(a) Lara Croft has been hired as a new auditor for Jolie Inc. Ms. Croft has suggested the following accounting changes in regards to the company’s financial statements. 1. At December 31, 2019, Jolie Inc. had a receivable of $500,000 from Relic Inc. on its statement of financial position. Relic had gone bankrupt, and no recovery is expected. Jolie proposes to write off the receivable as a prior period item. 2. The client proposes the following changes in depreciation policies. (a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2019, would have been $250,000 less. The effect of the change on 2020 income alone is a reduction of $60,000. (b) For its equipment in the leasing division, the client proposes to adopt the sum-of-theyears’-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2020. If straight-line depreciation were used, 2020 income would be $110,000 greater. 3. In preparing its 2019 statements, one of the client’s bookkeepers overstated ending inventory by $178,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment. 4. In the past, the client has spread pre-production costs in its furniture division over 5years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize pre-production costs on a per- unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2020, retained earnings at December 31, 2019, would have been $215,000 less. 5. For the nursery division, the client proposes to switch from FIFO to average-cost inventories because it believes that average-cost will provide a better matching of current costs with revenues. The effect of making this change on 2020 earnings will be an increase of $320,000. The client says that the effect of the change on December 31, 2019, retained earnings cannot be determined. 6. To achieve a better matching of revenues and expenses in its building construction division, the client proposes to switch from the cost-recovery method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2019, would have been $950,000 greater. Instructions (i) For each of the changes described above, decide whether: The change involves an accounting policy, accounting estimate, or correction of an error.
(a) Lara Croft has been hired as a new auditor for Jolie Inc. Ms. Croft has suggested the
following accounting changes in regards to the company’s financial statements.
1. At December 31, 2019, Jolie Inc. had a receivable of $500,000 from Relic Inc. on its
2. The client proposes the following changes in
(b) For its equipment in the leasing division, the client proposes to adopt the sum-of-theyears’-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2020. If straight-line depreciation were used, 2020 income would be $110,000 greater.
3. In preparing its 2019 statements, one of the client’s bookkeepers overstated ending inventory by $178,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment.
4. In the past, the client has spread pre-production costs in its furniture division over 5years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize pre-production costs on a per- unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If
the new accounting method had been used prior to 2020, retained earnings at December 31, 2019, would have been $215,000 less.
5. For the nursery division, the client proposes to switch from FIFO to average-cost inventories because it believes that average-cost will provide a better matching of current costs with revenues. The effect of making this change on 2020 earnings will be an increase of $320,000. The client says that the effect of the change on December 31, 2019, retained earnings cannot be determined.
6. To achieve a better matching of revenues and expenses in its building construction division, the client proposes to switch from the cost-recovery method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2019, would have been $950,000 greater.
Instructions
(i) For each of the changes described above, decide whether:
The change involves an accounting policy, accounting estimate, or correction of an error.
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