Write-down for an item of inventory in the prior year

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Reference no: EM133363454

Question: Assume that you are a graduate accountant working for Pinnacle Accountants & Co, a public accounting firm located at 87 Islington Street Sydney, NSW 2000. The manager of your firm, Mr. Peter Cliffe asked you to draft a letter in response to an email received from Ms. Sonia Duncan, the managing director of Shine Ltd in response to various key accounting issue. The following is the email sent from Ms. Sonia Cliffe to Peter Cliffe.

Dear Peter, Thank you for your phone call this morning. As agreed, I am emailing you regarding the two following accounting issues (listed below). As I do not have any accounting experience, please explain the principles and concepts for me in simple language. In order to assist our management team in the decision-making process, could you please make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant websites?

Issue 1 The R&D division of Shine Ltd undertakes both research and development activities of the company. Its current development project on a prototype is near completion. The costs identified in this project consist of the following:

Cost of materials used $5 000 000

Services of consultants used in the project $2 000 000

Fees to register a trade design $50 000

Amortisation of patent used in the project $100 000

Selling and administrative overheads allocated $1 000 000

Initial operating losses $500 000

Trading costs to operate the asset $100 000

Total costs allocated $8 750 000

The other costs that relate to this project are the salaries of scientists and technicians ($12,000,000) and depreciation of equipment used in the research and development activities ($900,000). Management estimates that about 1/3rd of these costs relate to the development project. Can you please advise the cost of the development project that shall be capitalised.

Issue 2 Our company operates profitably from a factory that it has leased under an operating lease. Annual lease rentals totaled $120,000. During the year ended 30 June 2023, we relocated its operations to a new factory. The lease on the old factory continues for the next four years (up to 30 June 2027), as it cannot be cancelled and the factory cannot be re-let to another user. Can you advise, whether the closure of the plant shall be recognised in the financial statements of 2023. Also, let us know any amounts, which shall be recognised in its financial statements.

Issue 3 Recently directors learnt about errors in accounting balances and the following new information became available:

(a) The current tax provision of the prior year was understated by $50,000 based on the final self-assessed tax computation completed in the current year.

(b) The write-down for an item of inventory in the prior year was determined to be overstated. The item was sold in the current year for an amount that exceeded its net realisable value by $20,000.

(c) A machine with a cost of $110,000 and an accumulated depreciation of $20,000 at the end of the prior year was previously estimated to have a residual value of $10,000 and a useful life of ten (10) years. The current year estimates indicated that the residual value was nil and the useful life was eight (8) years. The company used the straight-line method for depreciation.

Can you advise, whether (1) any adjustments are required, if so, (2) show the journal entries to effect the change in estimates. In addition, (3) any disclosure requirements of changes in Accounting Estimates so that we would have clear understanding on this matter.

Reference no: EM133363454

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