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the draft financial statements contain an accumulatg provision for the cost of restorg the site of a quarry that is being operated by deltoid. The result of an environmental audit has concluded that the provision has been calculated on the wrong basis and is materially underprovided. A firm of environmental consultants has summarised the required revision:
Current provision Required provision
income statement charge yr to 31 march x2 180 245
balance sheet liability -at 31 march x2 1200 2150
The directors consider that the incorrect original estimate constitute a fundamental error.other info in draft financial statements B/SHEET YR 31 march x2: NCL: environmental prov 1200
retained earings at 1 Ap x1 2500
Profit after tax for yr ended 31 march x2 2000Hi sir , can u please tell me the adjustments with regards to the retained earngs at ap x1 and PAT at 31 mx2..
The answers r as follows..but i dnt understd them especially WHY there is a prior period adjustment and if it’s the case why 65 charge was added to 2500..
1. 2000-65=1935
2.2500-(2150-1200-65)???= 1615?? this is wat i dont understd..please help..the
3.sofp ncl becomes 2150hi Sir please don’t forget to guide me through this question whenever you are free.thanks a lot in advance
It’s a prior period adjustment of a fundamental error and therefore needs to be adjusted retrospectively.
The previous year’s profits and carried forward retained earnings are 65 overstated and need to be retrospectively applied.
This year’s profits are therefore also affected!
I’m not sure why you believe this ear’s profits are INCREASED by 65 other than the basic principle that if this year’s charge relates to last year, and a prior period adjustment is made reducing the costs of this year and increasing last year’s costs, then surely that is correct
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