Question

P21.3 Leader Enterprises Ltd. follows IFRS and has provided the following information:

1. In 2019, Leader was sued in a patent infringement suit, and in 2020, Leader lost the court case. Leader must now pay a competitor $50,000 to settle the suit. No previous entries had been recorded in the books relative to this case because Leader's management felt the company would win.

2. A review of the company's provision for uncollectible accounts during 2020 resulted in a determination that 1.5% of sales is the appropriate amount of bad debt expense to be charged to operations, rather than the 2% used for the preceding two years. Bad debt expense recognized in 2019 and 2018 was $33,200 and $14,300, respectively. The company would have recorded $19,800 of bad debt expense under the old rate for 2020. No entry has yet been made in 2020 for bad debt expense.

3. Leader acquired land on January 1, 2017, at a cost of $70,000. The land was charged to the Equipment account in error and has been depreciated since then on the basis of a five-year life with no residual value, using the straight-line method. Leader has already recorded the related 2020 depreciation expense using the straight-line method.

4. During 2020, the company changed from the double-declining-balance method of depreciation for its building to the straight-line method because of a change in the pattern of benefits received. The building cost $1.4 million to build in early 2018, and no residual value is expected after its 40-year life. Total depreciation under both methods for the past three years is as follows. Double-declining-balance depreciation has been recorded for 2020.

   		Straight-Line		Double-Declining-Balance
   2018		$35,000		$70,000
   2019		35,000		66,500
   2020		35,000		63,175

5. Late in 2020, Leader determined that a piece of specialized equipment purchased in January 2017 at a cost of $75,000 with an estimated useful life of five years and residual value of $5,000 is now expected to continue in use until the end of 2024 and have a residual value of $3,000 at that time. The company has been using straight-line depreciation for this equipment, and depreciation for 2020 has already been recognized based on the original estimates.

6. The company has determined that a $350,000 note payable that it issued in 2018 has been incorrectly classified on its statement of financial position. The note is payable in annual instalments of $50,000, but the full amount of the note has been shown as a long-term liability with no portion shown in current liabilities. Interest expense relating to the note has been properly recorded.

Instructions

a. For each of the accounting changes, errors, or transactions, present the journal entry(ies) that Leader needs to make to correct or adjust the accounts, assuming the accounts for 2020 have not yet been closed. If no entry is required, write “none” and briefly explain why. Ignore income tax considerations.

b. Prepare the entries required in part (a) but, where retrospective adjustments are made, adjust the entry to include taxes at 25%.

c.  For each of the accounting changes, identify the type of change involved and whether retrospective or prospective treatment is required.

Answer 1

Part A
Date	Account Titles and Explanation	Debit	Credit
1)	Litigation Expense	$                           50,000
	Litigation Liability		$                      50,000
2)	Bad Debt Expense (($18,000 ÷ 2%) X 1.5%)	$                           13,500
	Allowance for Doubtful Accounts		$                      13,500
3)	Land	$                           70,000
	Accumulated Depreciation—Equipment ($14,000 X 4 years)	$                           56,000
	Depreciation Expense ($70,000 ÷ 5 )		$                      14,000
	Retained Earnings		$                      42,000
	Equipment		$                      70,000
4)	Accumulated Depreciation—Buildings	$                           29,925
	Depreciation Expense ($63,175 – $33,250)		$                      29,925
	Carrying  amount  of  the  building at January 1, 2021
	Cost less  accumulated depreciation to Dec. 31/2020 = $1,400,000 - $70,000 - $66,500 =	$                      1,263,500
	Remaining useful  life from Jan. 1/21 =	$                                  38	yrs
	Correct Depreciation Expense, 2021  (straight-line basis)   $1,263,500 ÷ 38	$                           33,250
5)	Accumulated Depreciation—Equipment (14000 - 6000)	$                             8,000
	Depreciation Expense		$                        8,000
	($75,000 – $5,000) ÷ 5 = $14,000 per year
	($75,000 – [$14,000 X 3] – $3,000) ÷ 5 = $6,000
6)	No entry  required
	This  is  an error in classification.
	No  amounts or items  are missing in the financial statements.
	Part B
1)	This   item   is   an   adjustment   to   the   current   year  financial statements.   It   is   not   an   error   in   a   prior  year’s   financial statements  and does  not require retrospective  adjustment
2)	This  is  a  change  in estimate – prospective treatment
3)	This  is  an error in a prior year – retrospective  treatment.
	Land	$                           70,000
	Accumulated Depreciation—Equipment	$                           56,000
	Deferred Tax Liability  ($42,000 X 25%)		$                      10,500
	Depreciation Expense		$                      14,000
	Retained Earnings [$42,000 X (1 – 25%)]		$                      31,500
	Equipment		$                      70,000
4)	This   is   a   change   in   estimate   –   prospective   treatment
5)	This   is   a   change   in   estimate   –   prospective   treatment
6)	No journal entry and no adjustment to opening retained  earnings   are   required.