Exam 20: Accounting Changes

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years remaining as at the beginning of the year,the accountant should do the following:

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

Chisholm Appliances is a relatively new producer of commercial grade appliances.To enhance the competitiveness of its products,on July 1,2018,the company introduced a warranty against defects for 12 months from the date of installation. No warranty claims were received in 2018.However,in February 2020,when the auditors examined the records for the year ended December 31,2019,they noted $255,000 of warranty claims relating to 2019 recorded as miscellaneous expense.The auditors requested the company to accrue for the expected warranty costs retrospectively to 2018. The auditors agreed with Chisholm's management that the estimated warranty fulfillment costs should be 0.5% of revenue.The company recorded revenue of $55,598,000 in 2018 and $56,213,000 in 2019.The company's tax rate is 30%.The general ledger for 2019 has not yet been closed. Required: Record any adjusting journal entries required to correct Chisholm's books.Include the effect of income taxes.

Which of the following statements is true?

For each of the following scenarios,determine the effects (if any)of the accounting change (correction of error,change in accounting policy,or change in estimate)on the relevant asset or liability,equity,and comprehensive income in the year of change and the prior year.Use the following table for your response: Prior Year $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Current Year a. b. c. Type of accounting change Treatment Asset or liability Equity Income Asset or liability Equity Income a.Company A increases the allowance for doubtful accounts (ADA).Using the old estimate,ADA would have been $45,000.The new estimate is $50,000. b.Company B omitted to record an invoice for a $10,000 sale made on credit at the end of the previous year and incorrectly recorded the sale in the current year.The related inventory sold has been accounted for. c.Company C changes its revenue recognition to a more conservative policy.The result is a decrease in prior-year revenue by $4,000 and a decrease in current-year revenue by $5,000 relative to the amounts under the old policy.

During the audit of Keats Island Brewery for the fiscal year ended June 30,2018,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 2017,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 2018,management decided to switch to the weighted-average method.This change reduced inventory by $25,000 at June 30,2017,and $40,000 at June 30,2018. 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 2017 was $600,000 and accumulated depreciation on June 30,2017,was $1,200,000.During 2018,management revises the estimate of useful life to 12 years,reducing the amount of depreciation to $480,000 per year. Type of Accounting Change Treatment Assets Liabilities Equity Income a. b. c.

Arbutus Inc.issued a 10-year bond on July 1,2016.The $30,000,000 par bond pays $900,000 of interest on December 31 and June 30.The company has a calendar year-end. It is now February 2020.During the audit of the 2019 financial statements,it was discovered that the bond indenture allowed holders to convert the bonds to common shares.The terms of the conversion allow each $1,000 bond to be converted into 50 shares.Additional investigation concluded that the bond would have yielded 8%/a had it not included the conversion option. Required: Record any adjusting journal entries required to correct Arbutus's accounts.The books for 2019 have not yet been closed.

Cantac Construction purchased a piece of equipment for $40 million in early 2017.The company depreciates the equipment using the straight-line method over its useful life of 20 years,when it will have zero residual value.Cantac's income tax rate is 40%.At the end of 2020,after four years of depreciation,the company wrote down the carrying amount of the equipment from $32 million to $24 million after performing an impairment test on the cash generating unit (CGU)to which the equipment belonged.As a result of the impairment,the annual depreciation declined from $2 million to $1.5 million.In 2023,prior to recording depreciation for that year,the company's staff discovered an error in one of the formulas in the spreadsheet used to compute the value in use for the impairment test carried out at the end of 2020.Removing the error in the spreadsheet,the value in use for the CGU exceeded its carrying value.Therefore,the CGU was in fact not impaired,and Cantac should not have recorded an impairment writedown on the demolition equipment at the end of 2020. Required: Prepare the journal entries to correct the error including subsequent years' depreciation and related tax effects.

For the following types of accounting changes,identify the relevant criteria for each accounting change by selecting "yes," "no," or "n/a" (not applicable).

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

Which of the following statements is true?

Which statement is true regarding accounting accruals?

Victory Welding Company overhauled a printing press for Helman's Printing Ltd.For the services completed on March 31,2018,Victory received a promissory note for $350,000 due and payable on March 31,2019.Helman's paid the amount as scheduled.Victory staff recorded the full amount as revenue on March 31,2018. It is now May 20,2019.The accounting staff at Victory just realized that the note was improperly recorded,and that no interest income had been recognized.The controller believes that an interest rate of 10% would be appropriate. Required: Record any journal entries necessary to correct Victory's accounts in relation to the note receivable from Helman's.

What is the essential characteristic that distinguishes a change in accounting policy from either an error correction or a change in estimate?

Complete the following table by giving one example of a change in accounting policy for each financial statement item. Financial Statement Item Changes in Accounting Policy Revenue Operating expenses Receivables Property, plant and equipment (PPE) Government assistance Accounting standards

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 of the following is an accounting error?

On December 15,2017,The Bay Company factored $1,600,000 of accounts receivable for proceeds of $1,500,000.The company recorded the transaction as being without recourse,with $100,000 recorded to interest expense.During the preparation of the financial statements dated December 31,2018,staff concluded that the factoring arrangement should have been classified as being with recourse.Additional information about the factoring is as follows: The factor withheld $40,000 for potential uncollectible accounts.? Actual uncollectible accounts amounted to $50,000;Dutton paid the additional $10,000 to the factor on August 7,2018 and recorded this amount as "miscellaneous expense." Required: 1.Reproduce the incorrect journal entry that was recorded on December 15 ,2017,and on August 7,2018. 2.Provide the correct journal entries that should have been recorded on December 15,2017,and on August 7,2018. 3.Record any correcting journal entries necessary to correct the error in Dutton's accounts.

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

For each of the following independent scenarios,indicate the effect of the error (if any)on: i.2017 net income ii.2018 net income iii.2018 closing retained earnings The company uses the periodic system of inventory and its fiscal year-end is December 31.Ignore income tax effects. a)Invoices in the amount of $42,000 for inventory received in December 2017 were not entered on the books in 2017.They were recorded as purchases in January 2018 when they were paid.The goods were counted in the 2017 inventory count and included in ending inventory on the 2017 financial statements. b)Goods received on consignment amounting to $73,000 were included in the physical count of goods at the end of 2018 and included in ending inventory on the 2018 financial statements. c)Your analysis of inventory indicates that inventory at the end of 2017 was overstated by $152,000 due to an inventory count error.Inventory at the end of 2018 was correctly stated. d)Provide the journal entry in 2018 to correct the error for (a)to (c).