QUESTION 3:

The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on

30 June 2023.

Scenario 1 Rabbit Ltd has, in the past, always depreciated its factory buildings over 25 years.

As a result of new information obtained by the company during the current year a decision was

made to reduce the expected useful life of the buildings to 18 years.

Scenario 2 During the preparation of the financial statements it was discovered that a flood

occurred in the previous financial year that destroyed some raw materials which were stored

off-site and that were expected to have a long useful life. The materials were uninsured. No

expense was recorded in the previous year in relation to the flood damage. The material was

valued at $75 000 and the expense is considered to be material and will be permitted as a

deduction for tax purposes. The tax rate is 30 per cent.

REQUIRED

Identify which of the two scenarios outlined above is a change in accounting estimate and

which is a prior period error. Also provide any necessary journal entries.