Question

Queenson Corp. is a public company. In preparing its financial statements for the year ended August 31, 20X4, it has been reviewing its accounting policies and is considering making the following changes:

• On September 1, 20X1, Queenson acquired equipment costing $500,000. At that time, the equipment was expected to last 10 years and was depreciated on a straight-line basis using a residual value of $40,000. However, in 20X4, the engineers reassessed the equipment and concluded that it would only last another five years, starting at the beginning of the 20X4 fiscal year. The residual value is expected to be only $5,000 at this time. The original amount of annual depreciation has already been recognized in 20X4.

• Queenson is considering changing its costing method of inventory from FIFO to weighted average, as weighted average is the normal practice in the industry. The following information has been gathered:   

20X3 20X4

Ending inventory:

FIFO $860,000 940,000

Weighted average 750,000 910,000

Queenson has a bonus program for its employees and would like to show the highest net profit before taxes as possible in 20X4. Currently, the before-tax earnings before any adjustments related to the above are $120,000. The company’s income tax rate is 25%. Income taxes for 20X4 have not yet been recognized.

Required:

a) Identify the type of change and the accounting treatment required being considered for the equipment. Prepare the journal entries required if Queenson was to change its method of calculating the depreciation on the equipment. (1.5 marks)

b) Identify the type of change and the accounting treatment required being considered for the inventory. If Queenson were to make this potential change, what are the journal entries required? (3.5 marks)

c) Make a recommendation as to whether Queenson should adopt each of these changes. Recalculate the profit before taxes if both adjustments are made and consider the impact in making your recommendation.

Answer 1

Solution: