Exam 20: Accounting Changes

Zyler Company is analyzing its accounts receivable for purposes of preparing its financial report for the year ended December 31,2017.The company uses the aging method to estimate bad debts.During this analysis,Zyler discovered that staff had written off a $55,000 account in 2017 even though the company had received information about the bankruptcy of the client in late 2016. The company has already recorded bad debts expense for 2017,but the general ledger for the year has not yet been closed.The following table provides information relating to Zyler's accounts receivables just prior to the discovery of the $55,000 error: 2016 2017 Accounts receivable - gross \ 2,240,000 \ 2,460,000 Allowance for doubtful accounts (123,000) (145,000) Accounts receivable-net 2,117,000 \ 2,315,000 Bad debts expense \ 255,000 \ 236,000 Record any adjusting journal entries necessary to correct the error in Zyler's accounts receivable.

For a construction contract where the company uses the percentage of completion method and there is a change in the estimated total cost of the contract from 12 million to 13 million,the accountant should do the following:

CBC Biomedical undertook a research and development project in 2016.As of March 1 of that year,management concluded that the project had met the requirements for the capitalization of development costs.For the remainder of 2016 and 2017,the company capitalized $4.3 million of development costs for the project.Capitalizing these costs helped CBC Biomedical to remain profitable;had these costs been expensed,the company would report losses.In 2018,CBC Biomedical began amortizing the development cost over the estimated useful life of 10 years,beginning with a full year of amortization in 2018. In 2021,in preparation for an initial public offering (IPO),the company engaged a public accounting firm to conduct an external audit of its financial statements.The auditors concluded that the development cost did not meet the criteria for capitalization.Specifically,it is their opinion that CBC Biomedical,at the time,did not demonstrate that the company had sufficient financial resources to complete the development project due to the recurring operating losses incurred.After some heated debate,CBC Biomedical management agreed with the auditors' position in order to obtain an unqualified audit opinion.The company had not yet recorded any amortization for 2021 when it agreed to correct the error.The company's tax rate is 30%. Required: Record the journal entries necessary to correct CBC's accounts.Include the effect of income taxes.

For the following accounting changes,identify the appropriate treatment under IFRS. Type of Accounting Change Accounting Treatment Change in estimate Change in accounting policy Correction of an error

Which statement is true regarding accounting accruals?

Wasson Company purchased land and a building in 2016 at a cost of $6,000,000.The land was valued at $1,000,000.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 2026 and Wasson 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,as of 2016,their useful lives did not extend for 25 years-the manufacturer's specifications indicate that the windows would be expected to remain in functioning condition until 2026.The estimated value of the windows when the building was purchased was $800,000. Required: a.Record the journal entry to record the replacement of the windows assuming that the windows were recorded as a separate component. b.Assume that LaSalle committed an error in not componentizing the windows separately from the building.Record the adjusting journal entry or entries required to correct this error. c.Record the journal entry to record the replacement of the windows after having properly recorded the windows as a separate component in part (b).

Sawatsky & Company Ltd is involved in the construction of top class luxury condos in Vancouver,Canada.Until the end of 2019,the company used the cost ratio method to estimate the percentage complete.After that point,the company switched to using estimates from architectural engineers to estimate the degree of completion.To prepare the financial report for the 2020 fiscal year,you have gathered the following data on projects that were in progress at the end of fiscal years 2018,2019,and 2020: Required: a.Compute the amount of revenue and cost of sales that was recognized in 2018 and 2019 using the old accounting policy. b.Compute the amount of revenue and cost of sales that should be recognized in each year using the new accounting policy. c.Record the adjusting journal entries to adjust revenue to reflect the change in accounting policy from using the cost ratio to using engineering estimates.The general ledger accounts for 2020 have not yet been closed.Ignore income tax effects.

Complete the following table indicating which of the following requires a correction due to an error from a prior period?

Which of the following is a change in policy?

Define the term "prospective adjustment" and which type of accounting changes is it applied to?

Evaluate each of the following independent situations to determine the type of accounting change (correction of error,change in accounting policy,or change in estimate)and the appropriate accounting treatment (retrospective or prospective). A B C D Situation A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. The retailer has never accrued for product guarantees. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. A retailer increases bad debts expense from 2.5 \% to 3\% of credit sales. A fashion designer decides to eet up an allowance for doubtful accounts at 3\% of amounts over 90 days. Type of Change Treat -ment Explana -tion

Pracene Sports Supply is a relatively new producer of sporting goods.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 sale. The company's products are of a sufficiently high quality such that 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 a small number of warranty claims in 2019 amounting to $243,000,which was recorded as miscellaneous expense.These claims alerted the auditors to the fact that the company should have but did not accrue for the expected warranty costs starting in 2018. Pracene's management estimates warranty fulfillment costs to be 0.10% of revenue.The company recorded revenue of $51,500,000 in 2018 and $55,300,000 in 2019.There is very little seasonality in the sales pattern through the year.The company's tax rate is 40%.The general ledger for 2019 has not yet been closed. Required: Record any adjusting journal entries required to correct Pracene's books.Include the effect of income taxes.

Grant Pharmaceuticals Ltd.undertook a research and development project in 2017.As of May 1 of that year,management concluded that the project had met the requirements for the capitalization of development costs.For the remainder of 2017 and 2018,the company capitalized $9.9 million of development costs for the project.Had these costs been expensed,the company would have reported losses.In 2019,Grant began amortizing the development cost over the estimated useful life of 10 years,beginning with a full year of amortization in 2019. In 2022,the auditors concluded that the development cost did not meet the criteria for capitalization.Specifically,Grant did not demonstrate that the company had sufficient financial resources to complete the development project.Grant's management agreed to correct the error in order to obtain a clean audit opinion.The company's tax rate is 30%. Required: Record the journal entries necessary to correct Grant's accounts.Include the effect of income taxes.

What is the essential characteristic that distinguishes an error correction from 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:

Define "a retrospective adjustment."

Chesapeake Inc.issued a 7-year bond on October 1,2018.The $735,000 par bond pays $51,450 of interest on October 1st each year,its year end. It is now February 2022.During the audit of the 2021 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%/annum had it not included the conversion option. Required: Record any adjusting journal entries required to correct Chesapeake's accounts.The books for 2021 have not yet been closed.

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

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 the following financial statement accounts provide a description of a change in accounting estimates. Financial Statement Items Changes in Accounting Estimates Revenue Receivables Property, Plant and Equipment Goodwill Current liabilities Deferred income taxes Employee future benefits