Case Study Accounting Policy, Changes in Accounting Estimate, and Errors [PDF]

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International accounting 2 – IAS 8 Accounting policy, Changes in accounting estimates and errors Case study 1 At the beginning of 2012, Tiger Company decided to change from the average cost inventory cost flow assumption to the FIFO cost flow assumption for financial reporting purposes. The following data are available in regard to Tiger Company’s pretax operating income and cost of goods sold. Profit before Difference Between Average Adjusted Income taxes Cost of Goods Sold and FIFO Before Income Cost of Goods Sold Taxes Prior to 2011 $2,000,000 150,000 $2,150,000 2011 1,000,000 50,000 1,050,000 2012 1,100,000 The income tax rate is 30%. The company has a simple capital structure with 100,000 shares of common stock outstanding. The company computed its 2012 income before taxes using the newly adopted inventory cost flow method. Tiger Company’s 2011 and 2012 revenues were $2,500,000 and 2,800,000, respectively. Its retained earnings balances at the beginning of 2011 and 2012 (unadjusted) were $1,400,000 and $2,100,000, respectively. The company paid no dividends in any year. Required Prepare (a) the journal entry necessary at the beginning of 2012 to reflect the change in accounting change and (b) the income statements and retained earnings statements for 2011 and 2012. Case study 2 For each of the following errors, indicate the effect (over, under, or no effect) on the current year’s and next year’s net income. Profit Description of Error 2011 2012 (a) 12/31/11 inventory overstated (b) 12/31/11 inventory understated (c) Prepaid insurance 12/31/12 overstated (d) Depreciation expense (straight-line) for 2011 understated (e) Understatement of 12/31/11 unearned revenue (f) Failure to accrue 12/31/11 revenue (g) Understatement of 12/31/11 prepaid expense Case study 3 During 2010, Company A changed its accounting policy for training costs in order to comply with IAS 38. Previously, Company A had capitalised certain training costs. Under IAS 38, it cannot capitalise trainning costs. During 2009, Company A had capitalised training costs of $6000. In periods before 2009, it had capitalised training costs of $12 000. In 2010, it incurred training costs of $4 500. Company A’s statement of comprehensive income for 2010 reported profit of $56 000 after income taxes of $24 000. The training costs of $4 500 were expensed in 2010. Company A’s retained earnings were $600 000 at the beginning of 2009 and $649 000 at the end of 2009. It had $100 000 in share capital throughout 2009 and 2010, representing 100 000 ordinary shares, and there were no other reserves. Company’s A income tax rate was 30% for both periods. Its reporting periods ends on 30 June. Required: Prepare accounting entry for the accounting change and comparative accounting performance and changes in equity. Case study 4 The Al Right Company made the following errors that were discovered by the auditors in connection with preparation of the December 31, 2012, income statement. It reported net income of 1|Page

International accounting 2 – IAS 8 Accounting policy, Changes in accounting estimates and errors $70,000 for 2011 and $100,000 for 2012. Ignore income taxes. Complete the schedule below to show the computation of the correct income for 2011 and 2012: 2012 2011 Net income as reported $100,000 $70,000 (1) On January 1, 2011, the company recorded the $30,000 acquisition cost of equipment with a ten-year life as maintenance expense. Straight-line depreciation is usually used and no residual value is expected at the end of the useful life. (2) On January 1, 2011, Al Right Company collected $10,000 for two years’ rental income in advance and failed to set up an unearned revenue account at year-end. It credited all the rent to Rent Revenue when received. (3) A three-year insurance policy costing $12,000 was charged to expense when paid in advance on January 1, 2011. (4) Ending inventory was overstated by $7,000 on December 31, 2011, and understated by $3,000 on December 31, 2012, due to computational errors. (5) Accrued wages expense was omitted in the amount of $7,000 on December 31, 2011, and $8,000 on December 31, 2012. Net income as corrected Case study 5 During 20X7 Lubi Co discovered that certain items had been included in inventory at 31 December 20X6, valued at $4.2m, which had in fact been sold before the year end. The following figures for 20X6 (as reported) and 20X7 (draft) are available. 20X6 20X7 (draft) $'000 $'000 Sales 47,400 67,200 Cost of goods sold (34,570) (55,800) Profit before taxation 12,830 11,400 Income taxes (3,880) (3,400) Net profit 8,950 8,000 Reserves at 1 January 20X6 were $13m. The cost of goods sold for 20X7 includes the $4.2m error in opening inventory. The income tax rate was 30% for 20X6 and 20X7. Required Show the statement of profit or loss and other comprehensive income for 20X7, with the 20X6 comparative, and retained earnings.

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