QUESTION 3 (10 Marks)

The Assistant Manager of Ridley Corporation is seeking your advice as the accountant, in dealing with the accounting changes in the company for the year 2020. Prepare a report, indicating the appropriate accounting treatment for the following situations. In your report, indicate the type of accounting change (change in accounting policy or change in estimate) or correction of error and the appropriate accounting treatment (retrospective or prospective).

1. It was found in May 2020 that warranty claims for 2019 sales have increased because of a defective component used in manufacturing. The extra costs amounted to $200,000 in excess of the 2019 warranty accrual. (2 marks)

2. In 2020, the company examined its entire policy relating to the depreciation of plant equipment. Plant equipment had normally been depreciated over a 15-year period, but recent experience has indicated that the company was using too short a period in its estimates and that the assets should be depreciated over a 20-year period. (2 marks)

3. For the companys defined benefit pension plan, the actuarys report revealed that employees will live until 85 years of age, three years longer than previously expected. (2 marks)

4. In 2020, the company decided to change its method of inventory pricing from average- cost to the FIFO method. The effect of this change on prior years is to increase 2018 income by $65,000 and increase 2019 income by $20,000. (2 marks)

5. One division of Ridley Corp., has consistently shown an increasing net income from period to period. On closer examination of its operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventory. (2 marks)