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Exam 10: Accounting Changes

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Question 1

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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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Original entries: 11ea7ef7_da3e_ecb8_92e1_79f5c387e231_TB1321_00_TB1321_00_TB1321_00_TB1321_00 2020 Journal entries to correct error: 11ea7ef7_da3e_ecb9_92e1_f9770b281d08_TB1321_00_TB1321_00_TB1321_00_TB1321_00

Question 2

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How should enterprises reflect changes in accounting standards?

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Enterprises should reflect changes in accounting standards according to the transitional provisions of each standard.Where there are no specific transitional provisions,retrospective adjustments should be made to reflect the change in accounting standard.

Question 3

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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 financial statement accounts,provide a description of a change in accounting estimates.

A retailer increases bad debts expense from 2.5% to 3% of credit sales.Given this information,which of the following statements is correct?

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.

Define "a retrospective adjustment."

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

An analysis of a company's inventory indicates that inventory at the end of 2016 was understated by $30,000 due to an inventory count error.Inventory at the end of 2017 was correctly stated.The company uses the periodic system of inventory and its fiscal year-end is December 31.Given this information,which of the following statements is correct?

Which of the following is an accounting error?

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

Which statement is true regarding accounting accruals?

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: 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.

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

Which of the following is a change in policy?

Which statement is true regarding accounting accruals?

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

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.

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.

Which of the following is an accounting error?