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Exam 20: Accounting Changes

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Stretton Company Limited,a private company,was started on January 1,2018.For the first year,the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements.However,for the year ended December 31,2019,an external auditor was appointed.The income statement for 2018 and the preliminary amounts for 2019 are as follows: Stretton Company Limited,a private company,was started on January 1,2018.For the first year,the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements.However,for the year ended December 31,2019,an external auditor was appointed.The income statement for 2018 and the preliminary amounts for 2019 are as follows: In the process of examining the accounting records the auditor noted the following issues: In the process of examining the accounting records the auditor noted the following issues: Stretton Company Limited,a private company,was started on January 1,2018.For the first year,the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements.However,for the year ended December 31,2019,an external auditor was appointed.The income statement for 2018 and the preliminary amounts for 2019 are as follows: In the process of examining the accounting records the auditor noted the following issues: Stretton Company Limited,a private company,was started on January 1,2018.For the first year,the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements.However,for the year ended December 31,2019,an external auditor was appointed.The income statement for 2018 and the preliminary amounts for 2019 are as follows: In the process of examining the accounting records the auditor noted the following issues:

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Nadire Company has a December 31 year-end.The company uses the aging method to estimate bad debts at year-end.For interim reporting,the company uses the percentage- of-sales method because it is simpler. In March of 2019,the company identified a $109,000 receivable from Woodscreen Inc.as uncollectible.Upon further consideration,staff concluded that the write-off should have occurred in the 2018 fiscal year because the information about the uncollectibility of the account was available at the time.The general ledger accounts for 2018 have already been closed. Required: a.Record the entry to write-off the uncollectible account. b.Record any adjusting journal entries necessary to correct the error in Nadire's 
accounts receivable.

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a.Write-off entry:
2019 Mar xx To write off uncollectible account for  Woodscreen Inc.  Dr. Allowance for doubtful accounts 109,000 Cr. Accounts receivable - Woodscreen Inc. 109,000\begin{array} { | l | l | l | l | } \hline 2019 \text { Mar } x x & \begin{array} { l } \text { To write off uncollectible account for } \\\text { Woodscreen Inc. }\end{array} & & \\\hline & \text { Dr. Allowance for doubtful accounts } & 109,000 & \\\hline & \text { Cr. Accounts receivable - Woodscreen Inc. } & & 109,000 \\\hline\end{array}
b.Adjusting entry:
2019 Mar xx To correct for an uncollectible account that  should have been written off in 2018 but was  discovered in the first quarter of 2019. Dr. Retained earnings - opening balance 109,000 Cr. Allowance for doubtul accounts 109,000\begin{array}{|l|l|l|l|}\hline 2019 \text { Mar xx} & \begin{array}{l}\text { To correct for an uncollectible account that } \\\text { should have been written off in } 2018 \text { but was } \\\text { discovered in the first quarter of } 2019 .\end{array} & & \\\hline & \text { Dr. Retained earnings - opening balance } & 109,000 & \\\hline & \text { Cr. Allowance for doubtul accounts } & & 109,000 \\\hline\end{array}

On January 1,2018,Allied Fittings signed a long-term rental agreement with KM Properties for the exclusive right to use a building for a period of 10 years at a rental rate of $2.5 million per year paid at the beginning of each year.The building has fair market value of $40 million,a 20-year life and the agreement includes an option for Allied to purchase the property for $20 million at the end of the lease,when the property would be expected to increase in value to $50 million.Allied's accounting staff recorded the lease as an operating lease. In 2020,management realized that the lease should have been recorded as a capital lease due to the bargain purchase option.Allied has a calendar year-end.The books for 2020 have not been closed.The company has an incremental borrowing rate of 6%,and depreciates similar property on a straight-line basis with full depreciation taken in the first year. Required: a.Record the adjusting entries necessary to reflect the lease as a finance lease on December 31,2020.

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Adjusting entries if amendment is considered a correction of an error.
Adjusting entries if amendment is considered a correction of an error. Adjusting entries if amendment is considered a correction of an error.

Which statement is correct about a correction of an error from prior periods?

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Question 4

Canlan Inc.is a subsidiary of a Canadian publicly traded manufacturer of construction materials.The company uses the first-in,first-out (FIFO)cost flow assumption. a.An invoice for $55,000 of material received and used in production arrived after the year-end.Neither the purchase nor the accounts payable was recorded until year two.However,the amount of raw materials in ending inventory was correct based on the inventory count. b.One of Canlan's products became obsolete and worthless during Year 1,but the inventory writedown did not occur until Year 2.The cost of this inventory was $225,000. c.In the Year 1 closing inventory count,employees improperly included 2,000 units of finished goods that had already been sold to customers.These units had a cost of $20,000 under FIFO. Required: For each of the above independent scenarios (a)through (c),indicate in the following table the effect of the accounting errors on the books of Canlan Inc.Specifically,identify the amount and direction of over- or understatement of inventory and income for Year 1 and Year 2.If an account requires no adjustment,indicate that the account is "correct." Canlan Inc.is a subsidiary of a Canadian publicly traded manufacturer of construction materials.The company uses the first-in,first-out (FIFO)cost flow assumption. a.An invoice for $55,000 of material received and used in production arrived after the year-end.Neither the purchase nor the accounts payable was recorded until year two.However,the amount of raw materials in ending inventory was correct based on the inventory count. b.One of Canlan's products became obsolete and worthless during Year 1,but the inventory writedown did not occur until Year 2.The cost of this inventory was $225,000. c.In the Year 1 closing inventory count,employees improperly included 2,000 units of finished goods that had already been sold to customers.These units had a cost of $20,000 under FIFO. Required: For each of the above independent scenarios (a)through (c),indicate in the following table the effect of the accounting errors on the books of Canlan Inc.Specifically,identify the amount and direction of over- or understatement of inventory and income for Year 1 and Year 2.If an account requires no adjustment,indicate that the account is correct.

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Question 5

For each of the following independent scenarios,indicate the effect of the error (if any)on: - 2016 net income - 2017 net income - 2017 closing retained earnings Additional information: - The company uses the periodic system of inventory and its fiscal year-end is December 31. - Ignore income tax effects. a.Your analysis of inventory indicates that inventory at the end of 2016 was understated by $20,000 due to an inventory count error.Inventory at the end of 2017 was correctly stated. b.Invoices in the amount of $59,000 for inventory received in December 2016 were not entered on the books in 2016.They were recorded as purchases in January 2017 when they were paid.The goods were counted in the 2016 inventory count and included in ending inventory on the 2016 financial statements. c.Goods received on consignment amounting to $99,000 were included in the physical count of goods at the end of 2017 and included in ending inventory on the 2017 financial statements.

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Question 6

Sampson Seadoos manufactures state-of-the-art seadoos.In 2015,the company's accountant recorded the following costs into the inventory account: Sampson Seadoos manufactures state-of-the-art seadoos.In 2015,the company's accountant recorded the following costs into the inventory account: The company had no work in process at the end of both 2014 and 2015.Finished goods at the end of 2014 amounted to 8,000 seadoos at $900/seadoo.Production was 13,453 seadoos and 4,000 seadoos remained in inventory at December 31,2015.The company uses a periodic inventory system and the FIFO cost flow assumption. Required: a.Of the $14,080,000,how much should have been capitalized into inventories? b.Compute the ending value of inventory and the cost of goods sold for 2015. 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 2015? d.Record the journal entry to correct the error in inventory costing. e.If the company uses the weighted-average cost method,how much would be the ending value of inventory and cost of goods sold for 2015? The company had no work in process at the end of both 2014 and 2015.Finished goods at the end of 2014 amounted to 8,000 seadoos at $900/seadoo.Production was 13,453 seadoos and 4,000 seadoos remained in inventory at December 31,2015.The company uses a periodic inventory system and the FIFO cost flow assumption. Required: a.Of the $14,080,000,how much should have been capitalized into inventories? b.Compute the ending value of inventory and the cost of goods sold for 2015. 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 2015? d.Record the journal entry to correct the error in inventory costing. e.If the company uses the weighted-average cost method,how much would be the ending value of inventory and cost of goods sold for 2015?

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Question 7

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

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Question 8

A company changes the depreciation for a piece of equipment from 20% declining- balance to units-of-production.Describe a plausible circumstance that would support this change as one of the following: (i)an error, (ii)a change in estimate,or (iii)a change in accounting policy.

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Question 9

Why is the retrospective approach conceptually appropriate for changes in accounting policy?

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Question 10

On June 30,2017,Whiggins Company received $60,000 from Carrington Finance Inc.in exchange for a promissory note.The terms of the note required Whiggins Company to repay Carrington on June 30,2019,the principal amount plus interest at 8% compounded semi-annually. Due to financial difficulties,Whiggins could not make the repayment as scheduled.On June 30,2019,Carrington agreed to extend the terms of repayment by one year,to June 30,2020.However,accounting staff at Carrington was unaware of the change in repayment terms and did not record the effects of the note restructuring during 2019.The error was discovered on June 30,2020,when Whiggins paid Carrington $70,192 in fulfillment of the terms of the restructured note. Carrington has a December 31 year-end.No interest had been accrued between the original repayment date and the extended repayment date. Required: Record any adjusting journal entries necessary to correct the error in Carrington's accounting records for the note receivable from Whiggins Company

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Question 11

Which of the following is a change in an estimate?

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Question 12

Complete the table giving an example of a change in estimate from each of the given areas. Financial Statement Items Employee future benefits Deferred income taxes Property, plant and equipment Current liabilities and long-term debt Goodwill Receivables Revenue

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Question 13

Nicolla Company recorded the purchase of a building in 2017 at a cost of $7,000,000.At the time of purchase,the estimated useful life of the building was 25 years.The company depreciates the building on a straight-line basis and has chosen to record a full year of depreciation in the year of acquisition,and none in the year of disposal. It is now 2027.Nicolla has found it necessary to replace all of the windows in this building at a cost of $1,000,000.Upon further review,management concluded that the windows should have been recorded as a separate component because,the manufacturer's specifications indicated that the windows would had a 10 year life expectancy.The estimated value of the windows when the building was purchased was $600,000. Required: Assume that LaSalle committed an error in not componentizing the windows separately from the building.Record the journal entry to record the windows as a separate component,correct all errors and record the replacement of the windows.

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Question 14

How many balance sheets are required by IAS 1 when there is a change in accounting policy and why?

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Question 15

Albacore Sailboats manufactures small sailing dingies.In 2019,the company's accountant recorded the following costs into the inventory account: Albacore Sailboats manufactures small sailing dingies.In 2019,the company's accountant recorded the following costs into the inventory account: The company had no work in process at the end of both 2018 and 2019.Finished goods at the end of 2018 amounted to 6,000 sailboats at $300/boat.Production was 50,000 sailboats and 4,000 boats remained in inventory at December 31,2019.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 2019. 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 2019? d.Record the journal entry to correct the error in inventory costing. The company had no work in process at the end of both 2018 and 2019.Finished goods at the end of 2018 amounted to 6,000 sailboats at $300/boat.Production was 50,000 sailboats and 4,000 boats remained in inventory at December 31,2019.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 2019. 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 2019? d.Record the journal entry to correct the error in inventory costing.

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Question 16

What types of accounting treatments are treated retrospectively and why?

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Question 17

Catherwood Inc.purchased a piece of real estate in early 2016.The staff accountant allocated the $5,000,000 purchase price as follows: 30% to land,50% to building,and 20% to fixtures.Catherwood recorded straight-line depreciation based on useful lives of 20 years and 5 years on the building and fixtures,respectively.No residual value was assigned to either depreciable asset.The company has a policy of recording a full year of depreciation in the year of acquisition,and none in the year of disposal. In 2020 a Catherwood staff in the accounting department discovered that the bundled purchase actually cost $6,000,000 and the extra $1,000,000 was debited to land,while the remaining $5,000,000 was allocated 30% to land,50% to building,and 20% to fixtures.The accounting staff believe that the allocation of 30% to land,50% to building,and 20% to fixtures still applies. Required: Record any adjusting entries required to correct the accounts in 2020 and provide supporting calculations.

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Question 18

How should enterprises reflect changes in accounting standards?

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Question 19

Why is the prospective treatment conceptually appropriate for changes in estimates?

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