Financial Years Profits - Research Paper Example

Abstract This is a presentation of adjustments considered necessary to the profits of the financial year ending 30.09.2010, which had been previously presented to the Management. Some errors were noted by the Financial Director, and the adjustments to the profits were effected through journal entries and the necessary IAS stated and the conclusion was through a reconciliation of the current financial year’s profits. Introduction While setting out to write this report, it is good to inform of the matter at hand. This report is about adjustments to the accounts presented by the assistant of the company and which were found to contain errors affecting the ptofits reported for the financial year ended 30th September 2010. More specifically, the report will answer the question, “What was the adjusted profit for the financial year ending 30th September 2010 and which were the actual adjustments made to the accounts to reach at that amount?” Results 1. In this case the problem lies in the fact that the financial assistant was not aware of the new changes where there was a review in 31st March 2010 giving the plant a useful life of 5 years. The depreciation rate that should be reflected in the financial statements and in the comptation of profits for the financial year should be based on the reviewed value. This is when IAS number 16 has been applied. The adjustments are going to be shown in the appendix number (1). A journal entry is to be used to correct this error by the Financial Assistant. Before the review: cost £120,000 Useful life 5 years Residual value £20,000 After review on 31.03.2010: Estimated useful life 5 years For rectification check Appendix (1) 2. This was a case by the Assistant where he did not consider the review of the value of the building in 1st October 2009. This is from the original £700,000 to £1,200,000. The review was to affect the profits by being included as a profit or gain to the firm rather than opening a revaluation account and reflecting the same in the asset account (in this case the building). IAS 16 is also applicable in this case as it is the most appropriate. Adjustments necessary are shown in Appendix (2). Building with carrying value: £700,000 Revaluation 1.10.2009 to: £1,200,000 Appendix (2) contains the journal entry to adjust this. 3. This is a case where the Investment property was shown under land and buildings. There was no clear cut line as to where it should have been included. Though, IAS 16 still applies in this case no action is going to be made in making a journal entry to rectify. This is since there are neither rates nor the depreciation rate applicable. Investment property shown in 30.09.2009: £800,000 It was included as Land and buildings with a depreciation of £20,000 Since there is no clarification as to whether the investment property was land and buildings, it is going to be considered under the same. Adjustment: since the rate of depreciation is not given nor the useful years as well as how the assistant treated it during the current financial year, no adjustment is to be made in the current financial year. In this case IAS 16 still applies. Check Appendix (3) for rectification. 4. the computer was purchased for £30,000 on 1st October 2010 and the set depreciation was Before review: Computer purchased for £30,000 on 01.10.2006 Depreciation: 20% ×£30,000 = £6,000 Financial years of depreciation, therefore, are; 2007, 2008, 2009, 2010, and 2011. The Assistant did not get informed on the review process and as such went on to use the old amounts and rates to reflect the same on the accounts. Thus, a review is going to be shown in Appendix (4) to show the rectification befitting this. Check for Appendix (4) for the journal entry to correct this error. 5. There was an erroneous inclusion of the capital grant amount in the computation of the depreciation. This should not have been the case if the appropriate IAS 20 was used. Thus, there will be a rectification on the same under Appendix (5). New machine purchased on 01.10.2009 at £600,000 Previous assistants charge of depreciation: £840,000÷5 = £168,000 Check journal adjustment number (5) to rectify this. 6. In this situation, the Assistant was right to include transport costs, duties and future costs in the determination of the value of the line of stocks in question. While applying IAS 2, no adjustments are called for. Check Appendix (6) on the same. Appendices (1) Previous depreciation amount by assistant: (£120,000­ £20,000)÷ 5= £20,000 Remainder in 2010: £120,000- (£20,000×3) = £60,000 Therefore, the correct depreciation= (£60,000- £20,000) ÷5 = £8,000 Journal entry to adjust this: Debit Asset (Plant) £20,000 Credit Depreciation account £20,000 Being a reversal of the wrong entry made by assistant Debit Depreciation account £8,000 Credit Asset (Plant) £8,000 Being the correct entry for the financial year ended 30th September 2010 after review in accordance with IAS 16. (iasb.org, 2010) Effect on profits is add back £12,000 (£20,000- £8,000), being the adjustment for the overcharge on Depreciation on Plant. (2) Journal entry to adjust this: Debit Profit and Loss account £500,000 Credit Revaluation account £500,000 Being an adjustment of revaluation posted erroneously in the income statement and correctly effected as per IAS 16. The previous financial year’s revaluation should not affect the current financial year’s profits. (iasb.org, 2010) Effect on profits is subtracting £500,000 revaluation since it had caused an overstatement. (3) Investment property shown in 30.09.2009: £800,000 It was included as Land and buildings with a depreciation of £20,000 Since there is no clarification as to whether the investment property was land and buildings, it is going to be considered under the same. Adjustment: since the rate of depreciation is not given nor the useful years as well as how the assistant treated it during the current financial year, no adjustment is to be made in the current financial year. In this case IAS 16 still applies. (4) Journal entry to adjust this: Debit Depreciation account £6,000 Credit Profit and Loss account £6,000 Being the adjustment for the assistant’s wrongly charged depreciation for the financial year. Debit Profit and Loss £2,000 Credit Depreciation £2,000 Being the corrected charge for the financial year (That, is £4,000÷ 2). This is in accordance with IAS 16’s requirements. Effect on profits is adding back £4,000, being the overcharge of depreciation on computers. (5) Journal adjustment: Debit Depreciation £168,000 Credit Profit and Loss £168,000 Being the erroneous charge of depreciation based on the capital grant. Adjusted current financial year’s depreciation: £600,000÷5 = £120,000 Journal entry to reflect this: Debit Profit and Loss £120,000 Credit Depreciation £120,000 Being the charge of depreciation based on the cost amount of the new machine. This is in accordance to the stipulations of IAS 20. (worldgaapinfo.com, 2010) Effect on profit is to add back £48,000, being the overcharge of depreciation based on the capital grant. (6) Adjustments: No adjustments are needed here This is due to the application of IAS 2 which stipulates the procedures when it comes to the valuation of inventories while determining profits. More precisely, the IAS 2:10 is the one to be applied here. Statement of Profits Reconciliation Statement of Profits reconciliation £ £ Reported profits 900,000 Add: overcharge depreciation on plant 12,000 Overcharge depreciation on computers 4,000 Overcharge of depreciation due to grant 48,000 64,000 Subtract: revaluation on building (500,000) Adjusted profits 464,000 Reference: Iasb.org. (2010). IAS 16: Property Plant and Equipment. Retrieved 29 November 2010 http://docs.google.com/viewer?a=v&q=cache:zk1l1s- zC04J:www.iasb.org/NR/rdonlyres/C10C2381-6B52-4C4A-92D4- 7874C40040D0/0/IAS16.pdf+IAS+ON+REVALUATION&hl=en&gl=ke&pid=bl&srcid =ADGEESg0racy735JVc21WuKjJ94fpSVygeDjTRu6JUEd4GxZhpRzwzwV7Xdyw0xC OKjeEV_Me9iq1Bqi5KMe1wQvkmJPx7C_Tjh4Fa8PxnJQ57mzrgXT8O0hwnnEr7ezP2 N0jt1GG6uv&sig=AHIEtbRVvd7ggbdWOAZ74j5pmOH3LzdicA Iasplus.com. (2010). IAS 2: Inventories. Retrieved 29 November 2010 http://www.iasplus.com/standard/ias02.htm Worldgaapinfo.com. (2010). IAS 20: Accounting For Government Grants and Disclosures Of Government Assistance. Retrieved 29 November 2010 http://docs.google.com/viewer?a=v&q=cache:Eja1tdqBIE8J:www.worldgaapinfo.com/pd f/IAS/IAS20.pdf+IAS+CAPITAL+GRANTS+ON+ASSETS&hl=en&gl=ke&pid=bl&src id=ADGEESgHYU7ULgSMQVoxLLbjW0g- 8grai4hzF7OJwhZxTT_KmXeIjU_yFDu8EnUpnAzvLTv4Iy1UCeb6Kv4- e6t6wbp66pUosqWF6xH6N7kpFG3KykgZVjuBS6_mtRvwb3aFuNf26pP9&sig=AHIEt bSz0fOwg3w7Lw2ovrqbtBtFl2RpOQ Read More