Leader Enterprises Ltd. follows IFRS and reported income before income tax of $176,000, $180,000, and $198,000 in

Question:

Leader Enterprises Ltd. follows IFRS and reported income before income tax of $176,000, $180,000, and $198,000 in each of the years 2012, 2013, and 2014, respectively. The following information is also available.
1. In 2014, Leader lost a court case in which it was the defendant. The case was a patent infringement suit, and Leader must now pay a competitor $25,000 to settle the suit. No previous entries had been recorded in the books relative to this case as Leader's management felt the company would win.
2. A review of the company's provision for uncollectible accounts during 2014 resulted in a determination that 1% of sales is the appropriate amount of bad debt expense to be charged to operations, rather than the 1.5% used for the preceding two years. Bad debt expense recognized in 2013 and 2012 was $25,000 and $17,500, respectively. The company would have recorded $22,500 of bad debt expense under the old rate for 2014. No entry has yet been made in 2014 for bad debt expense.
3. Leader acquired land on January 1, 2011, at a cost of $40,000. The land was charged to the equipment account in error and has been depreciated to December 31, 2014, on the basis of a five-year life with no residual value.
4. During 2014, 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 $1,280,000 to build in early 2012, 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 used in 2014.
Straight-Line.....Double-Declining-Balance
2012 ......................... $32,000 ................. $64,000
2013 ......................... 32,000 ................. 60,800
2014 ......................... 32,000 ................. 57,760
5. Late in 2014, Leader determined that a piece of specialized equipment purchased in January 2011 at a cost of $54,000 with an estimated life of five years and residual value of $4,000 is now expected to continue in use until the end of 2018 and have a residual value of $2,000 at that time. The company has been using straight-line depreciation for this equipment, and depreciation for 2014 has already been recognized based on the original estimates.
6. The company has determined that a $225,000 note payable that it issued in 2012 has been incorrectly classified on its statement of financial position. The note is payable in annual instalments of $25,000, 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 2014 have not yet been closed. If no entry is required, write "none" and briefly explain why. Ignore income tax considerations.
(b) Prepare any entries required in (a) where retrospective adjustments are made, taking into account income taxes at 25%.
(c) For each of the accounting changes, identify the type of change involved and whether retrospective or prospective treatment is required.
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Intermediate Accounting

ISBN: 978-1118300855

10th Canadian Edition Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy

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