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Prior period adjustment

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Prior period adjustment

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 25, 2016 at 10:46 am #345946
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    Hi Mike, hope you could help me on this:

    Emerald has had a policy of writing off development expenditure to profit or loss as it was incurred. In preparing its financial statements for the year ended 30 September 20X7 it has become aware that, under IFRS rules, qualifying development expenditure should be treated as an intangible asset. Below is the qualifying development expenditure for Emerald:
    Year ended 30 September 20X4: 300,000
    Year ended 30 September 20X5: 240,000
    Year ended 30 September 20X6: 800,000
    Year ended 30 September 20X7: 400,000

    All capitalized development expenditure is deemed to have a four year life. Assume amortization commences at the beginning of the accounting period following capitalization. Emerald had no development expenditure before year ended 30 September 20X4.

    Treating the above as the correction of an error in applying an accounting policy, calculate the amounts which should appear in the SOPL, SOFP, and statement of changes in equity of emerald in respect of the development expenditure for the year ended 30 September 20X7.

    Hope the workings below will be clear to you (i don’t know how else to present it)

    Answer:
    20X4:
    Expenditure 300,000

    20X5:
    Expenditure 240,000
    Amortization 75,000
    Carrying amount 165,000

    Balance 20X5:
    Expenditure 540,000
    Amortization 75,000
    Carrying amount 465,000

    20X6:
    Expenditure 800,000
    Amortization 135,000
    Carrying amount 665,000

    Balance 20X6:
    Expenditure 1,340,000
    Amortization 310,000
    Carrying amount 1,130,000

    20X7:
    Expenditure 400,000
    Amortization 335,000
    Carrying amount 65,000

    Balance 20X7:
    Expenditure 1,740,000
    Amortization 545,000
    Carrying amount 1,195,000

    Statement of financial position
    Development expenditure:
    1,195,000

    Statement of profit or loss:
    Amortization:
    335,000

    Statement of changes in equity
    Prior period adjustment
    Added to retained earnings at 01.10.20X5 = 465,000

    I got everything right except for the prior period adjustment figure which I got it wrong. Why is the carrying amount at year ended 20X5 used as the prior period adjustment instead of the carrying amount balance at year ended 20X6 (1,130,000)?

    October 25, 2016 at 11:18 am #345952
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    The amortisation figure is 645,000 not 545,000 in 2007

    Balance 20X7:
    Expenditure 1,740,000
    Amortization 545,000 (should be 645,000)
    Carrying amount 1,195,000

    “Why is the carrying amount at year ended 20X5 used as the prior period adjustment instead of the carrying amount balance at year ended 20X6 (1,130,000)?”

    Because it affects the retained earnings brought forward figure at the end of 2005 / start of 2006 and we need that for the opening figure for the statement of changes in equity

    Brought forward from 2005 adjusted for changes in 2006 = carried forward into 2007

    Does that make sense to you?

    October 25, 2016 at 12:40 pm #345955
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    Yes, it does now. Thank you for the help once again 🙂

    October 25, 2016 at 5:33 pm #346001
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    You’re welcome

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    Posts
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