Question

QUESTION 2 (25 MARKS) i. Identify and explain each of the below situations whether it is a change in policy, or a change in estimate or an error: The chief financial controller had announced that one line product has lost its customer appeal and will be phased out over the next 2 years. Due to this situation, a decision has been made to lower the estimates lives on related production equipment from the remaining 4 years to 2 years. (CLO2:PLO2:C1)(2 marks) ii. The high building was converted from sales offices to the accounting department at the beginning of 2016. Therefore, the expenses related to this building will now appear as an administrative expense rather than selling expense. (CLO2:PLO2:C1)(2 marks) ii. Management has decided to switch from the LIFO inventory valuation method to the average cost method for all inventories. (CLO2:PLO2:C1)(2 marks) The year-end salaries payable of RM7,000 were not recorded because the bookkeeper thought that "they were immaterial”.. (CLO2:PLO2:C1)(2 marks) During the course of finalizing the accounts for year 4, the accountant discovered that goods sold in year 3 of RM30,000 were included in the closing inventory of year 3. The opening inventory of year 34 included this inventory. (CLO2:PLO2:C1)(2 marks)

Answer 1

Question 2)a)

S. No.	Change in Policy/ Change in estimate or Error	Reason
i	Change in Estimate	Any change in usefil life of asset due to whichever reason is treated as a change in accounting estimate
ii	Error	Building expenses should go under their respective heads. If repair expenses are incurred on the building in which accounting department sits, it should go under the head "repairs & maintenance".
iii	Change in Policy	Any change in valuation method of inventory is a change in accounting policy
iv	Error	Every expense incurred by the company is to be recorded irrespective of materiality.
v	Error	This is clearly an error as the opening inventory for Year 4 and closing inventory for Year 3 are overstated.

Question 2)b)

i) Amount of interest income to be recognized as at 31st December (9 Months) = 10,000*10%*(9/12) = 750 RM.

ii) Note : Since we are not given the period of bonds, we cannot apply effective interest method to calculate the present value and calculate interest accordingly. Hence we have calculated interest @2% only :

Interest for 2017 = 400,000*2% = 2,000 RM

Interest for 2018 = 400,000*2% = 2,000 RM

iii) Revenue to be recognized = 200,000 units sold * RM 10 per unit sold = RM 20,00,000

Note : Since it is given that royalty is to be received on "every compact disc sold" hence we cannot accrue revenue by taking the units produced and royalty is to be calculated on actual number of units sold only.

iv) Dividend income can only be recognized when shareholder's right to receive the dividend is established. This happens when the dividend has been declared and not just proposed.

Hence in the current case Maimunah cannot record dividend income as dividend has only been proposed and not declared.