Question 9.1 (Total: 14 marks)

Easter Corp. bought a machine on January 3, 2018 for $275,000. It had a $15,000 estimated residual value and a ten-year life. The corporation uses straight-line depreciation. An expense account was debited in error on the purchase date, but this was not discovered until late 2020.

Required

Prepare the correcting entry or entries related to the machine for 2020. Ignore income tax effects.

Question 9.2 (Total: 20 marks)

For each of the following scenarios, choose the option from the following list which best describes the treatment of the item on the financial statements of Turkey Inc. for the current year ending December 31, 2020:

a) Change in accounting policy requiring retrospective application

b) Change in estimate

c) Correction of error

d) None of the above

Required

1. In 2020, the company changed its method of recognizing income from the completed-contract method to the percentage-of-completion method.
2. At the end of 2020, an audit revealed that the corporation's allowance for doubtful accounts was too large and should be reduced to 2%. When the audit was performed in 2019, the allowance seemed appropriate.
3. Depreciation on a truck, acquired in 2016, was understated because the service life had been overestimated. The understatement had been made in order to show higher net income in 2017 and 2018.
4. The company switched from average cost to FIFO inventory costing during the current year.
5. In 2020, Turkey introduced a new pension plan for its employees, which included past service costs of $ 50,000. It decided to recognize the $ 50,000 as part of its 2020 pension expense.
6. During 2020, a long-term bond with a carrying value of $3,600,000 was retired at a cost of $4,100,000.
7. After negotiations with Canada Revenue Agency, income taxes owing for 2019 were established at $42,900. They were originally estimated to be $ 28,600.
8. In 2020, the company incurred interest expense of $29,000 on a 20-year bond issue.
9. In calculating the depreciation in 2018 for buildings, an error was made which overstated income in that year by $75,000. The error was discovered in 2020.
10. In 2020, the company changed its method of depreciating plant assets from the double declining-balance method to the straight-line method.

Question 9.3 (Total: 30 marks)

Show how the following independent errors will affect net income on the income statement and the shareholders' equity section of the statement of financial position (SFP) using the symbol + (plus) for overstated, - (minus) for understated, and 0 (zero) for no effect.

		2019	2020
	Scenario	Income Statement	Balance Sheet (SFP)	Income Statement	Balance Sheet (SFP)
	Ending 2019 inventory overstated (Sample)	+	+	-	0
1	Failure to accrue 2019 interest revenue
2	A capital expenditure for factory equipment (useful life, 5 years) was charged to expense in error in 2019
3	Failure to accrue 2019 wages
4	Ending inventory in 2019 understated
5	Overstated 2019 depreciation expense; 2020 expense correct

Question 9.4 (Total: 36 marks)

Halloween Corp. reported net incomes for the last three years as follows:

2020 2019 2018

$ 240,000 $ 225,000 $ 180,000

During the 2020 year-end audit, the following items come to your attention:

1. Halloween bought a truck on January 1, 2017 for $98,000 cash, with an $8,000 estimated residual value and a six-year life. The company debited an expense account for the entire cost of the asset. Halloween uses straight-line depreciation for all trucks.

2. During 2020, Halloween changed from straight-line depreciation for its cement plant to double declining balance. The following calculations present depreciation on both bases:

2020 2019 2018

Straight-line $ 18,000 $ 18,000 $ 18,000

Double declining balance 23,100 30,000 36,000

The net income for 2020 was calculated using the double declining balance method.

3. In reviewing its provision for uncollectible accounts during 2020, the corporation has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2019 and 2018 when the expense had been $ 9,000 and $6,000, respectively. Halloween recorded bad debt expense using the new rate for 2020. If they had used the old rate, they would have recorded $ 3,000 less bad debt expense on December 31, 2020.

Required

1. Prepare the general journal entry required to correct the books for the item 1 situation (only) of this problem, assuming that the books have not been closed for 2020.
2. Present comparative income statement data for the years 2018 to 2020, starting with income before the cumulative effect of any accounting changes.
3. Assume that the beginning retained earnings balance (unadjusted) for 2018 was $630,000. At what adjusted amount should the beginning retained earnings balance for 2018 be shown, assuming that comparative financial statements were prepared?
4. Assume that the beginning retained earnings balance (unadjusted) for 2020 is $900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be shown?