Question # 16: Are there any transactions or events that have occurred since year-end 20X2 that we should disclose as subsequent events this year?
Issue : The question tries to access the number of events or transactions which could have made by the Aguamaint Inc’s management before the end of the year 20X2. With regard to allocating allowances for doubtful accounts, there is a need for determining the essence of the bookkeeping policy. In the case of prepaid insurance, the issue is to determine whether the company should capitalize or expense these expenses as an asset.
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The issue regarding the license agreement surrounds the need of scrutinizing they are incorporated in these costs and their useful life. This is in line with the need of determining the number of shares, their par value, their approval, and the nature of their transaction. The issue surrounding maintenance contracts entails reviewing the maintenance contract, determining the nature of the accounts receivables, those who paid them on time and the number of clients who woes the company. The issues regarding new customer contracts are the disclosure of any information concerning it with its potential investors and determining how tax benefit NOL will be carried forward.
Rule : For doubtful accounts, allowance should only be made if the all the accounting conditions are met. For prepaid expenses, they will have to be capitalized as assets because they items paid in advance which offer value with time. The rationale for license agreement entails evaluating how they are to be amortized. The rule governing the shares of stock used for exchanging license agreement requires Aguamaint Inc. to disclose them it in their financial information so as to offer a clear understanding of the transactions made.
Maintenance contracts require to be regarded as a single client whose transactions amounts to at least 10% of all the transactions made by the company. The rationale for expenses requires that all expenses be accounted for along with income or revenue within that time frame. The rule governing contracts with new customers is aimed at ensuring that the entity has disclosed both quantitative and qualitative information so as to enable users of financial statement its relevance.
Analysis: The disclosure of Aguamaint Inc’s previous year activities or events in the current accounting year will depend on their nature as assets or liabilities. The allowance for the bad debt affects when written off affects the account receivable which is an asset. In other words, the record will show a credit to the account receivables and a debit to the allowance for doubtful accounts. However, no loss or income is recorded in the income statement.
The recording of the prepaid expenses, this will be recognized in the balance sheet as a prepaid asset and also, reducing the cash of the company with a similar amount. Assume, Aguamaint Inc’s rent worth $24,000 had been paid in advance. This is the transaction to be recorded in the current financial year 20X3.
On the other hand, license agreement and maintenance contracts are intangible costs. The license agreements will be treated as an asset in the balance sheet and it will be amortized over the validity period. The maintenance contract expenses will not be capitalized in the year 20X3. Rather, it will be recorded as the operating expenses.
Conclusion: According to IAS 8, a prior year adjustment is a form of correction of a previous accounting period error. These adjustments may result from changes in accounting estimates, accounting policies, and errors. However, the figures that will be reinstated after the recording of the previous year transaction include the retained and respective accounts which are affected. The adjustment of each transaction in the current year brings about a change in the financial condition of the preceding balance sheet. However, these changes will not “disturb” the equality of the accounting equation. For instance, Aguamaint Inc. rent payment reduces the income (retain earnings) and cash and it would be restated as the following:
