Question

Identify the applicable accounting convention for the following business scenario and explain your choice

Regal Enterprises has purchased $45,000 worth new equipment for use in its manufacturing operations and would like to write off the cost of this equipment in just a couple of years, instead of the usual 10 years for this equipment type. The company's president fears that the economic conditions in its industry will worsen and cause the company to sell the equipment sooner than expected

Answer 1

According to the Accounting Conventions related to the change in accounting policy, a company can opt a new accounting policy in place of the existing one when the new accounting policy

Also materiality and going concern assumption are to be considered. The question that arises here is - what is material fact? The material fact depends on its nature and amount involved.

• gives more reliable financial information to the stakeholders,
• is required by the statute.

In the present scenario,let us assume that the amount of $45000 is material to the Regal enterprises. Also the company expects to sell the equipment earlier than expected. If the company is of the view that writing off the cost of the equipment for less than the period of its usual life (10 years) would lead to the better presentation and reliability of the financial statements, then the company should change the accounting policy and write off the remaining cost of the asset following the provisions of the new accounting policy. Also the fact of change in accounting policy should be disclosed in financial statements.

However, if the amount of $45000 is immaterial to the company, then it can write off the remaining cost of the equipment as the company may find it needful.