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Analyze each case and choose a letter code under each category (type and approach) to indicate the preferable accounting for each case.
Type | Approach |
P = Policy | RWR = Retrospective with restatement |
E = Estimate | RNR = Retrospective with no restatement |
AE = Accounting error | P = Prospective |
Used the instalment sales method in the past five years; an internal audit revealed that use of this method was intended to delay revenue recognition, even though the customers were highly creditworthy.
Incorrectly applied a 20% declining balance rate to equipment acquired three years previously when management had instructed that a 15% rate be used.
Changed the method of estimating bad debts accrued from a percentage-of-sales to an aging methodology.
Changed inventory cost method to exclude warehousing costs, as required by IFRS.
Discovered that a contract with a supplier had become an onerous contract in the previous year but the company had not recognized any associated loss.
Recognized an impairment of $1.5 million in a capital asset group. An impairment of $1 million became apparent two years previously but had not been recorded until this year.
Began capitalizing development costs because criteria for deferral were met this year for the first time; in the past, future markets had been too uncertain to justify capitalization.
Changed the depreciation method for delivery vehicles from straight-line to declining-balance.
Changed from straight-line to accelerated depreciation to reflect the company’s changing technological environment.
Switched from FIFO to average cost for inventory to conform to parent company preferences. Opening balances for the current and previous two years can be reconstructed.
Question 2
Change in Estimated Useful Life:
Stacey Corp. has been depreciating equipment over a 10-year life on a straight-line basis. The equipment, which cost $24,000, was purchased on 1 January 20X1. It has an estimated residual value of $6,000. On the basis of experience since acquisition, management has decided in 20X5 to depreciate it over a total life of 14 years instead of 10 years, with no change in the estimated residual value. The change is to be effective on 1 January 20X5. The 20X5 financial statements are prepared on a comparative basis; 20X4 and 20X5 incomes before depreciation were $49,800 and $52,800, respectively. Disregard income tax considerations.
Required:
Identify the type of accounting change involved, and analyze the effects of the change. Which approach should be used—prospective without restatement, retrospective with partial restatement, or retrospective with full restatement? Explain.
Prepare the entry, or entries, to appropriately reflect the change (if any) and 20X5 depreciation in the accounts for 20X5, the year of the change.
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Analyze each case and choose a letter code under each category (type and approach) to indicate the preferable accounting for each case.
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