ADMS 3595 Lecture Notes - Lecture 4: Measurement Uncertainty, Financial Instrument, Capital Asset
ADMS 3595 Solutions to Self Practice Questions
1
EXERCISE 21-2
(a) 1. Change in estimate – prospectively.
2. Change in estimate – prospectively.
3. Accounting error correction – full retrospective application.
4. Change in accounting policy – full retrospective
application.*
* GAAP specifies that changes in policy should be accounted for retrospectively with
full application to prior periods. In certain cases, it may be impracticable to determine
estimates for prior periods, in particular if it is impossible to assess circumstances and
conditions in prior years that need to be known in order to develop those estimates.
Partial retrospective or prospective application would then have to be used.
(b) Event #3:
Equipment ............................................................................ 220,000
Depreciation Expense .......................................................... 47,500 *
Accumulated Depreciation - Equipment .....................
($47,500 X 2) .......................................................... 95,000
Retained Earnings ...................................................... 120,750**
Deferred Tax Liability .................................................. 51,750***
*($220,000 – $30,000)/4 = $47,500
**($220,000 – $47,500) X (1 – 30%) = $120,750
***($220,000 – $47,500) X 30% = $51,750
Note to Instructor: The Deferred Income Tax effect for the current year is not included in
the above entry as noted in the question.
)
Event #4:
Retained Earnings ................................................................ 10,500
Income Tax Payable ($15,000 X 30%) ................................. 4,500
Inventory ..................................................................... 15,000
Changes for 2014 and 2015 have not been included since inventory changes are
counterbalancing and their impact on opening 2017 retained earnings is nil.
Note to Instructor: Also note that CRA generally requires a company to use the same
inventory costing method for tax as it uses for financial reporting purposes. Therefore, the effect
of the change in inventory costing method will result in a current tax amount, not a deferred tax
asset or liability.
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ADMS 3595 Solutions to Self Practice Questions
2
EXERCISE 21-4
(a) Patent: This is a change in estimate. The change would be applied to the current year and
prospectively.
Land and Building: This is a correction of an error. The adjustment would be applied
retrospectively. This would include restating all prior period financial statements presented
for comparative purposes, adjusting the opening balance of retained earnings for the
earliest period presented, presenting an opening statement of financial position for the
earliest comparative period reported, and reporting adjusted basic and fully diluted earnings
per share (EPS) as a result of the error correction.
(b) Amortization of Patent:
Amortization Expense................................................................ 91,000
Accumulated Amortization—Patents ................................ 91,000
Amortization recorded in 2015 and 2016:
($525,000 – $115,000) / 10 years X 2 years = $82,000
Annual amortization incorporating this change:
($525,000 – $170,000 – $82,000) / 3 years (2017 to 2019)
= $91,000
Land and Building – error correction entry:
Buildings.............................................................................. 200,000
Land .......................................................................... 200,000
Depreciation Expense* ........................................................ 7,500
Retained Earnings ............................................................... 18,750
Accumulated Depreciation –
Buildings ($7,500* X 3.5) ....................................... 26,250
*($200,000 – $50,000) / 20 years = $7,500 / year
(c) Change in Estimate (Patent): The nature and amount of the change should be disclosed.
Amortization expense for the patent has been increased by $50,000 ($91,000 – $41,000)
for the current and future years due to a change in estimated useful life and residual value.
Correction of Error (Land and Building):
The disclosure should enable users to understand the effects of the error on the financial
statements. It should include a statement of the nature of the error, the amount of the
correction for each prior period presented, the amount related to periods prior to those
presented, the amount of the correction made at the beginning of the earliest prior period
presented, and a statement that comparative information has been restated. Depreciation
expense has been increased by $7,500 for both 2017 and 2016 (include previous years if
included in comparative statements). This has decreased net income by $7,500 for both
2017 and 2016 and earnings per share by $XXX in each year.
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ADMS 3595 Solutions to Self Practice Questions
3
(d) If management determines assets’ useful lives and residual values as part of the year end
process, it is likely that the conditions leading to these changes would have occurred during
the year. In this case, the change in estimate would be applied to 2017 going forward. If
management determines that the factors leading to the change in estimate occurred at or
after year end, the changes would be applied to 2018 going forward.
In this exercise, it appears that depreciation and amortization expense is recorded once a
year. Since the controller uses the adjustment process to revise the estimate of useful life
and residual value, it would be appropriate to reflect the change to 2017 going forward.
(e) Impairments of depreciable assets frequently involve a revision of estimates of useful life
and residual value, but changes in estimates do not necessarily come from impairments of
assets.
Under IFRS, impairment tests for limited-life intangibles are done at the end of each
reporting period. The controller would need to review the patent for impairment, and if
events or changes in circumstances indicate that the carrying amount of the patent may
not be recovered, the controller would need to compare the patent’s carrying amount to its
recoverable amount (the higher of value in use and fair value less costs to sell). If the
recoverable amount is less than carrying amount of the patent, the impairment loss would
be the excess of the patent’s carrying amount over its recoverable amount.
Under ASPE, impairment tests are done when there may be evidence of impairment. The
controller would need to review the patent for impairment, and if events or changes in
circumstances indicate that the carrying amount of the patent may not be recovered, the
controller would need to compare the patent’s carrying amount to its recoverable amount
(the undiscounted future cash flows from use and ultimate disposal). If the recoverable
amount is less than the carrying amount of the patent, the patent is impaired. The
impairment loss would be the excess of the patent’s carrying amount over its fair value.
In this exercise there is no indication that the changes in estimates are due to impairment.
Consequently, the changes would be accounted for as a change in estimate.
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Document Summary
Change in estimate prospectively: change in estimate prospectively, accounting error correction full retrospective application, change in accounting policy full retrospective application. * gaap specifies that changes in policy should be accounted for retrospectively with full application to prior periods. In certain cases, it may be impracticable to determine estimates for prior periods, in particular if it is impossible to assess circumstances and conditions in prior years that need to be known in order to develop those estimates. Partial retrospective or prospective application would then have to be used. (b) event #3: Accumulated depreciation - equipment (,500 x 2) Note to instructor: the deferred income tax effect for the current year is not included in. ***(,000 ,500) x 30% = ,750 the above entry as noted in the question. Changes for 2014 and 2015 have not been included since inventory changes are counterbalancing and their impact on opening 2017 retained earnings is nil.
