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.