company accounting ch1 tut working

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Case Study 1 - Accounting Policies
The board of directors has resolved to change the accounting policy for treatment of advertising expenditure. Previously, advertising expenditure has been expensed as incurred. Following extensive market research, the board has taken the view that benefits from advertising expenditure in the form of product awareness and increased sales will be received by the company over a 3-year period following the expenditure. Due to a recent fire and water damage to the company’s accounting records, details of advertising expenditure in prior years have been destroyed.
The board of directors has approached
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3. Bankruptcy of Debtor after reporting date

The adjustment will increase Bad Debts expense by $89 120 and decrease Accounts Receivable by $89 120.

Base Amount
Error as % of base
Profit before tax
$352 000
25.3% (89 120/352 000)
Receivables (current)
621 000
14.4% (89 120/621 000)

The overstatement is material in relation to both base amounts and must be adjusted as it relates to conditions existing at reporting date.

The significant variances between the provision for warranty and the actual repairs in the two years indicate that either the policy of using a percentage of net credit sales as a means of estimating warranty costs is not appropriate, or the percentage used is not adequate. The company needs to look at changing either its policy or perhaps simply increasing the percentage used. Past claims as a percentage of past net credit sales should provide a reliable measure. If a new percentage is adopted it will be applied prospectively (from 2015-16 on) according to AASB 108 paragraph 36.

If the variance for 2014-15 was due to an error in calculation then, providing it is material, the figures for 2014-15 should be retrospectively corrected (according to AASB