Acct316 Public Management And Governance Assessment Answer

Management Reporting As A Basis For Transformation Of The Financial.

International Financial Reporting Standards.

Answer:

Following your request to review the notes you made the financial statements of Tranquil Lotus Limited(TLL), I am hereby writing to make my observations on certain transactional and procedural issues in regard to the treatment during the preparation of TLL’s unaudited financial statements (Balance sheet and Statement of Income and Retained Earnings) As at June 30, 2015.

Observations

During my review, I observed a number of violations of accounting rules and regulations in the preparation of the accounting records of Tranquil Lotus Ltd. Some of the violations are.

Non-disclosure of certain items on the balance sheet and income statement. For instance, in the balance sheet, the preference shares is just shown as share capital. This is against the principle of disclosure which requires that all pertinent information should be described during the preparation of financial statements as per IAS 32(Iasplus.com, 2018)
The redeemed Lotus points of 500

at a cost of $ 100 have not been included in the books and if not so, it has not been disclosed whether it has been added to the cost of goods sold or not.

Depreciation on Property Plant and equipment of $ 9259 has not been shown on the balance sheet. Instead, the net amount is shown. This is against the requirements of IAS 15 that stipulates that depreciation charged for the year for Property plant and Equipment should be included in the Incomes statement and at the same time the accumulated depreciation shown in the balance sheet for clarity(Iasplus.com, 2018).

The cash interest payable on the bonds payable is a capital expense and should not be included in the income statement as an accrual. The interest should be charged in the distribution of profits section before tax. Since payment has not been made, no entry should be done against the cash account until the interest is actually paid.

Recommendations

In regard to revenues earned from the sale of yoga, meditation and stress management merchandise. Each service should have been shown separately for the purposes of ascertaining which merchandise brings more revenue than another as per IAS 18 requirements which recommend that each revenue item should be shown separately.
The customer reward program (lotus points) program should not be dropped since it might be a contribution to the increased annual subscriptions witnessed in January and September. Despite the low redemption rate at $ 100, the programme might pick considering that the company is just one month old(Ifrs.org, 2018).
The preference shares should be shown as preference shares and not just shares. Shares earn dividends and preferences shares earn interest, therefore showing preference shares as shares are against IAS 32(Disclosure and presentations)(Iasplus.com, 2018).
Lance and Katrina should consider converting the long-term debt (convertible bonds) into shares as it acceptable under the terms of the bond so that Angel Investors can earn dividends rather than interest. Common Shares have no prior claim on the profits of the company and it is good as compared to the debt since the leverage ratio for the company will become low if the debt is converted into ownership.
In regard to lawsuit not yet determined, the company should consider providing both oral and written warnings for new participants who might want to take part in advanced classes so as to avoid future lawsuit expenses.
The short terms investment should always be recorded at fair values rather than cost value in the books.
In regard to the lawsuit, no entry should be made since the case has not yet started and no expense I regard to it has accrued.

Adjusting Journal Entries

Date	Details	Debit $	Credit$
15^th July 2015	Share Capital	1000
	Preference shares( Lance and Katrina)	50
	Preferences Shares account		1050
	Being record of preference shares recorded as share capital with the accumulated interest of $ 50
15^th July 2015	Lotus points	100
	Bank		100
	Being record of lotus points redeemed and paid for by bank not earlier recorded.( Assumption)
15^th July 2015	Short-term investments	4798
	Revaluation Reserve		4798
	Being record to correct the short-term investments account earlier recorded at book value rather than fair value at $ 24 798
1^st Sept 2014^h	Bank	93 750
	Annual membership fee		93750
	Being record of membership fees received of$ 93 750 not earlier indicated
1^st Jan 2015	Bank	93750
	Annual membership fee		93 750
	Being record of receipt of membership fees not earlier recognized as earned revenue for accounting purposes
15^th July 2015	Accounts payable	7500
	Interest payable on Bonds		7500
	Being record to correct the error made by recording interest payable on bonds as accounts payable account.

Adjusted Financial Statements

In regard to the above adjusting journal entries, the financial statements have to be prepared afresh to factor in the errors and adhere to the relevant accounting standards earlier violated.

Tranquil Lotus Ltd.

Adjusted Statement of Income and Retained Earnings

As at June 30, 2015

Revenue		$
	Annual Membership	187 500
	Drop ins	20 545
	Sales Revenue	14423
Total Revenue		223, 468
Expense
	Meals	2610
	Depreciation	9259
	Bank charges	196
	Cost of goods sold( 9254 +100)	9354
	Insurance	8078
	Utilities	4678
	Office expenses	624
	Interest expense	7500
	Salaries, wages and benefits	62425
	Repairs and maintenance	1731
	Business license and property	4379
Total Expenses		110834
Earnings from operations	Taxable Income	112 634
Tax at 30%	Tax at 30 %	(33 790.2)
	Net Income after attributable to shareholders	78, 843.8
Dividends
	100 @ 10 5 % Preferece dividends	50
Earnings after tax and preference dividends		78,793.80

Tranquil Lotus Ltd.

Adjusted Balance sheet

As at June 30, 2015

Non Current Assets		Cost $	Accumulated Depreciation $	Net Book Value $
	Buidlings	250 000	9259	240 741
	Land	50 000	-	50 000
	Short term Investment			24 798
	Total			315 539
Current Assets
	Inventory	18 648
	Accounts Receivabe	3 558
	Cash and Cash Equivalents	40 683		62 889
Total Assets				378 428
Financed by
Shareholders equity	50 common shares @ $1			50
	100 @ 10 preference shares			1000
	Retained Earnings			78, 793.80
Longterm Debt	3 % 500 @ 500 convertible bonds			250 000
Current Liabilities	Accounts payable			7500
	Accruals			2445
	Deffered taxes			38 639.2
Total Liabilities and Owners equity				378, 428

Computation of Adjusted Income for Tax Purposes and Income Tax Payable

		$	$
Retained profits for the year			112 634
Add back Non-Allowable expesnes	Meal Costs	2610
	Depreciation	9259
	Unearned revenue	3558
	Loyalty Programme	100	15 527
Deduct Allowable expenses
	Capital Allowance	5000	-500
Ajusted taxable income			123, 161
	Tax at 30%		36, 948.3
Net Income			86, 212.7

The capital allowance of $ 5000 for the building is arrived by calculating using a rate of 4% per annum but it has been allowed for half just half year only

½ ×4/100 × 250 000 = 5000

Meal costs are a non-allowable expense for tax purposes because it was not incurred in the process of delivering services for the realization of the profits which are to be taxed. This cost is not attributable to the company's revenue (Iasplus.com, 2018).

The income tax act provides that income received but not yet paid is not taxed. Therefore, the accounts receivable is not taxable income.

Journal Entries to Record payment of deferred taxes

Date	Details	Dr.	Cr.
15^th July 2015	Deferred tax account	36, 948.3
	Tax Payable		36, 948.3
	Being record of income tax payable but not yet paid
15^th July	Depreciation account	9259
	Capital allowance		5000
	Income statement account		4259
	Being record of adjusting entries to replace depreciation with capital allowance for tax purpose

Adjusted Financial Statements-After Factoring in Tax Payable and Deferred Taxes

Tranquil Lotus Ltd.

Adjusted Statement of Income and Retained Earnings

As at June 30, 2015

Revenue		$
	Annual Membership	187 500
	Drop ins	20 545
	Sales Revenue	14423
Total Revenue		223, 468
Expense
	Meals	2610
	Depreciation	9259
	Bank charges	196
	Cost of goods sold( 9254 +100)	9354
	Insurance	8078
	Utilities	4678
	Office expenses	624
	Interest expense on bonds	7500
	Salaries, wages and benefits	62425
	Repairs and maintenance	1731
	Business license and property	4379
Total Expenses		110834
Earnings from operations	Taxable Income	112 634
Tax at 30%	Tax at 30 %	(36 948.3)
	New Net Income after tax	75, 685.7
Dividends
	100 @ 10 5 % Preferece dividends	50
Earnings after tax and preference dividends		75 635.7

Tranquil Lotus Ltd.

Audited Balance sheet

As at June 30, 2015

Non Current Assets		Cost $	Accumulated Depreciation $	Net Book Value $
	Buidlings	250 000	9259	240 741
	Land	50 000	-	50 000
	Short term Investment			24 798
	Total			315 539
Current Assets
	Inventory	18 648
	Accounts Receivabe	3 558
	Cash and Cash Equivalents	40 683
	Deffered taxes	(4 799.3)		58, 089.7
Total Assets				373 628.7
Financed by
Shareholders equity	50 common shares @ $1			50
	100 @ 10 preference shares			1000
	Retained Earnings			75, 685.7
Longterm Debt	3 % 500 @ 500 convertible bonds			250 000
Current Liabilities	Accounts payable			7500
	Accruals			2445
	Deffered taxes			36 948.
Total Liabilities and Owners equity				373, 628.7

References

Iasplus.com. (2018). International Accounting Standards. [online] Available at: https://www.iasplus.com/en/standards/ias [Accessed 3 Mar. 2018].

Ifrs.org. (2018). IFRS. [online] Available at: https://www.ifrs.org/ [Accessed 3 Mar. 2018].

Tovsultanova, Lyubov G. "Management Reporting As A Basis For Transformation Of The Financial Reporting System In Accordance With The International Financial Reporting Standards." Russian Journal of Entrepreneurship 16.5 (2015): 755. Web.

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