Question

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A1. Consider the following cases: 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. (a) (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

Part A

Revision of estimates concept has been violated.

Change in depreciation rate is a regarded as revision in estimates but it is only reasonable to make such a change if there are certain internal or external factors invoking such revision which leads to change in rate of cash flows from the asset. These changes may increase or decrease the cash flows earned from an asset. Hence to match up with these change in cash flows depreciation rate may be changed. But in the given situation depreciation rate has been changed to increase the profit which is not a valid reason.

Part B

Revenue Recognition principle has been violated.

As per the accrual basis of accounting revenue is to be recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received.

In the given situation the fee receivable should have been recognised in the current year itself