Exam 9: Accounting Changes and Error Analysis

Provide and explain four reasons why companies may prefer/choose certain accounting methods and procedures over others.

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -At December 31, 2020, Grant Corp.'s auditor discovered the following errors: 1) Accrued salaries payable of $ 11,000 were NOT recorded at December 31, 2019. 2) Office supplies on hand of $ 5,000 at December 31, 2020 had been treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause

Recognition of accounting changes or corrections For each of the following items, indicate the type of accounting change and how each is recognized in the accounting records in the current year. 1. Change from straight-line method of depreciation to double declining balance method 2. Change from the cash basis to the accrual basis of accounting 3. Change from FIFO to weighted average cost method for inventory valuation purposes 4. Change due to failure to record depreciation in a previous period 5. Change in the net realizable value of certain receivables

Conditions for a change in accounting policy under IFRS and ASPE What conditions are allowed for a change in accounting policy to be acceptable? 1. The change is required by a primary source of GAAP. 2. A voluntary change results in the information in the financial statements being as reliable and more relevant. However, some voluntary changes are allowed under ASPE without having to meet the "reliable and more relevant" criterion. These include accounting and reporting: (a) for investments in subsidiary companies, and in companies where the investor has significant influence or joint control; (b) for expenditures during the development phase on internally generated intangible assets; (c) for defined benefit plans; (d) for accounting for income taxes; and (e) for measuring the equity component of a compound financial instrument Matching accounting changes to situations The three types of accounting changes are: Code a) Change in accounting policy b) Change in accounting estimate c) Error correction Instructions Following are a series of situations. You are to enter a code letter to the left to indicate the type of change. 1. Change due to debiting a new asset to an expense account. 2. Change from FIFO to weighted average costing. 3. Change due to failure to recognize unearned portion of revenue. 4. Change in amortization period for an intangible asset. 5 Change in the calculation of warranty liabilities. 6. Change due to failure to recognize and accrue income. 7. Change in residual value of a depreciable plant asset. 8. Change from an unacceptable accounting policy to an acceptable accounting policy. 9. Adoption of a new accounting standard. 10. Change due to expensing prepaid assets. 11. Change from straight-line to double declining-balance method of depreciation. 12. Change in estimated service life of a depreciable plant asset. 13. Change from one acceptable policy to another acceptable policy. 14. Change due to understatement of inventory. 15. Change in estimated net realizable value of accounts receivable.

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -What is the total net effect of the errors on Cheyenne's 2020 net income?