Reference no: EM132526760

Question - Prepare necessary adjusting entries to correct the errors issues (i) to (ii) in the financial statements of GHL for the year ended 31 March 2020 in accordance with relevant HKFRSs.

(i) On 1 April 2019 GHL purchased an equipment and simultaneously leased it to SG Health Services Ltd (SHS), an unrelated company in Singapore, on the following terms:

Lease term (with no cancellation clause) 5 years Remaining useful life of equipment 7 years Carrying amount and fair value of equipment at 1 April 2019 $918,124 Annual instalment receivable in arrears $225,000 Interest rate implicit in lease (per annum) 10% Residual value guaranteed by SHS at 31 March 2024 $91,500 Expected residual value at 31 March 2024 $105,000

GHL has treated the contract as an operating lease and recognized lease rental income of $225,000. Depreciation of $131,161 has been charged to the statement of profit or loss.

(ii) At 1 April 2019 there was a deferred tax liability of $6.6 million in the statement of financial position and no adjustments have been made to this figure at 31 March 2020. This deferred tax liability was solely in relation to the differences between the carrying amount ($90 million) and the tax based ($57 million) of plant and equipment. At 31 March 2020 these figures were $96 million and $54 million respectively for the carrying amount and tax base of plant and equipment. The applicable income tax is 20%. GHL accounts for plant and equipment using cost model under HKAS 16 'Property, Plant and Equipment'.

The first tax loss carried forward in respect of the year ended 31 March 2020 is $24 million. GHL has reliable budgets for a total taxable profit of $12 million for the next two financial years. Tax losses can be carried forward indefinitely under the tax law. Fanny used the full amount of tax loss to determine the deferred tax amount and has been reflected in the draft financial statements.