FA15 Problem: Accounting Policy Changes, Errors & Estimates – General

FA15 Problem: Accounting Policy Changes, Errors & Estimates – General

For each of the following items outline the impact of the change on the financial statements. Inaddition calculate the impact on the current year’s financial statements. Ignore the impact of taxes on all calculations.1.

Change in depreciation method:



was straight-line, $ 600,000



 proposed change to declining balance, $ 800,000 for the current year 2.

Leasehold improvements:



leasehold improvements of $ 650,000 made three years ago, useful life estimated at10 years, depreciation has been recognized for each of the past three years; nodepreciation has been recognized in the current year 



the leasehold improvements are now obsolete, and major renovations re planned for early next month. Useful life should have been four years, and not ten3.

Inventory error:



error in determination of the closing inventory, in the year end of two years ago,discovered last week 



inventory as reported approximately $ 40,000 understated4.

Inventory:



 proposed change is from FIFO to LIFO inventory valuation



LIFO closing inventory value about $ 700,000 lower than FIFO for the current year 



LIFO opening inventory about $900,000 lower than FIFO for the current year 



other Canadian companies generally use FIFO5.

Doubtful accounts:



existing policy is to age receivables and estimate uncollectible portion based on pastexperience



 proposed change is direct write-off as soon as they are deemed uncollectible



tighter credit policy to be instituted immediately



vice-president, administration, expects improved collection