MI 2021 Prelim Paper 1 Answer Guide

This question paper consists of 9 printed pages and 1 blank page. [Turn over H2PAA 2021 Prelim Paper 1 Answer guide Qn 1 (a) Street Wear Pte Ltd Statement to correct the net loss for the year ended 31 July 2020 $ Unadjusted net loss for the year (32,000) (1) Impairment loss for specialised equipment (700-200)-(350>290) (150,000) (1m) (2) Impairment loss for inventory (3000-2300) (7,000) (1m) (3) Unpresented cheques & direct transfer NIL (4) Impairment loss for trade receivables (710000-10000-128000)x5%)+10000 (38,600) (2m) (5) Overstatement of repairs and maintenance (45000 – 2500 - (5/12 x 2100) 41,625 (2m) (6) Depreciation of plant and equipment (40400x0.25) (10,100) (1m) Adjusted net loss for the year (196,075) (b) Street Wear Pte Ltd Balance sheet as at 31 July 2020 $ $ $ Non-current assets Cost Accumulated Depreciation Net book Value (1m) Property and plant at cost (5000k+40.4k) 5,040,400 (1,710,100) 3,330,300 (1m) Specialised equipment at cost 700,000 (350,000) 350,000 3,680,300 Current assets Inventory (1,476,000-7000) 1,469,000 (1m) Trade receivables (710,000-10,000-128,000) 572,000 Less : Allowance for impairment of trade receivables (700kx5%) (28,600) 543,400 (1m) Prepaid insurance 1,225 (1m) Cash at bank (-88,000+128,000) 40,000 (1m) Total current assets 2,053,625 Total assets 5,733,925 (c) Based on the information presented, the specialised equipment are considered “impaired” because its net book value of $500, 000 ($700k - $200k) is greater its current recoverable amount. Recoverable amount is the higher of (fair value less cost to sell of $$350,000) and (value-in-use of $290,000). (1m) Impairment loss of $150,000 ($500k-$350k) is recognised in the income statement as an expense and a corresponding increase in the asset’s accumulated depreciation to lower its net book value in the Balance sheet. (2m) This is consistent with prudence / conservatism concept, which acknowledges all possible losses which should be recognised sooner rather than later, to ensure all ensure assets and income are not overstated and prevent understatement of liabilities and expenses. (1m)

2 (d) The company should not proceed with the proposal to change depreciation methods, because there are no strong reasons justifying a change of method. (1m) This would go against the accounting concept of consistency, which states that similar accounting procedures/methods should be used for items of similar nature from period to period, to facilitate meaningful comparison and informed decision-making. (1m) However, a change in accounting methods is acceptable if it results in a more relevant and faithful representation of an underlying economic phenomenon . Here, the doctrine of disclosure is needed to acknowledge such changes in the notes to the accounts to allow users to take it into consideration when making decisions. (1m)

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