Moncton Developments Limited was established in early 20X2. During the first three years, the company followed the policy of expensing its development costs rather than capitalizing and amortizing them. The company followed this policy because in the early stages of the company€™s life, there was no reasonable assurance that the development costs would meet the criteria for capitalization. However, the company€™s development activities turned out to be very successful. Therefore, the company decided in 20X4 to change its method of accounting for product development expenses from expensing such items to capitalizing them and amortizing them over the period of expected benefit. To prepare for the change, the following data were gathered:

Moncton Developments has 50,000 common shares outstanding. The balance of retained earnings was $ 690,000 at 31 December 20X3. During 20X4, the company declared dividends of $ 50,000.

Required:
1. Determine the numerical impact of the policy change on net income and EPS for 20X2 and 20X3.
2. Prepare the retained earnings column (or section) of the 20X4 statement of changes in equity, giving appropriate treatment to the change in accounting policy.
3. Prepare an appropriate disclosurenote.

Transcribed Image Text:

20X4 20X3 20X2 $200,000 $150,000 $250,000 Depreciation and amortization, prior to change 70,000 70,000 60,000 120,000 110,000 90,000 840,000 770,000 300,000 Product development costs Restated amortization, after policy change Net income before income tax, old policy Net income after income tax at 30%). old policy 588,000539,000 210,000 $11.76 10.78 4.20 Earnings per share