Question

cteristics: P2-5 You are hired to review the accounting records of Sheridan Inc. (a public corporation) before it closes its reve- nue and expense accounts as at December 31, 2017, the end of its current fiscal year. The following information comes to your attention. 1. During the current year, Sheridan Inc. changed its shipment policy from fo.b. destination to fo.b shipping This would result in an additiona 1 $50,000 of revenue being recorded for fiscal 2017 2. The estimated remaining useful life of its manufacturing equipment was reviewed by management and increased by five years. This reduced depreciation expense by $30,000 during fiscal 2017. 3. When the statement of financial position was prepared, detailed information about the amount of cash on deposit in each of several banks was omitted. Only the total amount of cash under a caption "Cash in banks" was presented. 4. During the current year, Sheridan Inc. purchased an undeveloped piece of land for S320,000. The company spent $80,000 on subdividing the land and getting it ready for sale. A property appraisal at the end of the year indicated that the land was now worth $500,000. Although none of the lots was sold, the company recognized revenue of S180,000, less related expenses of $80,000, for a net income on the project of $100,000. The company has histori- cally used the cost model for this type of property 5. For several years, the company used the FIFO method for inventory valuation purposes. During the current year, the president noted that all the other companies in the industry had switched to the moving average method. 6. During fiscal 2017, new government legislation was passed requiring companies like Sheridan to install additional devices until 2022, an accrual for $375,500 has been established in the year-end financial statements for the future 7. To maintain customer goodwill, Sheridan voluntarily recalled some products during the year. Sheridan has not Sheridan Inc. decided not to switch to moving average because net income would decrease by S600,000. health and safety devices in their offices by 2022. Although Sheridan does not intend to retrofit the required new installation costs. established an accrual and is recording the sales returns as they happen Instructions State whether or not you agree with each of the accounting decisions made by Sheridan Inc. Explain your reasoning and, wherever possible, support your answers by referring to the generally accepted accounting principles that apply to the circumstances.

Answer 1

Answer:

1. Not agreed. Change in shipment policy shall be considered as change in accounting principle and it shall be adjusted retrospectively as per US GAAP.

2. Agreed. Change in depreciation method or increase/decrease in useful life of assets shall be considered as change in accounting estimate and it shall be adjusted prospectively

3. Not agreed. Consolidated bank balance should be reported under caption cash in banks

4. Asset held for sale should be accounted at fair market value on reporting date. Any notional loss or gain to be accounted. Company should incorporate the principle of asset held for sale in financial statements

5. Agreed. It is the option of the company. However, it is advisable to change the method to form uniformity in industry for comparison

6. Agreed. Cost should be accounted for required devices as prepaid asset.

7. Not agreed. Company should make provision of sales return based on the past experience and management judgement.