Question

Presented below are a number of business transactions that occurred during the current year for Ebersole Ltd. In each of the situations, discuss the appropriateness of the journal entries in terms of IFRS.

(a) Merchandise inventory that cost £310,000 is reported on the balance sheet at £345,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.

Inventory 35,000

Sales Revenue 35,000

(b) Because the general level of prices increased during the current year, Ebersole Ltd. determined that there was a £24,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.

Depreciation Expense 24,000

Accumulated Depreciation—Equipment 24,000

(c) Because of a “fire sale,” equipment obviously worth £400,000 was acquired at a cost of £310,000. The following entry was made.

Equipment 400,000

Cash 310,000

Sales Revenue 90,000

(d) Ebersole Ltd. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at £750,000 was written off as follows.

Retained Earnings 750,000

Goodwill 750,000

(e) The company is being sued for £1,500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.

Loss from Lawsuit 1,500,000

Liability for Lawsuit 1,500,000

(f) The president of Ebersole Ltd. used his expense account to purchase a new Rolls-Royce solely for personal use. The following journal entry was made.

Miscellaneous Expense 53,000

Cash 53,000

Answer 1

(a)	This entry is incorrect. Also. Fundamentally as per IFRS it is INCORRECT. Inventory cannot be increased in value like that. Inventory should be recorded at COST or MARKET VALUE whichever is LOWER. It shouldn't be increased up in value.
(b)	This is NOT CORRECT fundamentally as per the standard. Price level adjustments are NOT RECOGNIZED. It is against the monetary unit assumption where it is assumed that monetary unit remains reasonably stable.
(c )	This is AGAINST the historical cost principle. The purchase is to be recorded at cost. Also, NO SALES REVENUE should be recorded on such a transaction.
(d)	This is in VIOLATION of the RECOGNITION and matching principle. Intnagible assets are to be amortized over period of benefits availed.
(e )	This transaction is in LINE with the standards because the amount is both probable and can be reasonably estimated. Loss must be recorded.
(f)	Personal expenses MUST NOT be recorded as company's expenses. This is in VIOLATION of the accepted accounting principles.