1. Advanced Financial Accounting FIN-611
Mian Ahmad Farhan
Lecture-30
Accounting Policies, Changes in Accounting Estimates & Errors

2. Solution

3. Profit & Loss Account 2004 2004 Rs. Sales (72,750-1,000) 71,750
Cost of sales (47,833)
Gross profit (1/3 of sales) 23,917
Operating Expenses (7,750)
16,167
Income 30% (4,850)
Profit after tax 11,317

4. Working (2004) Gross profit = 717,50 x 1/3 = 23,917
Cost of goods sold = 71,750 – 23,917 = 47,833
Income tax = 16,167 x 30% = 4,850

5. Profit & Loss Account 2005 2005 Rs. Sales (75,000+1,000-1,500) 74,500
Cost of sales (49,667)
Gross profit (1/3 of sales) 24,833
Operating Expenses (7,500)
17,333
Income 30% (5,200)
Profit after tax 12,133

6. Working (2005) Gross profit = 74,500 x 1/3 = 24,833
Cost of goods sold = 74,500 – 24,833 = 49,667
Income tax = 17,333 x 30% = 5,200

7. Statement of Retained Earnings 2004
. Rs.
Opening Balance 4,800
Add Profit for the year 11,317
16,117
Less Closing Balance 8,050
8,067

8. Statement of Retained Earnings 2005
. Rs.
Opening Balance 8,067
Add Profit for the year 12,133
20,200
Less Closing Balance 10,250
9,950

9. Working (2005) Gross profit = 717,50 x 1/3 = 23,917
Cost of goods sold = 72,750 – 23,917 = 47,833
Income tax = 16,167 x 305 = 4,850

10. Prospective Application
Prospective application of a change in accounting policy and of recognizing the effect of change in an accounting estimate respectively are:
a). Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed.
b). Recognizing the effect of the change in the accounting estimates in the current and future affected by the change.

11. Question
Idrees Sports Private Limited purchased an assets with followings
details:
Cost price = Rs. 2,500,000
Estimated useful life = 10 years
Estimated residual value = Rs. 100,000
In third year, the company estimates the useful life of its assets at six
years with residual value Rs. 220,000. The company depreciates its
asset on straight line method.
Required: Account for the above Accounting Estimates in the Financial
Statement of Idrees Sports Private Limited in the third year.

12. Solution Straight line method
Depreciation Rate = 1 / Useful life x 100
Depreciation Rate = 1 / 10 x 100 = 10%
First year depreciation = 2,500,000 – 100,000
= 2,400,000 x 10% = 240,000
Second year depreciation = 2,500,000 – 100,000
Third year depreciation = 2,500,000 – 480,000 = 2,020,000
Amount of depreciation = 2,020,000 – 220,000 = 1,800,000
= 1,800,000 / 6 = 300,000 OR
Depreciation rate = 1 / 6 x 100 = %
Depreciation expense = 1,800,000 x / 100 = 300,000

13. Prior Period Error

14. Retrospective Restatements
Retrospective Restatements is correcting the recognitions, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred i.e. correction of error is to be made by restating the previous income statement and opening balance of previous periods’ retained earnings.

15. Question
During 2008, Saleem Co. discovered that some products that hade been sold during 2007 were incorrectly included in inventory at 31 December 2007 at Rs. 6,500
Saleem Co. accounting record for 2008 show sales of Rs. 104,000, cost of goods sold of Rs. 86,500 (including Rs. 6,500) for the error in opening inventory and income taxes of Rs. 5,250.

16. Question 2007 Rs. Sales 73,500 53,500 Less Cost of goods sold
Profit before income taxes
20,000
6,000
Less Income taxes
Profit
14,000

17. Question 2007 opening retained earning was Rs. 20,000 and closing
Saleem Co. income tax rate was 30% for 2008 and It
had no other income or expenses.
Saleem Co. had Rs. 50,000 of share capital through out
and no other components of equity except for retained
Earning.

18. Solution 2008 2007 Sales Less Cost of goods sold
104,000
73,500
Less Cost of goods sold
80,000
60,000
Profit before income taxes
24,000
13,500
Less Income taxes
7,200
4,050
Profit
16,800
9,450
The table will appear as row wise.

19. Working (2007) Reported cost of goods sold 53,500
Add Overstated closing stock 6,500
60,000

20. Working (2008) Reported cost of goods sold 86,500
Less Overstated closing stock 6,500
80,000

21. Statement of Change in Equity
2008
Rs.
2007
Opening retained profit
34,000
20,000
Adjustment in opening retained profit ,500
Less Income
tax effect (30%) 1,950
(4,550)
-----
Adjusted opening retained profit
Add Profit after tax
29,450
16,800
----
9,450
46,250
First Opening retained profit
Then 34000
Then 20,000
Then all items 2007 and
then all items of 2008 one by one