Would your answer to (b) change if the loan agreement with Portsmith Bank did not specify a minimum level for MattCom Ltd’s interest coverage ratio?

Explain which of the following items is material in accordance with the requirements of

 

AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

(a) During a routine computer system check, it was discovered that corruption of sales

data had led to an understatement of sales revenue by $180 000 for MattCom Ltd

during the reporting period ended 30 June 2018. Total sales revenue for the period

was $1 500 000.

(b) MattCom Ltd issued 500 5% $100 debentures during the reporting period ended

30 June 2013. At the time of issue, the market value of each debenture was $100.

At 30 June 2018, total liabilities were equal to $1.25 million. The issue of the

debentures significantly increased the likelihood of MattCom Ltd failing to meet

the required interest coverage ratio specified in a loan agreement with Portsmith

Bank.

(c) Would your answer to (b) change if the loan agreement with Portsmith Bank did not

specify a minimum level for MattCom Ltd’s interest coverage ratio?

(d) During the reporting period ended 30 June 2018, the financial situation of MattCom

Ltd deteriorated significantly due to increased competition and a shrinking market for its products. There is no evidence that MattCom’s situation will improve in the

future. During this time, the directors revalued equipment upwards by $47 000. At

the time of revaluation, recorded equity was $940 000.

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