NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL

AC1104 - ACCOUNTING II
Semester 2, 2023/2024

Seminars 10 to 11: Accounting Policies, Changes in Accounting Estimates and Prior Period
Errors

A) Pre-seminar preparation

a) Required readings: refer to course outline

b) Be prepared for the discussion questions

B) Self-study

a) Illustrations 1 to 4

b) NCKL illustrations 1 to 3, 5 to 7, and Cases A to E (pages 127 to 153, ignore tax

effects)

C) Discussion questions

Q3 TS & Q5 CMCF

AC1104 S10 to S11 - 1

Illustration 1 (Gucca)

Gucca Pte Ltd decided to change the inventory costing method from FIFO to Weighted Average
(WA) with effect from 2012 financial year. The company believes that changing the method to
WA will enhance comparison with its main competitors. The cost of the ending inventory under
the two methods is as follows:
2012 2011
$'000 $'000
FIFO Method 1,580 1,450
Weighted Average Method 1,630 1,560

Prepare

i) the necessary journal entries to account for the change in the inventory costing method;
and

ii) the relevant disclosures in the notes to the 2012 financial statements.

Illustration 2 (Omega)

Omega acquired a warehouse cum office on 1 October 2008 at a cost of $408,000. The premise
is to be depreciated on a straight-line basis over its estimated useful life of 20 years, with a residual
value of $20,000.

Based on the Urban Redevelopment Authority’s (URA) master plan issued in early September
2010, Omega decided that the warehouse cum office be revalued to $620,000 on 1 October 2010
and that its original useful life and residual value be revised to 30 years and $60,000 respectively.
However, the junior accountant has not yet accounted for the effects of this decision in the draft
2010/2011 financial statements as follows:

Draft profit or loss for the year ended 30 September 2011

Depreciation expense - $19,400.

Draft balance sheet as at 30 September 2011

Warehouse cum office - $408,000
Accumulated depreciation - $58,200

Revaluation is to be accounted for by eliminating the accumulated depreciation as at the date of

revaluation in accordance with SFRS(I) 1-16:35(b).

Prepare

i) the necessary journal entries to account for the effects of Omega’s decision; and

ii) the relevant disclosures in the notes to the 2010/2011financial statements, including
property, plant and equipment schedule.
AC1104 S10 to S11 - 2
Illustration 3 (Alpha)

Alpha acquired a warehouse on 1 March 2009 at a cost of $600,000. The warehouse is to be

depreciated on a straight-line basis over its estimated useful life of 25 years, with zero salvage
value.

Alpha estimated the useful lives of all its furniture and fittings to be 5 years with zero salvage
value. The depreciation method is based on a straight-line basis. Alpha acquired its furniture and
fittings at a cost of $30,000 on 1 January 2010.

Due to the rapid business expansion, Alpha acquired another set of office furniture and fittings at
a cost of $50,000 on 1 July 2011. However, the new set was erroneously categorised as warehouse
upon acquisition in 2011 and has yet to be rectified at the end of 2012 financial year.

Draft profit or loss for the year ended 31 December 2012

Depreciation expense (Warehouse) - $26,000
Depreciation expense (furniture & fittings) - $6,000

Draft balance sheet as at 31 December 2012

Property, plant and equipment (PPE) (net) - $567,000

Prepare

i) the necessary journal entries to rectify the errors; and

ii) the relevant disclosures in the notes to the 2012 financial statements, including PPE
schedule.

Illustration 4 (Evergreen)

On 1 July 2010, Evergreen Pte Ltd (Evergreen) erroneously credited the revenue account for
payment of $50,000 received from one of its customers. Evergreen’s financial year end is on 30
September, and its 2009/2010 financial statements were approved and issued on 20 October 2010.

Required

(i) Determine the effect of the error on the 2009/2010 financial statements.

(ii) Advise Evergreen on the appropriate accounting treatment(s) and provide the necessary
journal entries assuming the error was material and discovered on 20 January 2011.
Q1b of AA102 Sem 1 Exam 2010/2011

AC1104 S10 to S11 - 3

Suggested solution to illustration 1 (Gucca)

(i) Change in accounting policy (retrospective)

DR Beg. Inventory $110,000
CR Beginning retained earnings $110,000

Year-end correcting entry

DR COGS $60,000
CR Inventory $60,000

Alternative JE #1:
Change in accounting policy (retrospective)
DR COGS $110,000
CR Beginning retained earnings $110,000

Year-end correcting entry

DR Inventory $50,000
CR COGS $50,000

Alternative JE #2:
Change in accounting policy (retrospective)
DR Beg. Inventory $110,000
CR Beginning retained earnings $110,000

Year-end correcting entry

DR COGS $110,000
CR Inventory $110,000
DR Inventory $50,000
CR COGS $50,000

Alternative JE #3:
Change in accounting policy (retrospective)
DR Beg. Inventory $110,000
CR Beginning retained earnings $110,000

Year-end correcting entry

DR COGS $110,000
CR Beg. Inventory $110,000
DR Inventory $50,000
CR COGS $50,000

AC1104 S10 to S11 - 4

(ii) Notes to the financial statements

Change in accounting policies

During the year, the company has changed its inventory costing method from first-in-first-
out to weighted average. The change has been accounted for using the retrospective
method. The effects on the 2011 and 2012 financial statements are as follows:

2012 2011
$’000 $’000
Increase/(Decrease) in COGS 60 (110)
(Decrease)/Increase in profit before tax (60) 110
Increase in beginning R/E 110 -
Increase in ending R/E 50 110
Increase in ending inventory 50 110

Suggested solution to illustration 2 (Omega)

(i) Eliminating the accumulated depreciation as at the date of revaluation (SFRS(I) 1-

16:35(b))

DR Accumulated Depreciation 38,800

DR Warehouse cum Offices (PPE) 212,000
CR Revaluation Surplus 250,800

Correcting journal entries due to change in accounting estimates

DR Depreciation 600
CR Accumulated depreciation 600

AC1104 S10 to S11 - 5

(ii)
Notes to the financial statements

Property, plant and equipment

Warehouse Total
cum office
S$’000 S$’000
Cost /Valuation
At 01.10.10 408 408
Elimination of accumulated depreciation -38.8 -38.8
Revaluation 250.8 250.8
At 30.09.11 620 620

Acc depreciation
At 01.10.10 38.8 38.8
Elimination due to revaluation -38.8 -38.8
Charge for the year 20 20
At 30.09.11 20.0 20.0

Net book value at 30.09.11 600.0 600.0

Net book value at 30.09.10 369.2 369.2

Change in accounting estimates

There was a change in the estimates of the useful life and the residual value of the warehouse cum
offices. The effect of the change is to reduce the pre-tax profit of the current year and each of the
future years by $600.

Suggested solution to illustration 3 (Alpha)

Correction of prior period error

Reclassification
DR Beg. Furniture and fittings (PPE) $50,000
CR Beg. Warehouse (PPE) $50,000

DR Beg. accumulated depreciation - Warehouse $1,000

DR Beginning retained earnings $4,000
CR Beg. accumulated depreciation – Furniture and fittings $5,000

Year-end correcting entry

DR Accumulated depreciation - Warehouse $2,000
CR Depreciation - Warehouse $2,000

DR Depreciation – Furniture and fittings $10,000

CR Accumulated depreciation – Furniture and fittings $10,000
AC1104 S10 to S11 - 6
(ii)
Notes to the financial statements

Property, plant and equipment

Warehouse Furniture Total
and fittings
S$’000 S$`000 S$`000
Cost /Valuation
At 01.01.12 650 30 680
COE - Reclassification (50) 50 0
Restated 600 80 680
Additions/Disposals 0 0 0
At 31.12.12 600 80 680

Acc depreciation
At 01.01.12 69 12 81
Correction of error (1) 5 4
Restated 68 17 85
Charge for year 24 16 40
At 31.12.12 92 33 125

Net book value at 31.12.12 508 47 555

Net book value at 31.12.11 532 63 595

Correction of prior period error

Office furniture and fittings acquired at a cost of $50,000 on 1 July 2011 were erroneously
categorized as warehouse upon acquisition. The error has been corrected by using the retrospective
method. The effects of the correction on the 2011 financial statements are as follows:
2011
$’000
Increase in Depreciation# 4
Decrease in Profit before tax (4)
Beginning R/E (0)
Decrease in ending R/E (4)
Increase in NBV of FF 45
Decrease in NBV of WH (49)

# alternatively:
increase in depreciation (FF) 5
decrease in depreciation (WH) (1)

AC1104 S10 to S11 - 7

Suggested solution to illustration 4 (Evergreen)

(i) Revenue overstated $50,000

Net income overstated $50,000
Retained earnings overstated $50,000
Owner’s equity overstated $50,000
Asset overstated $50,000 / Liability understated $50,000*
Operating cash flow – no effects

(ii) No adjustment will be in 2009/2010 financial statements as the error was discovered after
the issuance of the 2009/2010 financial statements. However, such error needs to be
corrected in 2010/2011 financial statements.

According to SFRS(I) 1-8, for the 2010/2011 financial statements, Evergreen is required
to correct its prior period error retrospectively. It should disclose in the notes to 2010/2011
financial statements, the nature of the prior period error and the amount of the correction
for each financial statement line item affected.

DR Beginning retained earnings $50,000

CR Beg. trade receivable/Unearned revenue* $50,000

* depending on whether the correct entry was to credit to A/R account or Unearned
revenue account.

AC1104 S10 to S11 - 8

Question 1 (Wiki)

Wikiwiki Limited (Wiki) is a GST registered company and has a 31 March financial year-end.
Wiki carried all its non-current assets at cost model unless otherwise stated.

On 1 January 2018, Wiki purchased a freehold building at a cost of $32.1 million, inclusive of 7%
GST. The estimated useful life and salvage value of the asset were 30 years and $3 million
respectively. Wiki recognised the freehold building as an investment property upon acquisition
and a straight-line depreciation method is adopted, if applicable. The depreciation charge is
apportioned across the financial year.

On 1 January 2019, the management of Wiki overheard the Singapore Government’s future
development plan of the area that the building is located and hence decided to carry the freehold
building at fair value. Wiki correctly accounted for the change in accounting policy and recognised
$1.9 million as fair value gain in the profit or loss at the end of the financial year 2018/2019. The
fair values of the freehold building were increased from $31 million on 31 March 2018 to $31.9
million on 1 January 2019.

Towards the end of March 2020, with the sign of economic slow-down, the fair value of the
freehold building deteriorated to $28 million. Wiki immediately switched its fair value model
back to cost model from 1 April 2019 onwards and accounted for the depreciation charge of $1.04
million in the financial year 2019/2020.

Required

(i) Briefly explain Wiki’s motive to change its accounting policy of investment property from
cost model to fair value model on 1 January 2019.

(ii) Provide all the necessary journal entries for the financial years 2017/2018 and 2018/2019
which were correctly recorded by Wiki before economic slow-down.

(iii) Critically evaluate Wiki’s action on switching its accounting policy from fair value model
back to cost model towards the end of financial year 2019/2020, with reference to Singapore
Financial Reporting Standards (International).

(iv) Determine the effects on the 2019/2020 financial statements regarding Wiki’s action towards
the end of financial year 2019/2020.
Q1 of AC1104 Sem 2 Exam 2019/2020
Key ans: (ii) GST receivable $2.1m, Fair value gain on freehold building $1.9m;
(iv) Depn $1.04m (O), IP $3.86m (O)

AC1104 S10 to S11 - 9

Question 2 (SSPL)

Part I

SuperStore Pte Ltd (SSPL) uses the First-In First-Out (FIFO) inventory method to determine the
cost of its ending inventory under the periodic inventory system, whereby ending inventory
quantities are determined by a physical count. SSPL has a 31 December financial year end. It
sells electrical and electronic appliances. All sales are made on credit. It reported the following
selected financial statement data:

2012 2011
Ending inventories (inclusive of recoverable assets) $500,000 $400,000
Sales returns $15,000 $12,000
Refund liability $33,000 $30,000

Ratios:
Gross profit margin 30%
Inventory turnover 4 times

Required

(i) Based on the information in the above table, determine the amount of net sales for 2012.

(ii) If the weighted average method had been used instead of the FIFO method, inventory
would have been higher by $60,000 and $40,000 at the end of the financial year 2012 and
2011 respectively. Determine the inventory turnover ratio for 2012 if SuperStore Pte Ltd
had used the weighted average inventory method.

Part II

Before the finalisation of the 2012 accounts, James, SSPL’s financial controller, discovered that
goods shipped from a vendor F.O.B. shipping point on 28 December 2011 were received on 9
January 2012. The merchandise cost $20,000. This amount is considered material. The credit
purchase was not recorded until 2012. Year-end physical counts include items on the shelves, in
storage and in the receiving area only.

Required

(iii) Determine the effects of the error in the 2012 financial statements.

(iv) Advise SuperStore Pte Ltd on the appropriate accounting treatment for the financial year
2012. Your advice should include the necessary journal entries and disclosures.
Adapted from Q1 of AB1102 Sem 2 Exam 2012/2013
Key ans: (i) $2,571,429; (ii) 3.56; (iii) Beg inventory understated by $20,000; (iv) COE

AC1104 S10 to S11 - 10

Question 3 (TS)

Tesela (TS) is a GST-registered company in software development business and its financial year
ends on 30 June. TS has an accounting policy to carry its property, plant and equipment (PPE) and
intangible assets (IA) at cost model, and its investment property (IP) at fair value model. The junior
accountant noted the following issues in Notes (1) to (4) while preparing 2019/2020 financial
statements prior to the issuance date on 15 September 2020.

Notes

(1) TS started a research project on a new software, GEX. On 30 June 2016, TS incurred a
total research cost of $500,000 on GEX. TS capitalised the research cost upon incurrence
and amortised it immediately on a straight-line basis over its five-year estimated useful life
with no residual value. Subsequent to the capitalisation of the research cost, TS
demonstrated its intention, ability and technical feasibility of completing GEX, and has
sufficient resources to do so by 1 January 2017. On 30 June 2017, TS incurred a
development cost of $750,000 on GEX. Upon incurrence of the development cost, TS
capitalised it as a subsequent cost incurred on GEX, and amortised it accordingly. TS
reported the software GEX on the financial statements as at 30 June 2020 and the
breakdown of its book value is as follows:

Software GEX (IA) $1,250,000

Accumulated amortisation ($962,500)
$287,500

The completed GEX was available for use in TS’s operations from 30 June 2018 to 30 June
2023, with no residual value.

(2) TS signed a Sales and Purchase Agreement on 1 July 2018 to acquire a sales office to
expand its geographical coverage of business activities. The purchase price of the sales
office was $1,070,000, inclusive of 7% GST. On top of the purchase price, TS also paid a
total sum of $150,000 for legal fees and agent commission for such acquisition. Although
the sales office was available for use from 1 January 2019, TS chose to put the sales office
into operation from 30 June 2019 onwards. The sales office is depreciated on a straight-
line basis and has an estimated useful life of 10 years with no residual value. TS reported
the sales office on the financial statements as at 30 June 2020 and the breakdown of its
book value is as follows:

Sales office (PPE) $1,000,000

Accumulated depreciation ($100,000)
$900,000

AC1104 S10 to S11 - 11

(3) TS reclassified its old machinery as held for sale on 30 June 2019 when it met all the
recognition criteria of SFRS(I) 5 Non-Current Assets Held for Sale and Discontinued
Operations. The old machinery was purchased on 30 June 2016 at a cost of $500,000. The
asset is depreciated on a double-declining basis with an estimated residual value and useful
life of $10,000 and 5 years, respectively. The junior accountant has correctly recognised
the depreciation of the old machinery before the reclassification. The fair value less costs
to sell of the held for sale asset item as of 30 June 2019 was $120,000. TS recognised the
difference between fair value less costs to sell and carrying amount of the held for sale
asset item as a fair value gain in the statement of profit or loss on 30 June 2019. TS
continued to report and recognise the old machinery as held for sale at a value of $120,000
as at 30 June 2020, since it satisfies all the exception criteria in SFRS(I) 5 Non-Current
Assets Held for Sale and Discontinued Operations in the event of a sale not completed
within a year of the reclassification.

(4) TS has an office building solely for its own use before Covid-19 outbreak. However, amid
Covid-19, only 10% of TS’s essential workforce is allowed to commute and work at TS’s
office building on a daily basis, occupying 25% of its office building’s total floor area.
With the availability of the remaining 75% floor area, TS decided to look for a tenant and
rent it out on operating lease. On 30 June 2020, TS successfully leased out the remaining
75% of its office building’s floor area to a logistic company. On the same day, TS
immediately reclassified the entire office building as an investment property at its fair value
of $3,000,000. Prior to the reclassification on 30 June 2020, the carrying amount of the
office building was $2,500,000 (net of accumulated depreciation of $1,000,000). The
depreciation expense of the office building was recorded correctly in the financial year
2019/2020. The entire office building cannot be sold or rented out on finance lease
separately.

Required

(i) Critically evaluate TS’s accounting treatment of intangible assets over the financial periods
from 2016 to 2020 in Note (1). Provide all the necessary adjusting and/or correcting journal
entries for the financial year 2019/2020, if any.

(ii) Provide all the necessary adjusting and/or correcting journal entries for items in Notes (2)
and (3) above for the financial year 2019/2020, if any.

(iii) Critically evaluate TS’s accounting treatment of its office building on 30 June 2020 in Note
(4). Provide all the necessary adjusting and/or correcting journal entries for the financial
year 2019/2020, if any.

(iv) Determine the effects on the 2019/2020 financial statements if the necessary adjusting
and/or correcting journal entries in requirements (i), (ii) and (iii) above were not made.
Q1 of AC1104 Sem 1 Exam 2020/2021
Key ans: (i) DR Beg. Acc. Amortisation (IA) $525,000;
(ii) DR Beg. Sales Office (PPE) $150,000, CR Beg. Machinery (HFS) $12,000;
(iii) DR Revaluation Reserve $500,000; (iv) BRE (U) $105,500

AC1104 S10 to S11 - 12

Question 4 (iGlobal)

iGlobal is a wholesale electronics company. It uses the weighted average inventory costing
method to determine the cost of its ending inventory. By 18 February 2012, iGlobal’s external
auditors had completed their audit of iGlobal’s financial statements which are scheduled to be
issued on 25 February 2012. However, on 20 February 2012, Tom Crooz, the company’s financial
controller, discovered errors in the ending inventory for both the 2010 and 2011 audited financial
statements.

Amounts
per the audited Correct amounts
financial statements
$’ millions $’ millions

Ending inventory, 31 December 2010 32 29

Ending inventory, 31 December 2011 36 25
Cost of goods sold, 2011 300 ?

Required

(i) Determine the effects of the inventory errors on the 2011 financial statements.

(ii) With reference to the relevant Singapore Financial Reporting Standards (International),
propose appropriate accounting treatments (including journal entries and disclosures) to
correct the errors in the 2011 financial statements.

(iii) Determine the Inventory Turnover ratio for the financial year 2011 after correcting the
inventory errors.

(iv) Assume Tom Crooz’s annual bonus is determined based on the audited net income. Discuss
the ethical dilemma that Tom Crooz faces upon discovery of the errors.

(v) If the above inventory errors are not discovered and corrected in the 2011 financial
statements, determine the effects of these inventory errors on the 2012 financial statements
assuming the ending inventory for 2012 is correct.
Q3a of AA102 Sem 1 Exam 2011/2012
Key ans: (i) COGS $8m(U); (ii) COE, Dr BRE $3m; (iii) 11.407; (v) NI $11m(U)

AC1104 S10 to S11 - 13

Question 5 (CMCF)

CanMiCurlFree Pte Ltd (CMCF) distributes toiletries that are specially formulated for sensitive
skin and its financial year is 31 December. CMCF adopts the cost model to measure all its non-
current assets except for investment property. While preparing the draft financial statements for
the financial year ended 31 December 2020, CMCF uncovered the following information
regarding its assets.

CMCF bought a delivery van for $100,000 on 1 January 2014 and depreciated it on a straight-line
basis with no residual value. The initial estimated useful life of the van is 10 years. CMCF revised
its estimated total useful life effective from 1 January 2017.

In line with its business expansion, CMCF intended to sell the delivery van and replaced it with a
lorry that has a bigger capacity on 1 July 2019. On the same day, CMCF ceased the use of the van
for delivery and reclassified it as an asset held for sale in accordance with SFRS(I) 5 Non-current
assets held for sale and discontinued operations. The van was available for immediate sale and
CMCF has initiated an active program to solicit buyers since 1 July 2019. CMCF received a
number of reasonable offer prices close to the fair value of the van after the reclassification.
However, the van remained unsold at the end of the financial year 2019 as the management was
only willing to sell the van above $35,000, which was the van’s carrying amount upon
reclassification on 1 July 2019. CMCF recorded an impairment loss for the van at the end of
December 2019.

In the year 2020, the management expected that it would be difficult to sell the van at its desired
selling price. Due to increasing online sales and deliveries during the COVID-19 pandemic, there
was a high demand for rent of delivery vans. On 30 June 2020, the van was rented to a company,
Pomelo & Company, on a one-year operating lease for an annual rent of $21,000. At the same
time, CMCF reversed the impairment loss of the van recorded in the previous financial year and
reclassified it from asset held for sale to investment property at its previous carrying amount of
$35,000. On 31 December 2020, the van was marked to its fair value of $32,500 in accordance
with SFRS(I)1-40 Investment Property. There were no other journal entries recorded for the van
in financial year 2020 except as described above. The rental income from the van had been
correctly recorded.

Information on the fair value less cost to sell of the van was as follow:
Fair value less cost to sell at $
1 July 2019 35,000
31 December 2019 33,000
30 June 2020 33,500

AC1104 S10 to S11 - 14

The following schedule was extracted from the disclosure notes on the asset held for sale for the
financial year ended 31 December 2019. Assume that the presentation in the disclosure notes
correspond to the accounting entries recorded for the van during the financial year, and the van
was the only asset held for sale for CMCF.

Asset held for sale

$
Balance on 1 Jan 2019 0
Transfer from PPE 35,000
Impairment loss (2,000)
Balance on 31 Dec 2019 33,000

Required

Assume that the van was correctly accounted for prior to its reclassification to asset held for sale.

(i) Compute the revised total useful life of the van applicable from 1 January 2017.

(ii) Briefly comment on whether the classifications adopted by CMCF for the van in the financial
years 2019 and 2020 were appropriate.

(iii) Prepare all necessary correcting journal entries to account for the van for the financial year
2020.

(iv) Prepare a relevant disclosure note to the financial statements for the financial year ended 31
December 2020 to reflect the correction made to account for the van in requirement (iii)
above, excluding the property, plant and equipment schedule.

(v) A company director of CMCF commented, “If the management of CMCF was committed
to sell the van at its reasonable current market value and eventually sold it for $33,000
towards the end of the financial year 2019, CMCF could have reported a higher net profit
for both financial years 2019 and 2020.” Discuss whether you agree with the director by
showing all relevant supporting computations.
Q1 of AC1104 Sem 2 Exam 2020/2021
Key ans: (i) 8 years;(iii) CR BRE $5,000, DR Writeback of impairment loss (HFS) $2,000;
(iv) Increase in PPE $28,000, Decrease in HFS $33,000; (v) Agree

AC1104 S10 to S11 - 15

Question 6 (CS)

Abbreviations use in this question:

* AIR Artificial intelligence robot
IA Intangible assets
IP Investment properties
PPE Property, plant and equipment
PPEHFS Property, plant and equipment held for sale

Chishiki Singapore Pte Ltd (CS) is a franchisee of Chishiki Japan Pte Ltd (CJ). CS’s principal
activities are to operate Japanese tuition schools and sell any learning aid devices in Singapore.
CS has a 31 December financial year end and below information is extracted from the draft balance
sheet and profit lo loss statement prepared by its inexperienced accountant.

Extracted from draft balance sheet

31/12/2017 31/12/2016
$’000 $’000
PPE* - Office units (Note 2) 780 840
PPE - AIR* (Note 3) 14.6 17.8
IP* – AIR (Note 3) 48 50
PPEHFS* – AIR (Note 3) 168 168
IA* (Note 4) 252 36
Cash on hand & balances with banks 480 440
Fixed deposits 130 100
Trade and other receivables 18 22
Inventories 50 30
Share capital 80 50
Revaluation reserve (Note 2) 100 100
Retained earnings 430.6 803.8

Draft loss for the financial year ended 31 December 2017 was $343,200 after
(charging)/crediting the followings:
$’000
Rental income 18
Gain on disposal of 1,000 units of PPEHFS - AIR (Note 3) 290
Depreciation of PPE - Office units (Note 2) (60)
Depreciation of PPE - AIR (Note 3) (3.2)
Amortisation (24)
Fair value loss on IP* - AIR (Note 3) (2)

AC1104 S10 to S11 - 16

Additional Information

(1) CS’s accounting policies for the respective non-current assets are as follows:

Non-current assets Accounting policies

PPE Cost model except for office units
IP Fair value model
IA Cost model

The straight-line method is adopted where applicable.

(2) CS’s PPE items consist of office units and AIR.

(a) Office units were acquired in early financial year 2011 and stated at cost with
estimated salvage value and total useful life of $89,000 and 20 years respectively.
On 31 December 2015, the office units were first revalued to $900,000. CS has a
policy to revalue its office units once every 3 years.

After the first revaluation was done in 2015, CS reviewed and revised its estimated
salvage value to zero from the financial year 2016. There was no change in the
estimated useful life.

(b) AIR (see Note 3 below)

(3) AIR is a newly invented Japanese language learning device in early 2015. On 1 December
2015, CS signed a 2-year non-cancellable contract with Yushu, a Japanese manufacturer
to acquire 3,000 units of AIR at a total purchase consideration of $600,000. The shipping
cost per shipment was $10,000. According to the contract, cash is paid upon receiving
each shipment.

Among the 3,000 units of AIR, 100 units were used by CS at its tuition schools, another
100 units were to be held for renting out on operating lease to its existing students and the
rest were held for sale to its existing students and public. Upon acquisition, CS’s
inexperienced accountant had classified the AIR units as PPE, IP and PPEHFS according
to the use of the assets, and accounted for the assets in accordance with SFRS(I) 1-16
Property, Plant and Equipment, SFRS(I) 1-40 Investment Property and SFRS(I) 5 Non-
Current Assets Held For Sales and Discontinued Operations respectively.

The shipments of 3,000 units of AIR and the classifications are as follows:

Classification upon acquisition

Shipment Total PPE IP PPEHFS
receiving date (unit) (unit) (unit) (unit)
1 January 2016 1,000 100 100 800
1 July 2016 1,000 0 0 1,000
1 January 2017 1,000 0 0 1,000

AC1104 S10 to S11 - 17

 CS set its AIR’s selling price and monthly rental to be $500 per unit and $30 per unit per
month respectively. CS had successfully sold 1,000 units in each of the financial years
2016 and 2017. Each unit sold was accompanied with one year product warranty and the
costs of product warranty were recorded correctly.

CS estimated that the useful life and the salvage value of each unit of AIR classified as
PPE to be 5 years and $50 respectively.

The fair values, costs to sell and net realisable value of each unit of AIR are as follows:

Date Fair value Costs to sell Net realisable value

31 December 2016 $500 $0 $500
31 December 2017 $480 $0 $480

(4) The 2017 financial statements are expected to be approved and issued on 28 April 2018.

(5) Assume all omissions and mistatements have no effects on income tax expense and tax
liability.

Required

(i) Refer to the information regarding the office units in Note 2(a) above, determine the
following:
(a) the acquisition cost in the early financial year 2011; and
(b) the depreciation charge for the financial year ended 2015.

(ii) State the main characteristics of the following assets in accordance with Singapore
Financial Reporting Standards (International).
(a) inventory
(b) investment property;
(c) property, plant and equipment; and
(d) property, plant and equipment held for sale.

(iii) Refer to the main characteristics provided by you in requirement (ii) above, comment on
the classification of assets done by the inexperienced accountant in Note 3 above.

(iv) Refer to the information regarding the AIR in Note 3 and your comment in requirement
(iii) above, provide all the necessary adjusting/correcting journal entries for the three
shipments in the financial year 2017, if any.
Q4 of Sem 1 Exam 2018/2019
Key ans: (i)(a) $1,037,000; (iii) PPE and inventory classifications only;
(iv) Dr Beg. AIR (PPE) $21,000, DR Beg. Inventory $168,000;

AC1104 S10 to S11 - 18

Question 7 (Peppa)

Peppa Pte Ltd (“Peppa”) is a GST-registered company that sells specialised baking equipment and
has financial year end of 31 March. Its accounts assistant met with an accident and was hospitalised
before he could finalise the accounts for March 2017. You are the audit assistant assigned to audit
the accounts for the financial year ended 31 March 2017. During the audit process you discovered
the following issue.

The bestseller of Peppa is an electronic mixer known as “Maxerbake”. It comes with a normal
product warranty of one year and customer may purchase an extended warranty for another year.
The normal retail price of “Maxerbake” and the extended warranty is $1,800 and $200 respectively.
These prices exclude the 7% GST. To celebrate the New Year, Peppa ran a one-day promotion on
1 January 2016 to offer free extended warranty for every purchase of “Maxerbake” in cash. In
other words, customers get the mixer and the extended warranty by paying only $1,926, inclusive
of 7% GST. The promotion was well received with 50 units sold within the day.

Since the promotion in 2016 was a huge success and in response to customers’ demand, Peppa ran
a similar promotion on 1 January 2017. Retail prices for “Maxerbake” and its extended warranty
remained unchanged in 2017 and thus customers could still get the mixer and the extended
warranty for $1,926 when they made and paid for the purchase on 1 January 2017. For this second
round of promotion, 65 units were sold during the day.
When you reviewed the recording of the promotional sales on 1 January for both years, you noted
that the entire amount of revenue was recognised under the sale of mixers only. This was
not in compliance with SFRS(I) 15 Revenue from Contracts with Customers, which was adopted
by Peppa since 1 April 2015.

Despite the incorrect amount recognised for the sale of mixers during the promotional days, Peppa
recorded the corresponding cost of goods sold and estimated cost of normal product warranty
correctly. However, as no warranty revenue was recognised for the sale of extended warranty, no
corresponding expenses were recorded. Estimated cost of extended warranty per unit was $72.
All warranty claims were recorded correctly in the Provision for warranty account.

Peppa accounted for GST appropriately at the time of cash receipt or delivery of goods or services,
whichever is earlier.

Required

(i) Briefly discuss the accounting treatment of the errors made for the promotional sales on
(a) 1 January 2016; and
(b) 1 January 2017

(ii) Prepare all necessary journal entries to correct the errors which arose from the promotional
sales on 1 January 2016 and 1 January 2017.
AC1104 S10 to S11 - 19
(iii) Assume that the errors from the promotional sales on 1 January 2016 and 1 January 2017
were discovered after the financial statements for the financial year ended 31 March 2017
were authorised for issue. Prepare the necessary journal entries to correct the errors in
financial year 2017/2018.
Adapted from Q2 part 2 of AC1102 Sem 2 Exam 2016/2017
Key ans: (ii) Dr BRE $9,000, Cr Provision for warranty exp $900; (iii) Dr BRE $19,350

Question 8 (ML)

Maeberay Ltd (ML) was set up in early October 2009 to provide consulting service and has
financial year end of 30 September. ML owns the following two properties which have been
accounted for at cost and depreciated on a straight-line basis since acquisition.

 Shophouse in Katong bought since incorporation. It cost $2,500,000 and was estimated
to be in use for the next 30 years with residual value of $100,000. It houses the
consulting & administrative team.

 Office unit in Bugis was bought on 2 July 2012 and leased out to tenants to earn rental
income. The unit cost $3,000,000 with an estimated useful life of 25 years. Assume $0
residual value.

For the financial year ended 30 September 2016, the following events unfolded at ML:

31 December Management decided to change its accounting policy to account for all
2015 properties at fair value instead of cost. The changes in accounting policies
comply with Singapore Financial Reporting Standards (International).

The revaluation of property, plant and equipment (PPE) is done in accordance

with SFRS(I) 1-16 Property, Plant and Equipment paragraph 35(b) where the
accumulated depreciation is eliminated against the gross carrying amount of the
asset. It is ML’s company policy to revalue its PPE at the end of each financial
year.

28 February Tenant at Bugis vacated the office unit at the end of the lease term. Effort to
2016 secure new tenant was ongoing.

20 March Water was found leaking from the roof of the Katong shophouse. Engineers
2016 who examined the building advised that the roof was damaged and urgent repair
was required. Repair cost was estimated to be $100,000. As it is an old building,
it would require substantial maintenance subsequently even after repair. The
engineers suggested replacing the entire roof with a new technologically
advanced material that would materially reduce the maintenance cost and
require less energy to cool the building, thus resulting in further saving in energy
costs.

AC1104 S10 to S11 - 20

 31 March Management decided to take a long-term view to replace the entire roof. Staff
2016 was temporarily moved to the office unit at Bugis while the roof was being
replaced but would return to operate from the Katong shophouse when the roof
was fixed. Recoverable amount was assessed to be higher than carrying amount.

30 June 2016 Work on the roof was completed for $418,500. The staff liked the convenience
of the new office location and petitioned to stay put at Bugis. With no success
of securing a new tenant for its Bugis office unit and seeing the rental potential
of the Katong shophouse with increased interest in heritage, ML decided to use
the Bugis unit as its permanent office and to hold its Katong shophouse for
leasing purpose.

1 August Katong shophouse was leased out on an operating lease for three years starting
2016 from 1 August.

The financial statements for the year ended 30 September 2016 were authorised for issue on 23
November 2016.

Fair values of the two properties during the financial year ended 30 September 2016 were as follow:

Katong Shophouse Bugis office unit

1 October 2015 $2,300,000 $2,650,000
31 December 2015 $2,285,000 $2,600,000
31 March 2016 not available $2,720,000
30 June 2016 $2,400,000 not available
30 September 2016 $2,380,000 $2,600,000

Required

(i) Prepare all the necessary journal entries (with dates) to account for the events of the two
properties during the financial year ended 30 September 2016 in accordance with the
Singapore Financial Reporting Standards (International). Ignore journal entries for rental
income.

(a) Bugis office; and

(b) Katong shophouse.

(ii) On 31 October 2016, it was discovered that the residual value of the Katong shophouse
should be revised to $250,000 with the completion of the new roof but the accountant
overlooked it. Explain how the discovery of this oversight would impact the net profit for
the financial year ended 30 September 2016.

AC1104 S10 to S11 - 21

(iii) Assume that Maeberay Ltd was not in the consulting business but a property developer and
was holding the Katong shophouse for sale in the ordinary course of business. If the Katong
shophouse was bought for $2,300,000 on 1 October 2015, briefly explain how the discovery
of the leaking roof may impact the reported value of the shophouse in the financial statements
for the year ended 30 September 2016.
Q2 of Sem 1 Exam 2016/2017
Key ans: (i)(a) Cr BRE $40,000, (b) Fair Value Loss on Katong Shophouses (IP) $$20,000

Question 9 (CT)

CreaTech Ltd’s (CT) principal activities consist of the design, manufacture and distribution of
digitised sound and video boards, computers and related multimedia digital entertainment products.
CT has its financial year end on 31 December.

CT acquired a five-storey office building in Bukit Panjang on 1 January 2010 for $15 million cash
($3 million for each floor). CT’s initial intention is to rent out the building on operating lease.
Each storey of the building can be sold or leased out on finance lease separately.

According to CT’s accounting policy, all its properties are accounted for at cost. The useful life of
the building was estimated to be 50 years with no salvage value and straight-line depreciation
method was to be adopted for the building.

Soon after the tenant on the first floor of the Bukit Panjang building vacated at the end of the lease
term in February 2011, CT conducted a major alteration to the first floor to turn the office space
into a retail shop in order to earn a higher rental rate. The alteration was completed on 30 June
2011 for $0.485 million cash. However, CT changed its initial plan to rent out the retail space and
decided to set up its own retail shop on the first floor of the building to cater to the increasing
number of residents in Bukit Panjang ever since the office building was acquired. The retail shop
was opened on 1 July 2011. The other four floors were still held for rental to others. The estimated
useful life and salvage value of the building remain unchanged.

In 2014, as management expected the market value of the Bukit Panjang building to increase in
2015 due to the upcoming operation of Stage 2 of the Downtown Line, which directly connects to
Bukit Panjang MRT station, it decided to change its accounting policy to account for all properties
at fair value instead of cost from 1 January 2015 onwards. The changes in accounting policies
comply with Singapore Financial Reporting Standards (International). The revaluation of property,
plant and equipment (PPE) is done in accordance with SFRS(I) 1-16 Property, Plant and
Equipment paragraph 35(b) where the accumulated depreciation is eliminated against the gross
carrying amount of the asset.

There was a dramatic decrease in the number of customers buying CT’s products from its retail
stores after CT’s online store started operating in 2014. Hence, CT decided to close its retail store
in Bukit Panjang and rent it out on 1 July 2015.

AC1104 S10 to S11 - 22

Fair values (in millions) of the Bukit Panjang building during the financial year ended 31
December 2015 were as follows:

1st Floor 2nd‒5th Floors

1 January 2015 $3.6 $10.0
1 July 2015 $3.5 not available
31 December 2015 $4.0 $12.5

Required

(i) Prepare all the necessary journal entries (with dates) to account for the events of the Bukit
Panjang building in accordance with the relevant Singapore Financial Reporting Standards,
during the following two financial years ended:
(a) 31 December 2011; and
(b) 31 December 2015

Ignore journal entries for rental income.

(ii) If all properties had been accounted for at cost, CreaTech Ltd’s draft net income for 2015
financial year would have been $7.25 million. This draft net income would have fallen
short of analysts’ consensus estimate of $10.25 million. Explain if management would be
able to meet the analysts’ consensus estimate after changing its accounting policy to
measure all its properties at fair value from 1 January 2015. Provide corresponding
computation to support your explanation.
Q3 of Sem 2 Exam 2016/2017
Key ans: (i)(a) 1st floor Change in use from IP @ Cost to PPE @ Cost on 1/7/2011,
(b) 1st floor CAP from PPE @ Cost to PPE @ Revalued Amount on 1/1/2015: Dr AD $0.335m,
2nd – 5th floors CAP from IP @ Cost to IP @ Fair Value on 1/1/2015: Dr BRE $0.8m;

Question 10 (Charlie)

Charlie White Pte Ltd (Charlie) is in the mini mart business and has a financial year end of 30
June. Charlie acquired a shophouse on 3 January 2016 for $5,000,000 for use as its new retail
outlet. The shophouse is to be depreciated over its estimated useful life of 30 years on a straight-
line basis with a residual value of $500,000.

On 30 June 2017, Charlie carried out its first revaluation on its shophouse and revalued it to its
fair value by adopting SFRS(I) 1-16 Property, Plant and Equipment paragraph 35(b) where
accumulated depreciation was eliminated upon revaluation. Charlie has a policy to revalue its
shophouse under SFRS(I) 1-16 at every alternate year end.

On 31 March 2018, the shophouse was vacated as management decided to relocate the outlet to a
rented space in the city fringe area in response to customers’ request for a more convenient shop
location. As the management intended to sell the shophouse, Charlie accounted for the shophouse
in accordance with SFRS(I) 5 Non-current assets held for sale and discontinued operations from
31 March 2018 onwards.

AC1104 S10 to S11 - 23

The following balances were extracted from Charlie’s Statement of Financial Position as at 30
June 2018.
Share capital $1,688,000
Retained earnings $ 876,000

Mr Suibian joined Charlie as a senior finance manager in early 2019 after the 2017/2018 financial
statements were authorised for issue. While going through the accounts, Mr Suibian discovered
that the management of Charlie did not actively search for a buyer for the shophouse even though
the shophouse was ready to be sold at any time from 31 March 2018. The management team merely
spread news through word of mouth to its business associates and waited for any interested parties
to approach them for further negotiation. The management team was willing to accept a selling
price which was reasonable in relation to the shophouse prevailing market value.

In addition, Mr Suibian found that there was no journal entry made with regard to the shophouse
for the financial year ended 30 June 2019.

The following table provides more information regarding the shophouse.

Shophouse Fair value Cost of disposal Value in use

at 30 June 2017 $5,060,000 $10,000 $5,000,000
at 31 March 2018 $4,960,000 $10,000 $4,980,000
at 30 June 2018 $4,890,000 $10,000 $4,960,000
at 30 June 2019 $4,730,000 $10,000 $4,800,000

Required

(i) Prepare all the necessary journal entries related to the shophouse for the financial year
ended 30 June 2017.

(ii) Compute the depreciation expense recorded for the shophouse for the financial year ended
30 June 2018 and the carrying amount of the shophouse as at 30 June 2018, before the
discovery by Mr Suibian.

(iii) Assume the shophouse was sold on 31 March 2019 for $4,750,000 (net of disposal cost).
Prepare all the necessary journal entries related to the shophouse for the financial year
ended 30 June 2019.

(a) for the discovery by Mr Suibian in early 2019; and

(b) for the sale on 31 March 2019.

(iv) Assume the shophouse remained unsold on 30 June 2019 after the discovery by Mr Suibian.
Charlie’s draft net income (excluding all transactions related to the shophouse) was
$267,000 and there was no share transaction for the financial year ended 30 June 2019.
Prepare a statement of changes in equity of Charlie for the financial year ended 30 June
2019.

AC1104 S10 to S11 - 24

(v) Assume you were a bondholder who had previously assessed the liquidity and solvency of
Charlie based on its financial statements issued for the financial year ended 30 June 2018,
briefly explain how your assessment would change with Mr Suibian’s discovery. In your
explanation, you should identify and use one liquidity ratio and one solvency ratio as at 30
June 2018 which would be revised following the discovery.
Q2 of AC1102 Sem 1 Exam 2019/2020
Key ans: (i) Revaluation Reserve $285,000; (ii) Carrying amount $4,880,000;
(iii)(a) Cr BRE $20,000, (b) Loss of disposal $30,000;
(iv) Retained Earnings and Revaluation Reserve as at 30/6/2019 were $1,003,000 and $275,000 respectively

Question 11 (Koel)

Koel Pte Ltd (Koel) is the largest one-stop travelling essentials provider in Singapore and owns
twenty stores island wide. The travelling essentials include down, jacket, thermal wear, luggage,
and many more. Koel has its financial year-end on 30 June.

Koel measures all its non-current assets at fair value at each financial year end and adopts the
straight-line depreciation method, where applicable. The revaluation of Property, Plant and
Equipment (PPE) is to be made in accordance with SFRS(I) 1-16 para 35(b), where the
accumulated depreciation is eliminated against the gross carrying amount of the asset.

In early April 2021, Koel acquired a 2-storey building at a total cost of $2 million. The two stories
have the same size and the same cost per square foot. The whole building could not be sold or
leased out under a finance lease separately. The useful life and salvage value for each storey is the
same with 25 years and $605,000, respectively. The fair value of each floor as at financial year
ended 30 June 2021 and 30 June 2022 were $1.1 million and $1.46 million.

Upon acquisition in 2021, Koel occupied the first floor (1st floor) for retail store purposes and used
up to 10% of the second floor (2nd floor) area for window display and storage purposes. Koel had
no plan to occupy the remaining 90% on the 2nd floor area in 2021 but successfully leased it to a
tenant under an operating lease in early January 2022. Koel’s accountant classified the 1st floor as
a PPE, and the entire 2nd floor as an Investment Property (IP), and recognised them accordingly
since acquisition in the financial year 2020/2021.

Koel issued its financial year 2021/2022 financial statements on 9 August 2022.

Required

(i) With reference to Singapore Financial Reporting Standards (International), discuss if you
agree with the classifications of the 2-storey building in the financial years 2020/2021 and
2021/2022.

(ii) From the discussion in (i) above, provide all the necessary journal entries in the financial
year 2021/2022 to adjust or correct the accounting treatments which you do not agree with
the accountant of Koel.

AC1104 S10 to S11 - 25

(iii) Assume Koel sold the 2-storey building for $3 million on 31 July 2022. After taking into
account requirement (ii) above, provide all the journal entries to record the sale of the 2-
storey building on 31 July 2022.

(iv) If Koel did not make the correction in requirement (ii) above, what is the impact on the net
profit in the financial year 2022/2023 for the 2-storey building, assuming that Koel sold it
for $3 million on 31 July 2022? Show your workings.
Q1 of AC1104 Sem 1 Exam 2022/2023
Key ans: (ii) Cr Beg. RR $103,950, Dr FV gain on IP $360,000;
(iii) Cr Gain on disposal $86,000; (iv) no impact

-END-

AC1104 S10 to S11 - 26