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Change in estimate:
BUSINESS ACCOUNTING 300 / 310 DEPARTMENT Included in depreciation is a change in accounting estimate to the amount of
IAS 8: Accounting policies, changes in accounting OF R4 000(#). This increase in depreciation is a result of the decision to review the
estimates and errors residual value of the ASSET, which was then reduced. The cumulative effect of
ACCOUNTING the change on future periods is an increase in depreciation of R8 000(@).
Suggested solution to class example

J STURDY
UP CLASS EXAMPLE 2 – Suggested solution

DRUMMOND LIMITED
CLASS EXAMPLE 1 – Suggested solution NOTES FOR THE YEAR ENDED 31 DECEMBER 2016

WORKINGS: 1. Prior period error

W1. OLD NEW Difference This represents a correction in respect of a maintenance expense that was
Estimate Estimate recorded as part of plant in the 2014 financial year. The opening balances of equity
Cost 125 000 125 000 at the beginning of 2015 have been adjusted, while the comparative amounts were
Depreciation 2017 [(125 000 – 25 000) / 5] (20 000) (20 000) restated accordingly. The effect of the correction of the error on the 2015 results is
Balance / CA Dec 2017 105 000 105 000 as follows:
Depreciation 2018 (20 000) (20 000)
Balance / CA Dec 2018 85 000 85 000 2015 01/01/2015
Depreciation 2019 New [(85 000 – 13 000)/ 3] (20 000) (&)(24 000) (#) (4 000) R R
Asset life = 5 years Decrease in cost of sales [W1] 180 000
Asset is two years old on 31/12/2018 Increase in income tax expense (180 000 x 28%) (50 400)
Remaining useful life is 3 years on 1/ 01/ 2019 Increase in profit 129 600
Balance / CA Dec 2019 65 000 61 000
Increase (decrease) in Property, plant &
What amount will be depreciated in future? equipment [W2] (540 000) (720 000)
Balance / CA Dec 2019 65 000 61 000 (Increase#) decrease* in deferred tax [@28%] 151 200 201 600
Residual value (25 000) (13 000) Increase (decrease) in equity (388 800) (518 400)
(@)
Amount to be depreciated in the future is: 40 000 48 000 8 000 Adjustment against opening retained earnings of
2015 (518 400)
PROOF: * Debit to deferred tax account and
W2. OLD NEW Difference # Credit to deferred tax account
Residual Residual
value value
WORKINGS
Residual values 25 000 13 000 12 000
This means that due to the change in the W1. ERROR
estimate of the residual value R12 000 EXTRA
depreciation will be written-off in the future. Adjust plant against maintenance expense in 2014 with R900 000 (given)
(#)
Depreciation already recognised in 2019 (4 000) Reverse depreciation on plant 2014: R900 000 x 20% = R180 000
(@) Reverse depreciation on plant 2015: R900 000 x 20% = R180 000
Depreciation to be recognised in future periods 8 000
# Net decrease in plant on 1/1/2015: R900 000 x 80% = R720 000
OR
ANSWERS Net decrease in plant on 1/1/2015: R900 000 – R180 000 = R720 000
a. R24 000 (&) [(85 000 – 13 000)/ 3] NOTE: Remember that the effects on the balances in the statement of financial
position is compounded as it reflects balances. (For example the decrease in the
b. NOTES FOR THE YEAR ENDED 31 DECEMBER 2019
PPE balance 31 December 2015 is R540 000 (900 000 – 180 000 – 180 000)).

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W2. Adjust carrying amount of Property, Plant and Equipment: NOTES FOR THE YEAR ENDED 31 DECEMBER 2017
Decrease carrying amount in 2014: R900 000–R180 000 [W1] = R720 000
Decrease carrying amount in 2015: R720 000 – R180 000 [W1] = R540 000 2. Profit before tax

Profit before tax is stated after the following was taken into account:
CLASS EXAMPLE 3 – Suggested solution
2017 2016
R R
GODI LIMITED
Income:
STATEMENT PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Dividends received (given) 10 000 -
FOR THE YEAR ENDED 31 DECEMBER 2017
Operating lease income – machinery (given) - 160 000
Profit on sale of vehicles (given) 20 000 -
Note 2017 2016
Compensation received i.r.o. fire damage to equipment
R R
(given) 60 000 -
Revenue 150 000 100 000
Expenses:
Cost of sales (W1) (100 600) (69 500) (i)43
Depreciation 000 45 000
Gross profit 49 400 30 500 Loss of equipment due to fire damage (ii)50 000
Other income 90 000 160 000
Other expenses (W1) (105 000) (97 000)
Change in estimate:
Profit before tax 2 34 400 93 500 Included in depreciation is a change in accounting estimate to the amount of
Income tax expense (W2) 3 (6 832) (26 180) R10 000(iii). This decrease in depreciation is as a result of the decision to depreciate
Profit for the year 27 568 67 320 machinery on the reducing balance method in future, instead of the straight-line
method. The cumulative effect of the change on future periods is an increase in
GODI LIMITED depreciation of R10 000(iv).
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2017 (i) R53 000 (given) – R25 000 (old depr) + R15 000 (new depr) = R43 000
Note Retained
earnings (ii) Carrying amount (given)
R (iii) Change in estimate
R
Balance at 31 December 2015 (given – as shown previously) 11 088 Depreciation according to the old method
(straight-line method) [W1(a)] 25 000
Profit for the year - restated 67 320 Depreciation according to the new method
Dividends declared (given) (7 000) (reducing balance method) [W1(b)] 15 000
Balance at 31 December 2016 71 408 Adjustment (decrease in depreciation) 10 000
Profit for the year 27 568
Dividends declared (given) (10 000) (iv) Future effect of change in estimate
Balance at 31 December 2017 88 976 R
Depreciable amount at 31/12/2017 according to
new depreciation method (v) 60 000
Depreciable amount at 31/12/2017 according to
old depreciation method (v) 50 000
Cumulative increase in future depreciation 10 000

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(v) Depreciable amount WORKINGS:

New Old
method method W1. Calculation of other expenses
R R 2017 2016
Carrying amount at 01/01/2017 (given) 75 000 75 000 R R
Depreciation for 2017 [W1(a) & 3(b)] (15 000) (25 000) As shown previously 115 000 167 000
60 000 50 000 Adjustment due to change in estimate (10 000) -
- Depr according to old method (a) (25 000)
3. Income tax expense - Depr according to new method (b) 15 000
2017 2016 Adjustment due to correction of error - (70 000)
R R 105 000 97 000
Main components of income tax expense
(a) Old depr method: R125 000(CP)/5 yrs = R25 000
- Current tax (W2) 4 032 26 180
- Deferred tax (W2) 2 800 -
(b) New depr method: R75 000(CA beginning of 2017) x 20% = R15 000
6 832 26 180
W2. Calculation of income tax expense
Tax reconciliation 2017 2016
2017 2016 R R
R R
Current tax (a) 4 032 26 180
Accounting profit before tax 34 400 93 500 Deferred tax (b) 2 800
Standard tax rate 28% 28% 6 832 26 180
Tax at standard rate 9 632 26 180
Tax effect of non-taxable items: a) Current tax
- Dividends received (R10 000 x 28%) (2 800) - 2017 2016
Income tax expense 6 832 26 180 R R
Profit before tax (see P/L) 34 400 93 500
Non-taxable items
7. Correction of prior period error - Dividends received (given) (10 000) -
Temporary differences
Correction of an investment that was incorrectly accounted for as administrative costs. - Wear and tear on machinery (R125 000 x 20%) (25 000) (25 000)
The comparative amounts have been restated appropriately. The effect of the - Depr for 2016 (with old method) [W1(a)] - 25 000
adjustment on the 2016 results is as follows: - Depr for 2017 (with new method) [W1(b)] 15 000 -
Taxable income 14 400 93 500
2016
R Current tax @ 28% 4 032 26 180
Decrease in other expenses 70 000
Increase in income tax expense (R70 000 x 28%) (19 600)
Increase in profit 50 400

Increase in investments 70 000

Increase in current tax payable (19 600)
Increase in equity 50 400

Increase in basic earnings per share XX

Increase in diluted earnings per share XX

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b) Deferred tax
CA TB TD DT 28% SCI
(DR)/CR DR/(CR)
R R R R R
2015 Machinery (i)100 000 (ii)100 000 - -
Balance - -

2016 Machinery (i)75 000 (ii)75 000 - -

Balance - -

(i) (ii)
2017 Machinery 60 000 50 000 10 000 2 800
Balance 2 800 2 800

(i) Carrying amount

R
Cost (given) 125 000
Depr (old method) [W1(a)] (25 000)
CA: 31/12/2015 100 000
Depr (old method) [W1(a)] (25 000)
CA: 31/12/2016 75 000
Depr (new method) [W1(b)] (15 000)
CA: 31/12/2017 60 000

(iv) Tax base

R
Cost (given) 125 000
Wear and tear (R125 000 x 20%) (25 000)
TB: 31/12/2015 100 000
Wear and tear (R125 000 x 20%) (25 000)
TB: 31/12/2016 75 000
Wear and tear (R125 000 x 20%) (25 000)
TB: 31/12/2017 50 000

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