AYB340 COMPANY ACCOUNTING
TOPIC 1 - SOLUTIONS TO TUTORIAL QUESTIONS
Case Study 1 - Accounting Policies
The board of directors has resolved to change the accounting policy for treatment of advertising expenditure. Previously, advertising expenditure has been expensed as incurred. Following extensive market research, the board has taken the view that benefits from advertising expenditure in the form of product awareness and increased sales will be received by the company over a 3-year period following the expenditure. Due to a recent fire and water damage to the company’s accounting records, details of advertising expenditure in prior years have been destroyed.
The board of directors has approached…show more content… Furthermore, paragraph 12 of AASB 1031 notes:
In deciding whether an item or an aggregate of items is material, the size and nature of the omission or misstatement of the items usually need to be evaluated together. In particular circumstances, either the nature or the amount of an item or an aggregate of items could be the determining factor. For example: an entity expands its operations into a new segment which affects the assessment of the risks and opportunities facing the entity (paragraph 12(b)(iii)).
NOTE: This solution is only one possibility. Students may use alternative or average base amounts.
1. Unrecorded creditor’s invoices
These invoices understate Expenses (purchases and service related expenses) and Accounts Payable by $62 150.
Error as % of base
Profit before tax
17.7% (62 150/352 000)
19.7% (62 150/316 000)
As the error is greater than 10% of both base amounts it is material and must be adjusted.
If the invoices all relate to purchases within a perpetual inventory system the accounts affected are Inventories (current asset) and Accounts Payable (current liability) and there will be nil profit effect.
2. Sales invoices not processed
These invoices understate both Sales Revenue and Accounts Receivable by $50 000. Additionally, Cost of goods sold (expense) is understated and Inventory (current asset) is