QUESTION 1:

If an expense is inadvertently omitted in a year prior to the years presented in the current year financial statements, the correction is debited to opening retained earnings in the earliest period presented. An alternative sometimes proposed is that the error should be recognised in profit or loss in the period it is discovered. What are the reasons for proposing the error be presented through profit or loss in the period it is discovered?

QUESTION 2:

(A) Consider the following two independent scenarios:

Scenario 1: Fishtail Ltd has always measured its manufacturing equipment using the cost basis. In the current year, it decides the revaluation method will provide more relevant and reliable information to investors.

Scenario 2: Fishtail Ltd has always depreciated its motor vehicle fleet using the straight-line method. In the current year, Fishtail decides that the diminishing value method will better reflect the consumption of the assets going forward.

REQUIRED

Which of the above scenarios is a change in accounting policy, and which is a change in accounting estimate? Describe the accounting for each scenario naming the affected accounts.

(B) Consider the following two independent scenarios:

Scenario 1: Rabbit Ltd has always calculated its warranty provision as 2% of sales. In the current year, Rabbit decides the provision should be 3% of sales.

Scenario 2: During the preparation of the financial statements, Rabbit Ltd learns a flood in the previous financial year destroyed raw materials (inventory) that had been stored off-site. The materials were uninsured. There was no expense recorded in the previous year in relation to the flood damage. The raw material was valued at $75 000 which is a material amount for the company. The loss is deductible and the tax rate is 30 per cent.

REQUIRED

Which of the above scenarios is a prior period error, and which is a change in accounting estimate? Describe the accounting for each scenario naming the affected accounts. Provide the current year journal entry for the second scenario.

QUESTION 3:

Maritime Ltd is in the process of closing its books for the year-end. What is the impact for each of the following adjustments in each of the following:

Statement of Financial Performance

Statement of Financial Position

Cash Flow Statement

Scenario 1: Maritime Ltd purchased a new range of boat steering parts from an overseas manufacturer. The company has estimated that warranty costs will be 4% of total sales. Total sales for the current income year is $640,000.

Scenario 2: The auditors estimate the provision for long service leave should be $112,000 instead of the current provision of $150,000.

Scenario 3: Maritime Ltd decides the effective life of equipment purchased in the current year is 8 years and not the 6 years originally estimated. The difference in the depreciation expense each year is $47 000.

Scenario 4: The allowance for doubtful debts has been calculated as a percentage of total sales, being 2% of $1,000,000. However, it is decided that it would be more appropriate to calculate the allowance as a percentage of credit sales (i.e. 3% of $750,000).