QUESTION 3 (10 Marks)

DBT Inc. is currently undergoing the annual year-end audit of its financial statements for the year ended December 31, 2021. Its books are still open for the fiscal year, but are closed for all previous accounting periods. The auditors found the following independent situations.

a) On January 1, 2020, DBT purchased a piece of manufacturing equipment for $230,000. The equipment was estimated to have a 5-year useful life. When the equipment was purchased, DBTs accounting clerk debited maintenance expense. This was not discovered until the auditors noticed it while auditing the 2021 fiscal year end. Straight-line depreciation has not been recorded on this asset since it was purchased. The equipment is a Class 8 asset (20% CCA rate). No deferred taxes were recorded since it was purchased. Assume current taxes were recorded and paid correctly. DBT is subject to a 30% tax rate.

REQUIRED:

i. Identify the accounting change (policy, estimate, or error) and how should it be treated? (1 Mark)

ii. Showing your calculations, prepare the journal entry/entries necessary to implement the change or correction required. (4 Marks)

b) On January 1, 2017, DBT purchased a different piece of manufacturing equipment for $140,000, with an expected useful life of 10 years and anticipated salvage value of $40,000. On January 1, 2021, the useful life of the equipment was believed to be 12 years in total. However, since the equipment will be older when finally sold, it will only be sold for $25,000 at the new end of its useful life. Straight-line depreciation expense has not yet been recorded for 2021. Ignore income taxes for this situation.

REQUIRED:

i. Identify the accounting change (policy, estimate, or error) and how should it be treated? (1 Mark)

ii. Showing your calculations, prepare the journal entry/entries necessary to implement the change or correction required. (4 Marks)