journals assuming that the depreciation journal had already
been processed for 2003 (i.e. before the change in estimate).
Question # 4
Machinery was purchased on 1 January 2001, on which date it was estimated to have a
useful life of 5 years and a nil residual value. The carrying amount on 31 Dec 2002 was:
Question # 6
A vehicle was purchased for Rs. 100,000 on 1 January 2001.
Depreciation on vehicles of Rs. 10,000 was recorded instead of Rs. 25,000 in 2001 but this
was only discovered during 2002 after the 2001 Financial Statements had been published.
The error is considered to be immaterial.
Required:
Journalize the correction of this error and disclose (where relevant).
Question # 7
During 2007 Global discovered the certain items had been included in inventory at 31
December 2006, Valued at Rs. 4.2m, which had in fact been sold before the year end. The
following figures for 2006 (as reported) and 2007 (draft) are available.
2006 2007 (draft)
Rs.’000’ Rs.’000’
Sales 47,400 67,200
Cost of goods sold 34,570 55,800
Profit before taxation 12,830 11,400
Income taxes 3,849 3,420
Profit for the period 8,981 7,980
Retained earnings at 1 January 2006 were Rs.13m. The cost of goods sold for 2007 includes
the Rs.4.2m error in opening inventory. The income tax rate was 30% for 2006 and 2007.
No dividends have been declared or paid.
Required:
Show the statement of profit & loss for 2007, with the 2006 comparative, and retained
earnings.
Question # 8
During the audit of Axis Industries Limited for the year ended 30 June 2000, you observed
that 1040 liters of palm-oil which was already sold by the company during the year 1999,
was incorrectly included in closing inventory as at 30 June 1999. Such quantity carries a
financial impact of Rs. 52, 000. Extracts from the accounts are as follows:
Note 1: Cost of sales for the year ended 30 June 2000 contains the above mentioned error in
the opening inventory.
As at 30 June1998 Rs.160,000
As at 30 June 1999 Rs. 272,000
Required:
Draft the statement of profit & loss and statement of retained earning under the treatments
specified in IAS-8, for the relevant years.
Question # 9
(Aug-2013)
Question # 10
(Apr-2019)