Question

Leader Enterprises Ltd. follows IFRS and has provided the following information:

1.In 2016, Leader was sued in a patent infringement suit, and in 2017, Leader lost the court case. Leader must now pay a competitor $50,000 to settle the suit. No previous entries had been recorded in the books relative to this case because Leader's management felt the company would win.

2.A review of the company's provision for uncollectible accounts during 2017 resulted in a determination that 1.5% of sales is the appropriate amount of bad debt expense to be charged to operations, rather than the 2% used for the preceding two years. Bad debt expense recognized in 2016 and 2015 was $33,200 and $14,300, respectively. The company would have recorded $19,800 of bad debt expense under the old rate for 2017. No entry has yet been made in 2017 for bad debt expense.

3.Leader acquired land on January 1, 2014 at a cost of $70,000. The land was charged to the Equipment account in error and has been depreciated since then on the basis of a five-year life with no residual value, using the straight-line method. Leader has already recorded the related 2017 depreciation expense using the straight-line method.

4.During 2017, the company changed from the double-declining-balance method of depreciation for its building to the straight-line method because of a change in the pattern of benefits received. The building cost $1.4 million to build in early 2015, and no residual value is expected after its 40-year life. Total depreciation under both methods for the past three years is as follows. Double-declining-balance depreciation has been recorded for 2017.

Straight-Line Double-Declining-Balance

2015 $35,000 $70,000

2016? 35,000 ? 66,500

2017 ?35,000 63,175

5.Late in 2017, Leader determined that a piece of specialized equipment purchased in January 2014 at a cost of $75,000 with an estimated useful life of five years and residual value of $5,000 is now expected to continue in use until the end of 2021 and have a residual value of $3,000 at that time. The company has been using straight-line depreciation for this equipment, and depreciation for 2017 has already been recognized based on the original estimates.

6.The company has determined that a $350,000 note payable that it issued in 2015 has been incorrectly classified on its statement of financial position. The note is payable in annual instalments of $50,000, but the full amount of the note has been shown as a long-term liability with no portion shown in current liabilities. Interest expense relating to the note has been properly recorded.

Instructions

(a)

For each of the accounting changes, errors, or transactions, present the journal entry(ies) that Leader needs to make to correct or adjust the accounts, assuming the accounts for 2017 have not yet been closed. If no entry is required, write “none” and briefly explain why. Ignore income tax considerations.

(b)

Prepare the entries required in part (a) but, where retrospective adjustments are made, adjust the entry to include taxes at 25%.

(c)

For each of the accounting changes, identify the type of change involved and whether retrospective or prospective treatment is required.

Answer 1

1).IAS 37 deals with con­tin­gen­cies. It requires that entities should not recognise con­tin­gent li­a­bil­i­ties – but should disclose them, unless the pos­si­bil­ity of an outflow of economic resources is remote. In the given case, the company's management did not record any provision for the lawsuit because it was of the opinion that the company would win.

The entries to be passed would be -

~ Loss from Lawsuit A/c Dr. $50000

To Bank A/c. $50000

~ Statement of Profit and loss A/c. Dr. $50000

To Loss from Lawsuit A/c . $50000

2). The change requires only prospective effects.

~ Statement of P/L A/c . Dr. $14850

To Provision for Bad debt $14850

~ Provision for bad debt A/c . Dr. $14850

To Bad debt A/c $14850.  

3). The entry for recording land shall be passed and the depreciation provided earlier would now be part of company's profit.

~ Land A/c. Dr. $70000

To equipment $14000

To Statement of P/L a/c . $56000

This profit of 56000 actually belongs to 4 years from 2014 to 2017 and shall be adjusted accordingly.

4). This adjustment requires retrospective effect on assets book value. The building was subject to additional depreciation of $94675. Therefore, the adjustment entry to be passed would be -

~ Building A/c . Dr. $94675

To Excess Depreciation A/c. $ 94675

~ Excess depreciation A/c Dr. $94675

To Depreciation A/c . $ 28175

To Statement of P/L. $ 66500