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Acct316 Public Management And Governance Assessment Answers

Question:

Management Reporting As A Basis For Transformation Of The Financial.

International Financial Reporting Standards.

Answer:

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

Date

Details

Debit $

Credit$

15th July 2015

Share Capital

1000

 
 

Preference shares( Lance and Katrina)

50

 
 

Preferences Shares account

 

1050

 

Being record of preference shares recorded as share capital with the accumulated interest of $ 50

  

15th July 2015

Lotus points

100

 
 

Bank

 

100

 

Being record of lotus points redeemed and paid for by bank not earlier recorded.( Assumption)

  

15th July 2015

Short-term investments

4798

 
 

Revaluation Reserve

 

4798

 

Being record to correct the short-term investments account earlier recorded at book value rather than fair value at $ 24 798

  

1st Sept 2014h 

Bank

93 750

 
 

Annual membership fee

 

93750

 

Being record of membership fees received of$ 93 750 not earlier indicated

  

1st Jan 2015

Bank

93750

 
 

Annual membership fee

 

93 750

 

Being record of receipt of membership fees not earlier recognized as earned revenue for accounting purposes

  

15th July 2015

Accounts payable

7500

 
 

Interest payable on Bonds

 

7500

 

Being record to correct the error made by recording interest payable on bonds as accounts payable account.

  

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

Revenue

 

$

 

Annual Membership

187 500

 

Drop ins

20 545

 

Sales Revenue

14423

Total Revenue

 

223, 468

Expense

  
 

Meals

2610

 

Depreciation

9259

 

Bank charges

196

 

Cost of goods sold( 9254 +100)

9354

 

Insurance

8078

 

Utilities

4678

 

Office expenses

624

 

Interest expense

7500

 

Salaries, wages and benefits

62425

 

Repairs and maintenance

1731

 

Business license and property

4379

Total Expenses

 

110834

Earnings from operations

 Taxable Income

112 634

Tax at 30%

Tax at 30 %

(33 790.2)

 

Net Income after attributable to shareholders

78, 843.8

Dividends

  
 

100 @ 10 5 % Preferece dividends

50

Earnings after tax and preference dividends

78,793.80

Tranquil Lotus Ltd.

Adjusted Balance sheet

As at June 30, 2015

Non Current Assets 

 

Cost $

Accumulated Depreciation $

Net Book Value $

 

Buidlings

250 000

9259

240 741

 

Land

50 000

-

50 000

 

Short term Investment

  

24 798

 

Total

  

315 539

Current Assets

    
 

Inventory

18 648

  
 

Accounts Receivabe

3 558

  
 

Cash and Cash Equivalents

40 683

 

62 889

Total Assets

   

378 428

Financed by

    

Shareholders equity

50 common shares @ $1

  

50

 

100 @ 10 preference shares

  

1000

 

Retained Earnings

  

78, 793.80

Longterm Debt

3 % 500 @ 500 convertible bonds

  

250 000

Current Liabilities

Accounts payable

  

7500

 

Accruals

  

2445

 

Deffered taxes

  

38 639.2

Total Liabilities and Owners equity

  

378, 428

Computation of Adjusted Income for Tax Purposes and Income Tax Payable

  

$

$

Retained profits for the year

  

112 634

Add back Non-Allowable expesnes

Meal Costs

2610

 
 

Depreciation

9259

 
 

Unearned revenue

3558

 
 

Loyalty Programme

100

15 527

Deduct Allowable expenses

   
 

Capital Allowance

5000

-500

Ajusted taxable income

  

123, 161

 

Tax at 30%

 

36, 948.3

Net Income

  

86, 212.7

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

Date

Details

Dr.

Cr.

15th July 2015

Deferred tax account

36, 948.3

 
 

Tax Payable

 

36, 948.3

 

Being record of income tax payable but not yet paid

  

15th July

Depreciation account

9259

 
 

Capital allowance

 

5000

 

Income statement account

 

4259

 

Being record of adjusting entries to replace depreciation with capital allowance for tax purpose

  

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

Revenue

 

$

 

Annual Membership

187 500

 

Drop ins

20 545

 

Sales Revenue

14423

Total Revenue

 

223, 468

Expense

  
 

Meals

2610

 

Depreciation

9259

 

Bank charges

196

 

Cost of goods sold( 9254 +100)

9354

 

Insurance

8078

 

Utilities

4678

 

Office expenses

624

 

Interest expense on bonds

7500

 

Salaries, wages and benefits

62425

 

Repairs and maintenance

1731

 

Business license and property

4379

Total Expenses

 

110834

Earnings from operations

 Taxable Income

112 634

Tax at 30%

Tax at 30 %

(36 948.3)

 

New Net Income after tax

75, 685.7

Dividends

  
 

100 @ 10 5 % Preferece dividends

50

Earnings after tax and preference dividends

75 635.7

Tranquil Lotus Ltd.

Audited Balance sheet

As at June 30, 2015

Non Current Assets 

 

Cost $

Accumulated Depreciation $

Net Book Value $

 

Buidlings

250 000

9259

240 741

 

Land

50 000

-

50 000

 

Short term Investment

  

24 798

 

Total

  

315 539

Current Assets

    
 

Inventory

18 648

  
 

Accounts Receivabe

3 558

  
 

Cash and Cash Equivalents

40 683

  
 

Deffered taxes

(4 799.3)

 

58, 089.7

Total Assets

   

373 628.7

Financed by 

    

Shareholders equity

50 common shares @ $1

  

50

 

100 @ 10 preference shares

  

1000

 

Retained Earnings

  

75, 685.7

Longterm Debt

3 % 500 @ 500 convertible bonds

 

250 000

Current Liabilities

Accounts payable

  

7500

 

Accruals

  

2445

 

Deffered taxes

  

36 948.

Total Liabilities and Owners equity

  

373, 628.7

 

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.


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