Exam 9: Accounting Changes

During the audit of Keats Island Brewery for the fiscal year ended June 30, 2022, the auditors identified the following issues: For each of the three issues described below, using the following table, identify both the direction (increase or decrease)and the amount of the effect relative to the amount without the accounting change. a. The company sells beer for $1 each plus $0.10 deposit on each bottle. The deposit collected is payable to the provincial recycling agency. During 2021, the company had recorded $12,000 of deposits as revenue. The auditors believe this amount should have been recorded as a liability. b. The company had been using the first-in, first-out cost flow assumption for its inventories. In fiscal 2022, management decided to switch to the weighted-average method. This change reduced inventory by $25,000 at June 30, 2021, and $40,000 at June 30, 2022. c. The company has equipment costing $6,000,000 that it has been depreciating over 10 years on a straight-line basis. The depreciation for fiscal 2021 was $600,000 and accumulated depreciation on June 30, 2021, was $1,200,000. During 2022, management revises the estimate of useful life to 12 years, reducing the amount of depreciation to $480,000 per year.

Complete the table giving an example of a change in estimate from each of the given areas.

Which of the following is an accounting error?

Give an example of a change in accounting policy which does not require retrospective treatment and explain why.

Define "a retrospective adjustment."

Over time, has management's free will over accounting changes increased or decreased? Explain why.

Which of the following statements is true?

The discussion in IAS 16 paragraphs 60-62 indicates that a change in depreciation method is usually a change in accounting estimate. Explain the logic behind why a change in depreciation method is normally considered a change in estimate.

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year, the accountant should do (or not do)the following:

Which statement is true regarding accounting accruals?

Why are retrospective adjustments to past years' income and expenses recorded directly in retained earnings?

For the following accounting changes, identify the appropriate treatment under IFRS.

Complete the following table by giving one example of a change in accounting policy for each financial statement item.

Which statement is true regarding accounting accruals?

Albacore Sailboats manufactures small sailing dinghies. In 2022, the company's accountant recorded the following costs into the inventory account: The company had no work in process at the end of both 2021 and 2022. Finished goods at the end of 2021 amounted to 6,000 sailboats at $300/boat. Production was 50,000 sailboats and 4,000 boats remained in inventory at December 31, 2022. The company uses a periodic inventory system and the FIFO cost flow assumption. Required: a. Of the $15,098,000, how much should have been capitalized into inventories? b. Compute the ending value of inventory and the cost of goods sold for 2022. c. If the error in inventory costing had not been corrected as per part (a), by how much would inventory be overstated at the end of 2022? d. Record the journal entry to correct the error in inventory costing.

Which of the following is a change in an estimate?

Which of the following is a change in policy?

What are two reasons why an accounting change may be permitted to give modified retrospective or prospective treatment?

How should enterprises reflect changes in accounting standards?

Define the term "prospective adjustment." Which type of accounting changes is it applied to?