Exam 10: Accounting Changes

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:

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.

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:

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:

Which of the following statements is true?

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

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

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:

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

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.

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.

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.

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

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.

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

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?

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).

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.

Star Company Ltd.,is a private company that started on January 1,2017.During an external audit that was conducted at the end of the second year of the company's operation (2018),the following information was presented: Star Company has one huge machine that cost $6,000,000 and was depreciated over an estimated useful life of 10 years.Upon reviewing the manufacturer's reports in 2018,management now firmly believes the machine will last a total of 15 years from date of purchase.They would like to change last year's depreciation charge based on this analysis. The company's building (cost $5,000,000,estimated salvage value $0 useful life 20 years)was depreciated using the 10% declining-balance method.The company and auditor now agree that the straight-line method would be a more appropriate method to use. Star Company does not accrue for warranties; rather it records the warranty expense when amounts are paid.Star provides a one-year warranty for defective goods.Payments to satisfy warranty claims in 2017 were $100,000,and $270,000 in 2018.Out of the $270,000 paid in 2018,$150,000 related to 2017 sales.A reasonable estimate of warranties payable at the end of 2018 is $275,000. Required: a.As the auditor on this engagement,what is your recommended treatment for each of these matters in terms of whether they are errors,changes in accounting policy,changes in estimate? Explain your conclusion. b.Assume that management of Star Company agrees with your recommendations.How would the balances above be presented in the corrected income statements for 2012 and 2013?