Question

Topic 3: Accounting policies and other disclosures

Forever Young Ltd is a company that manufactures and supplies beauty products to local and international retailers. As the financial accountant of the company, the following events have been brought to your attention whilst finalizing the financial statements for the reporting period ending 30 June 2019:

1. During September 2018, a client filed a lawsuit against Forever Young Ltd, having suffered severe skin damage after consuming the company’s products. This was reported as contingent liability in its financial statements ending 30 June 2019. The case was not heard until the second week of July 2019. During that hearing, the judge handed down a decision against Forever Young Ltd where the company was liable to pay damages and costs totaling $500,000.

2. The company acquired a plant on 1 July 2013 which was depreciated on a straight-line basis. At that time, the plant had an estimated useful life of 15 years with zero residual value. During 2019, following the advice of an expert’s review, the directors have decided that the plant should have an estimated useful life of 20 years. There is no change required for its residual value. As at 1 July 2018, the plant has the following balances:

	$
Cost of plant	3,000,000
Accumulated depreciation	(1,000,000)
Carrying amount	2,000,000

Prior to learning about the directors’ decision on this change, you have calculated the depreciation based on the original useful life of the plant for the financial statements ending 30 June 2019.

3. During July 2019, upon checking the asset register, you realised that something was missing. Forever Young Ltd acquired a new vehicle on 1 January 2018 for $80,000. Jane, an accounting clerk, has charged this cost to the vehicle maintenance expense account for the financial year ended 30 June 2018. The directors have decided that all motor vehicles are depreciated at 20% p.a. on a straight-line basis.

4. MyBeauty Ltd is a major client with a receivable overdue which amounts to $75,000. As you have heard of the financial instability of MyBeauty Ltd, you have allowed for doubtful debts of $25,000 for this client in the statements ending 30 June 2019. On 6 July 2019, a liquidator was appointed to process the bankruptcy of MyBeauty Ltd. You were advised on 16 July 2019 that no amount will be recovered from the liquidator in respect of the amount due.

You are to assume that all events described above are material. Ignore any tax effect.

Required:

As the financial accountant of Forever Young Ltd,

1. State, which of the following would best describe the circumstance of each of the event above.
   • Change in accounting policy;
   • Change in accounting estimate;
   • Prior period error; or
   • Events occurring after the end of the reporting period – state if the event would fall under adjusting or non-adjusting category.
2. Explain your decisions made for each of the event described in (i) above and discuss the appropriate accounting treatment based on your decisions. Provide any relevant adjusting entries and/or note disclosures required. Support your answers with authorities in reference to the relevant accounting standards.
3. Prepare any journal entries and note disclosures where relevant, in accordance with relevant accounting standards, for each event above in the financial statements ending 30 June 2019 of Forever Young Ltd.

Answer 1

Event
1	Event occurring after the end of the reporting period : Non-adjusting
2	Change in accounting estimate
3	Prior Period Error
4	Event occurring after the end of the reporting period : Adjusting

Adjusting entries:

Event	Account Titles	Debit	Credit
June 30, 2019		$	$
1.	No entry required	0	0
2.	Accumulated Depreciation	66,667
	Depreciation Expense		66,667
3.	Vehicle	80,000
	Depreciation Expense	16,000
	Accumulated Depreciation		24,000
	Retained Earnings		72,000
4.	Allowance for Doubtful Accounts	75,000
	Accounts Receivable		75,000