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Anonymous
Asked: March 19, 20222022-03-19T21:15:38+02:00 2022-03-19T21:15:38+02:00In: FINANCIAL ACCOUNTING 310 , GFA 711S

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 yearls affected. • Income tax is levied at 30%. The effect of this error is as follows:

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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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