Part A: Hot Limited has recently discovered that inventory has been incorrectly valued using the weighted average method (WA) instead of the first-in-first-out method (FIFO) for the past four years.
- The error is considered to be material.
- The tax authorities will be re-opening the tax assessments for all year affected.
- Income tax is levied at 30%.
The effect of this error is as follows:
| Year-end inventory balances | 20X7 | 20X6 | 20X5 | 20X4 |
| C | C | C | C | |
| WA method (did use) | 15 000 | 14 000 | 12 000 | 10 000 |
| FIFO method (should have used) | 18 000 | 15 000 | 14 000 | 11 000 |
The draft financial statements before correcting this error are shown below.
| HOT LIMITED DRAFT STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X7 | ||||
| 20X7 C | 20X6 C | |||
| Revenue | 1 | 200 | 000 | 900 000 |
| Cost of sales | (420 | 000) | (350 000) | |
| Gross profit | 780 | 000 | 550 000 | |
| Other costs | (220 | 000) | (200 000) | |
| Profit before tax | 560 | 000 | 350 000 | |
| Income tax expense | (235 | 200) | (136 500) | |
| Profit for the year | 324 | 800 | 213 500 | |
| Other comprehensive income for the year | ||||
| Total comprehensive income for the year | 324 | 800 | 213 500 | |
| HOT LIMITED | ||||
| DRAFT STATEMENT OF CHANGES IN EQUITY | ||||
| FOR THE YEAR ENDED 31 DECEMBER 20X7 | ||||
| Retained | ||||
| earnings | ||||
| C | ||||
| Balance: 1/1/20X6 | 67 500 | |||
| Total comprehensive income: 20X6 | 213 500 | |||
| Balance: 31112/20X6 | 281 000 | |||
| Total comprehensive income: 20X7 | 324 800 | |||
| Balance: 31/12/20X7 | 605 800 |
Required: Prepare the statement of comprehensive income, statement of changes in equity, statement of financial position, statement of compliance, accounting policy note for inventory and the correction of error note for inclusion in Hot Limited’s financial statements for the year ended 31 December 20X7, in terms of International Financial Reporting Standards.
Part B
Use the information provided in part A, except that, instead of there being an error, the accounting policy was changed from recording inventory movements using the weighted average formula to using the first-in, first-out formula instead.
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