Question 1

The 30 June 2018 financial statements of ABC Ltd have been prepared in draft form. However, the financial statements have not yet been printed and sent to shareholders. Subsequent to the reporting date, the following events occur.

i. A judgement is handed down in the Victorian Supreme Court on 15 July 2018 in relation to a 2017 product liability case brought by a customer against the company. This judgement renders the company liable for court costs and compensation totalling $240,000.

ii. On 14 July 2018 the Commonwealth government enacts legislation altering the company income tax rate from 39 per cent to 42 per cent for all income tax returns from 1 July 2018.

iii. On 28 July 2018 the company’s country warehouse is destroyed by fire. The total carrying value of the warehouse, which was uninsured, is $350,000.

iv. On 2 August 2018 the financial cost of inventory shipped from overseas is determined. The inventory was received in June 2018 and the cost was estimated for accounting purposes. The revised cost is $900,000 greater than the prior estimate.

v. On 16 July 2018 the company enters into a contract to purchase 25 per cent of the issued capital of competitor XYZ Ltd for $750,000.

vi. 9 July 2018: the remuneration committee determined the CEO’s bonus for the year ended 30 June 2018 as $300,000, the manager is entitled to an annual bonus based on company profits as determined by the remuneration committee. 

Assume all amounts are materials for financial statements purposes.

Required: 

Discuss the appropriate accounting treatment of the above events.

Question 2

Why do we need to understand accounting policies applied by an organisation, together with changes therein?

Workshop 04 Revaluation of Property Plant and Equipment

Question 3

Pigeon Ltd purchased land for $750 000 6 years ago. It was revalued on 31 December 2019 to $600 000. A subsequent revaluation on 31 December 2021 found the market value to be $900 000 due to a change in council zoning for the area. 

Required:

What are the journal entries required to record the revaluations on 31 December 2019 and 31 December 2021? Ignore Tax Effects.

Question 4

How could a revaluation of a non-current asset minimise or loosen the effects of restrictive debt covenants?