Question

Question 3:

Woo Ltd. recently conducted an extensive review of its accounting and reporting policies. The following accounting changes are an outgrowth of that review:

1. Woo acquired a machine at a cost of $400,000 in 2016. The machine has been depreciated on a straight-line basis with no residual value since it was acquired. During 2019, it was decided that the benefits from the machine would be consumed over a total of 13 years rather than the 20-year useful life now being used to depreciate its cost.

2. At the beginning of 2019, Woo changed its method of valuing inventory from the FIFO cost method to the weighted-average cost method. At December 31, 2018 and 2017, Woo’s inventories were as follow:

	2018	2017
On a FIFO cost basis	$560,000	$540,000
On a weighted-average cost basis	$500,000	$490,000

3. Woo‘s income tax rate is 20%.

4. Woo reports net income for 2019 and 2018 for the following amounts:

	2019	2018
Net income	$840,000	$900,000

5. The retained earnings of Woo as at December 31, 2018 and 2017 before adjusting the     effect from the changes in inventory valuation method are as follow:

	2018	2017
Retain earnings	$3,200,000	$2,800,000

6. Dividends declared during 2019 and 2018 were $100,000 and $500,000, respectively.

Required:

1. Prepare the journal entries needed in 2019 related to each change.             [10 marks]

2. Prepare the statements of changes in equity (in part) for the year ended at 31 December 2019 after the adjustments (including comparative figure for 2018) in accordance with HKAS 8.                                                                          [10 marks]

Answer 1

Ans
(a) Journal Entry	$	$
Machinery (F.A.) A/C…..............Dr.	32,307
To Retained Earning A/C		32307
(Being excess depreciation charged revered
as per Notes 1)
Depreciation A/C…...............Dr.	30769
To Machinery (F.A.) A/C		30769
(Being depreciation charged for the year 2019)
Retained Earning A/c…..........Dr	10000
To Purchase A/c		10000
(Being stock value reduced effect given for ealier
period as change in method of valuation as per
Notes 2)
Retained Earning A/c…..........Dr	4461
To Income Tax (Deffered) A/c		4461
(Being tax provision on earlier period given)
Retained Earning A/c…..........Dr	100000
To Proposed Dividend A/C		100000
(Being tax provision on earlier period given)
Profit & Loss A/c …............Dr.	168000
To Provision for Tax		168000
(Being tax for current year provided)
Notes
Depreciation p.a. till 2018 = (400000/20)= 20000 $
WDV as on 31.12.2018 is (400000-(20000*3))= 340000
Depreciation p.a. as per 13 year Is (400000/13)= 30769
WDV should be at 01.01.2019 is (400000- (30769*3))= 307693
Additional Depreciation reversal during 2019 is 340000-307693=32307
Depreciation for 2019 is 30769 $
(b) Statement of change in Equity for 31st Dec 2019
Particulars	Amount in $	Amount in $
	2,019	2,018
Opening Balance	32,00,000	2800000
Depreciation reversal on F.A.	32,307
Change in Stock Value	-10,000
Tax effect on depreciation & stock (22307*20%)	-4,461
Proposed Dividend	-1,00,000	-500000
Net income after Tax for the year	6,72,000	900000
Closing Balance	37,89,846	32,00,000
Notes :
1. Income Statement for 2019
Net Income	8,40,000
Tax Provision @ 20%	1,68,000
Net Income after Tax	6,72,000
(Assumed current year adjustment already done and then net income of $ 8,40,000 derived but before tax .
2. Change in Stock in 2018	Opening Stock	Closing Stock	Gain / (Loss)
As per FIFO	540000	560000	20000
As per WAC	490000	500000	10000