Question

You are the auditor of Maglite Services Inc ., a privately owned full-service
cleaning company following ASPE that is undergoing its first audit for the period
ending September 30, 2017 . The bank has requested that Maglite have its
statements audited this year to satisfy a condition of its debt covenant . It is
currently October 21 , 2017 , and the company's books have been closed . As part of the audit , you have found the following situations :

1 . Despite having high receivables , Maglite has no allowance for doubtful
accounts , and cash collections have slowed dramatically . Unfortunately .
Maglite is owed $5,000 by Brad's Fast Foods at the end of fiscal 2017 . Brad's
has received substantial media attention during the past year due to Department
of Health investigations that ultimately resulted in the closure of the company's
operations ; the owner has apparently moved to the Bahamas . No adjustment*
has been made for this balance . Maglite's management estimates that an
allowance for doubtful accounts of $47, 000 is required . During the 2017 fiscal
year, the company wrote off $38, 000 in receivables , and it estimates that its
September 30, 2016 allowance for doubtful accounts should have been
$30,000 .
2 . Maglite's only capital asset on its books is an advanced cleaning system that
has a cost of $35, 000 and a carrying amount of $ 20. 825. Maglite has been
depreciating this asset using the capital cost allowance used for tax purposes
for the two years prior to its year ended September 30 , 2017 , at the rate of
30%/} . Useful life at the time of purchase was estimated to be 10 years . Maglite
would like to change to a straight - line approach to provide more relevant
information to its statement users . Management anticipates that the asset will
continue to be of use for four years after the September 30 , 2017 year end and
will have no residual value . Because the company's accountant was uncertain
about how to deal with the change in policy , depreciation expense has not been
recorded for the fiscal veal .

3. Maglite purchased a computer at the beginning of the fiscal year and
immediately expensed its $3, 000 cost . Upon questioning , one of the owners
said he thought the computer would likely not need to be replaced for at least
two more years .
4. You notice that there are no supplies on the statement of financial position .
Company management explains that it expenses all supplies when purchased .
The company had $ 1, Son of cleaning supplies on hand at the end of September
2017 , which is about $500 higher than the balance that was on hand at the end
of the previous year .

5 . This year , Maglite started to keep a small amount of excess cash in trading
investments that are bought and sold on the local stock exchange . At the end of
September 2017, the fair value of this portfolio was $15,000 and the carrying
value of the investments was $ 12, 000' ( which represented the cost of the
investments ) .

Instructions

( a ) Assuming that the company's books are closed , prepare any journal entries
that are required for each of the transactions . Ignore income tax
considerations .

( b ) For each of the items , discuss the type of change that is involved and how
it is accounted for on the current and comparative financial statements .

( c ) If Maglite elected to follow IFRS , discuss how this might change your
answers to part (a) .

(d) Repeat part A assuming that the books are open.

Answer 1

(a) and (b)

(1)

          Retained Earnings.......................................................................     52,000

          Allowance for Doubtful Accounts.............................................                       47,000

          Accounts Receivable..................................................................                        5,000

This is a correction of an error. The company must apply retrospective application in order to correct the presentation of receivables and bad debt expense in its comparative financial statements for 2016 and 2017.

(2)

The company is changing from a non-GAAP method to a GAAP method, and this should be treated as a correction of an error (a retrospective change). The following solution takes the view that this is an accounting error that is applied to the 2015 and 2016 years. As of October 1, 2017, the company should account for the change in useful life as a change in estimate--prospectively.

          Accounts needing correction as of October 1, 2017:

Accumulated Depreciation and Retained Earnings, representing the difference in depreciation expense between CCA and the straight-line method:

          Depreciation taken (CCA): $35,000 – $20,825 = ......................   $14,175

          Depreciation (straight-line): $35,000 ÷ 10 X 2 =........................    $ 7,000

          ....................................................................................................    $ 7,175

The 2017 accounts have to be adjusted through Retained Earnings because the books for fiscal 2017 have also been closed.

          Accounts needing correction as of September 30, 2017:

Accumulated Depreciation and Retained Earnings, representing the Depreciation Expense (straight-line method) for the year ending September 30, 2017 using a remaining (and revised) useful life of 5 years:

          Net carrying amount of asset, October 1, 2017 now = $35,000 - $7,000 = $28,000

          Revised depreciation rate = $28,000 ÷ 5 years = $5,600/year

          Entry needed to adjust years ended September 30, 2015, 2016 and 2017:

          Accumulated Depreciation– Equipment.......................................... 1,575

          Retained Earnings......................................................................................          1,575

          $7,175 - $5,600 = $1,575

(3)

          Office Equipment...........................................................................  3,000

          Retained Earnings......................................................................................        3,000

          Retained Earnings............................................................................. 1,000

          Accumulated Depreciation—Equipment...............................                            1,000

          ($3,000 / 3)

This is a correction of an error. Since the error affects only 2017, no retrospective application is necessary.

(4)

          Supplies.......................................................................................       1,500

          Retained Earnings.......................................................................                       1,500

This is a correction of an error. Retrospective application is required for the 2016 balance in supplies. Since this is a counter-balancing error, no journal entry is required, but the opening balance in supplies of $1,000 will need to be adjusted on the comparative financial statements.

(5)

          FV-NI Investments ....................................................................      3,000

          Unrealized Gain or Loss.............................................................                        3,000

          This is the initial choice of an accounting policy for a new type of transaction. It is not an accounting change.

(c)        As a privately held entity, Maglite may choose to follow either ASPE or IFRS. Under IFRS, Maglite would have to account for the trading securities at FV-NI – the option to account for them at FV-OCI is not available for trading investments. Under ASPE, the trading investment must be accounted for using the fair value through net income (FV-NI) model. Therefore, there would be no difference in the answers under IFRS and ASPE.

(d)

(1)

          Retained Earnings*.....................................................................     30,000

          Bad Debt Expense......................................................................     22,000

          Allowance for Doubtful Accounts.............................................                       47,000

          Accounts Receivable..................................................................                        5,000

          *Beginning balance in the allowance for doubtful accounts.

(2)

          If two entries are made:

          Accumulated Depreciation - Equipment* .................................       7,175

          Retained earnings.......................................................................                         7,175

          *($35,000 – $20,825) – 2 X ($35,000/10)

          Depreciation Expense** ............................................................       5,600

          Accumulated Depreciation - Equipment....................................                         5,600

**($35,000 – $7,000) / 5

(3)

          Office Equipment.......................................................................     3,000

          Office Expense...........................................................................                       3,000

          Depreciation Expense.................................................................       1,000

          Accumulated Depreciation—Equipment....................................                       1,000

          ($3,000 / 3)

(4)

          Supplies.......................................................................................       1,500

          Supplies Expense........................................................................                            500

          Retained Earnings.......................................................................                       1,000

(5)

          FV-NI Investments.....................................................................      3,000

Unrealized Gain or Loss ……………………………………..                      3,000