Reference no: EM133045500

Question 1 - Majestic Enterprise Limited currently depreciates all its non-current assets using a straight line basis over a period of ten years. However, management decided on January 1, 2019 that even though its non-current assets have a remaining useful life of two years, a revision will be made to increase the remaining useful life to five years instead. On the matter of its inventories, which are all currently carried at average cost method, a change will be made as of January 1, 2019 to first in first out method. If the first in first out method was used initially, then the entity's cost of sales would have experienced an accumulated decrease of $400 million.

Required - Briefly discuss the effect of the changes made by management in accordance with IFRS.

Question 2 - Pennington Ltd discontinued one of its divisions in July 2019. The process involved selling off the entire assets of the division plus paying redundancy costs. Up to the point of closure, the division incurred operating profits, exclusive of the redundancy cost and gain or loss on disposal, of $330 million. Redundancy costs for the closed division amounted to an additional $270 million. It also disposed of assets which had cost and accumulated depreciation respectively of $500 million and $300 million respectively. The sales proceeds on disposal amounted to $120 million. The associated taxes have already been accounted for, and the total net effect of the discontinued operation has already been reflected in the administrative expenses associated with continuing operations. For the period ended December 31, 2019, the rest of the company reported revenues of $1,200 million. It also reported cost of sales, administrative expenses and distribution costs of $150 million, $380 million and $220 respectively. Total finance cost for the period amounted to $160 million, and the tax rate stands at 30%.

Required - Prepare the statement of profit and loss for the period ended December 31, 2019?

Question 3 - Since ABC Ltd's date of incorporation, it has been recognising the purchase of computers as an expense. However, after receiving the appropriate advice from the entity's new financial consultant who is assisting with the preparation of the entity's financial statements for 2019, the entity decided that the appropriate treatment should have been to capitalise the amounts as assets instead. The cumulative amount recognised as expense over the years totalled $120 million. The entity's retained earnings as at January 1, 2019 stood at $40 million and it earned net income of $80 million for the entire period. The company has share capital of $500 million as at January 1, 2019 and it issued $300 million in new share capital during the period. It declared dividends of 5% of the ending share capital as at December 31, 2019.

Required - Prepare the entity's statement of changes in equity for the year 2019.

Question 4 - A local bakery constructed an oven on January 1, 2017. The construction cost includes direct material, direct labour and overheads of $20 million, $30 million and $100 million respectively. Only 70% of the total overheads is considered reasonable. The oven is expected to have useful life of 25 years and depreciated on a straight line basis to residual value of $2 million. However, the oven has a burner that is to be replaced every four years. The burner represents 45% of the assets total capitalized cost. The burner is to be depreciated using a straight line basis to a residual value of $8 million. Both the burner and the main oven attract capital allowance at 20% per annum on a straight line basis. The current tax rate is 25%.

Required - a. Determine the carrying value of the asset at the end of 2017 and 2018.

b. Determine the deferred tax liability balance at the end of 2017 and 2018.

c. Prepare the relevant financial statement extracts for 2017 and 2018.

d. Explain the impact that the change in the deferred tax liability between 2017 and 2018 would have on the 2018 financial statements.