Question

SECTION A: Short Questions (Total 25 marks) Al. Consider the following cases: (a) Rivers Limited purchased a machine for $200,000. The machine was depreciated at the rate of 25% per annum using the straight-line method. In order to raise the reported profit, the company's accountant decided to change the depreciation rate to 10% per annum. (b) Talent Limited is a recruitment agency. On 10 December 2018, Talent Limited helped Ocean Limited hire its Senior Manager and charged the company an agency fee of $30,000. The agency fee was received on 15 January 2019. Talent Limited did not include the $30,000 agency fee in its statement of profit or loss and other comprehensive income for the year ended 31 December 2018, Required: For each of the above cases, identify the accounting principle or concept that has been violated and give a brief explanation. (Total 10 marks)

Answer 1

a) Change of depreciation rate will be termed as change of accounting estimate. As per Principle of Consistency , change in accounting estimate or accounting policy is to be done only when it is required by law or the change will result in better presentation of financial statements. Changing depreciation rate to increase profits is not a valid reason to change the accounting estimate or accounting policy hence it is not allowed. Principle of Consistency will be violated if depreciation rate is changed just to increase the profits.

b) As per Realization Concept, revenue is to be recognized when goods or services are delivered and there is reasonable certainty that amount will be realized. As per Matching Concept , cost incurred to earn the revenue should be recorded in the same period i.e. corresponding cost and revenue to be recorded in the same period. In the present case revenue is earned in December 2018 and should be recorded in December 2018 itself. Revenue recognition can not be delayed to the time till it is realized in cash. Talent Limited has violated Realization Concept and Matching Concept by not recording revenue earned of $ 30,000 in December 2018