The following financial statement was prepared by the accountant of Real estate Zambia PLC. Real estate PLC.

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Question:

The following financial statement was prepared by the accountant of Real estate Zambia PLC.

Real estate PLC. Balance Sheet as at December 31, 2018

Current Assert: Cash K182, 200

Accounts receivable (less allowance of K14, 000 for

doubtful account) 220,700

Inventory 2,314,000

Prepayment 360,000 K3, 076,900

Less Current Liabilities;

Account payable K206, 400

Accrued payroll 8,260

Accrued interest on mortgage note 12,000

Estimated taxes payable 66,000 292,660

Net working capital K2,784,240

Property, Plant, and Equipment (at cost)

Cost Depreciation Value

Land and equipment K983, 300 K310, 000 673,300

Machinery and equipment 905,000 338,000 567,000

Leased Equipment 230,700 230,699 1

K2, 119,000 K878, 699 K1, 240,301

Deferred Charges; Prepaid taxes and other expenses 11,700

Interest charged on mortgage note 10,800 1,262,801

Total net working capital and noncurrent assets K4,047,041

Less Deferred liabilities;

Mortgage note payable 300,000

Unearned revenue 1,898,000 2,198,000

Total net assert 1,849,041

Stockholder’s Equity;

6% preferred stock par value K400, 000

Common stock at per value 800,000

Paid-in surplus 210,000

Retained earnings 483,041

Treasury stock at cost (370 shares) (44,000)

Total stockholder’s equity 1,849,041

The statement is not accompanied by notes, but you have discovered the following

a) On 31 December 2017 Real Estate Company issued K300, 000 of 10% bonds. The bonds are due on January 1, 2023, with interest payable each July 1 and January 1. The bonds are issued to yield 8% Interest. The accountant forgot to include this transaction in the years 2017 and 2018.

b) The unearned revenue includes K100, 000 for the services not yet offered to one of the clients T and T. The terms and condition for this sale was that, on January 1, 2018, Real Estate sold equipment to T and T for K620, 000. This price includes a 2-year assurance warranty service T and T received and paid for the equipment on the same date. The standalone price for the equipment is K600, 000. While that for the warranty service is K100, 000 per year.

Required:

i) Basing on the guidelines of IAS 1 “Presentation of financial statement”, identify any 5 weaknesses in the financial statement prepared by the accountant above

ii)Basing on the guidelines of International Financial Reporting Standard 9, “Financial Instruments” explain how Real state should record the transaction in( a) above, and prepare the journal entry for both 2017 and 2018.

iii) IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” describes the different types of errors and how they should be account for. Explain what type of error has been made by real estate by forgetting to include the issue of the bonds and the effect it will have on the financial statements for 2017(5 marks)

iv) Citing relevant accounting standards, critically evaluate the way the transaction in

(b) above has been recorded and prepare the correct adjusting journal if necessary

v)Prepare the correct statement of financial position and accompanying notes suitable for presentation to shareholders as prescribed by IAS 1 “Presentation of financial statement (remember to include the effect of the information in

(a) and (b)

vi) Explain why the statement you have prepared in

(v) will be more preferred by users compared to the one prepared by the accountant above.