ACCT316 Public Management and Governance

Following your request to review the notes you made the financial statements of Tranquil Lotus Limited(TLL), I am hereby writing to make my observations on certain transactional and procedural issues in regard to the treatment during the preparation of TLL’s unaudited financial statements (Balance sheet and Statement of Income and Retained Earnings) As at June 30, 2015.

Observations

During my review, I observed a number of violations of accounting rules and regulations in the preparation of the accounting records of Tranquil Lotus Ltd. Some of the violations are.

• Non-disclosure of certain items on the balance sheet and income statement. For instance, in the balance sheet, the preference shares is just shown as share capital. This is against the principle of disclosure which requires that all pertinent information should be described during the preparation of financial statements as per IAS 32(Iasplus.com, 2018)
• The redeemed Lotus points of 500
  
  at a cost of $ 100 have not been included in the books and if not so, it has not been disclosed whether it has been added to the cost of goods sold or not.
• Depreciation on Property Plant and equipment of $ 9259 has not been shown on the balance sheet. Instead, the net amount is shown. This is against the requirements of IAS 15 that stipulates that depreciation charged for the year for Property plant and Equipment should be included in the Incomes statement and at the same time the accumulated depreciation shown in the balance sheet for clarity(Iasplus.com, 2018).
• The cash interest payable on the bonds payable is a capital expense and should not be included in the income statement as an accrual. The interest should be charged in the distribution of profits section before tax. Since payment has not been made, no entry should be done against the cash account until the interest is actually paid.

Recommendations

• In regard to revenues earned from the sale of yoga, meditation and stress management merchandise. Each service should have been shown separately for the purposes of ascertaining which merchandise brings more revenue than another as per IAS 18 requirements which recommend that each revenue item should be shown separately.
• The customer reward program (lotus points) program should not be dropped since it might be a contribution to the increased annual subscriptions witnessed in January and September. Despite the low redemption rate at $ 100, the programme might pick considering that the company is just one month old(Ifrs.org, 2018).
• The preference shares should be shown as preference shares and not just shares. Shares earn dividends and preferences shares earn interest, therefore showing preference shares as shares are against IAS 32(Disclosure and presentations)(Iasplus.com, 2018).
• Lance and Katrina should consider converting the long-term debt (convertible bonds) into shares as it acceptable under the terms of the bond so that Angel Investors can earn dividends rather than interest. Common Shares have no prior claim on the profits of the company and it is good as compared to the debt since the leverage ratio for the company will become low if the debt is converted into ownership.
• In regard to lawsuit not yet determined, the company should consider providing both oral and written warnings for new participants who might want to take part in advanced classes so as to avoid future lawsuit expenses.
• The short terms investment should always be recorded at fair values rather than cost value in the books.
• In regard to the lawsuit, no entry should be made since the case has not yet started and no expense I regard to it has accrued.

Adjusting Journal Entries

Adjusted Financial Statements

In regard to the above adjusting journal entries, the financial statements have to be prepared afresh to factor in the errors and adhere to the relevant accounting standards earlier violated.

Tranquil Lotus Ltd.

Adjusted Statement of Income and Retained Earnings

As at June 30, 2015

Tranquil Lotus Ltd.

Adjusted Balance sheet

As at June 30, 2015

Computation of Adjusted Income for Tax Purposes and Income Tax Payable

The capital allowance of $ 5000 for the building is arrived by calculating using a rate of 4% per annum but it has been allowed for half just half year only

½ ×4/100 × 250 000 = 5000

Meal costs are a non-allowable expense for tax purposes because it was not incurred in the process of delivering services for the realization of the profits which are to be taxed. This cost is not attributable to the company's revenue (Iasplus.com, 2018).

The income tax act provides that income received but not yet paid is not taxed. Therefore, the accounts receivable is not taxable income.

Journal Entries to Record payment of deferred taxes

Adjusted Financial Statements-After Factoring in Tax Payable and Deferred Taxes

Tranquil Lotus Ltd.

Adjusted Statement of Income and Retained Earnings

As at June 30, 2015

Tranquil Lotus Ltd.

Audited Balance sheet

As at June 30, 2015

References

Iasplus.com. (2018). International Accounting Standards. [online] Available at: https://www.iasplus.com/en/standards/ias [Accessed 3 Mar. 2018].

Ifrs.org. (2018). IFRS. [online] Available at: https://www.ifrs.org/ [Accessed 3 Mar. 2018].

Tovsultanova, Lyubov G. "Management Reporting As A Basis For Transformation Of The Financial Reporting System In Accordance With The International Financial Reporting Standards." Russian Journal of Entrepreneurship 16.5 (2015): 755. Web.