Case Study Accounting Policy, Changes in Accounting Estimate, and Errors

International accounting 2 – IAS 8 Accounting policy, Changes in accounting estimates and errors
Case study 1 At the beginning of 2012, Tiger Company decided to change from the average cost
inventory cost flow assumption to the FIFO cost flow assumption for financial reporting purposes.
The following data are available in regard to Tiger Company’s pretax operating income and cost of
goods sold.
Profit before Difference Between Average Adjusted Income
taxes Cost of Goods Sold and FIFO Before Income
Cost of Goods Sold Taxes
Prior to 2011 $2,000,000 150,000 $2,150,000
2011 1,000,000 50,000 1,050,000
2012 1,100,000
The income tax rate is 30%.
The company has a simple capital structure with 100,000 shares of common stock outstanding. The
company computed its 2012 income before taxes using the newly adopted inventory cost flow
method. Tiger Company’s 2011 and 2012 revenues were $2,500,000 and 2,800,000, respectively. Its
retained earnings balances at the beginning of 2011 and 2012 (unadjusted) were $1,400,000 and
$2,100,000, respectively. The company paid no dividends in any year.
Required Prepare (a) the journal entry necessary at the beginning of 2012 to reflect the change in
accounting change and (b) the income statements and retained earnings statements for 2011 and 2012.
Case study 2 For each of the following errors, indicate the effect (over, under, or no effect) on the
current year’s and next year’s net income.
Profit
Description of Error
2011 2012
(a) 12/31/11 inventory overstated
(b) 12/31/11 inventory understated
(c) Prepaid insurance 12/31/12 overstated
(d) Depreciation expense (straight-line) for 2011
understated
(e) Understatement of 12/31/11 unearned revenue
(f) Failure to accrue 12/31/11 revenue
(g) Understatement of 12/31/11 prepaid expense
Case study 3 During 2010, Company A changed its accounting policy for training costs in order to
comply with IAS 38. Previously, Company A had capitalised certain training costs. Under IAS 38, it
cannot capitalise trainning costs.
During 2009, Company A had capitalised training costs of $6000. In periods before 2009, it had
capitalised training costs of $12 000. In 2010, it incurred training costs of $4 500. Company A’s
statement of comprehensive income for 2010 reported profit of $56 000 after income taxes of $24
000. The training costs of $4 500 were expensed in 2010.
Company A’s retained earnings were $600 000 at the beginning of 2009 and $649 000 at the end of
2009. It had $100 000 in share capital throughout 2009 and 2010, representing 100 000 ordinary
shares, and there were no other reserves.
Company’s A income tax rate was 30% for both periods. Its reporting periods ends on 30 June.
Required:
Prepare accounting entry for the accounting change and comparative accounting performance and
changes in equity.
Case study 4 The Al Right Company made the following errors that were discovered by the auditors
in connection with preparation of the December 31, 2012, income statement. It reported net income of
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International accounting 2 – IAS 8 Accounting policy, Changes in accounting estimates and errors
$70,000 for 2011 and $100,000 for 2012. Ignore income taxes. Complete the schedule below to show
the computation of the correct income for 2011 and 2012:
2012 2011
Net income as reported $100,000 $70,000
(1) On January 1, 2011, the company recorded the $30,000
acquisition cost of equipment with a ten-year life as maintenance
expense. Straight-line depreciation is usually used and no residual
value is expected at the end of the useful life.
(2) On January 1, 2011, Al Right Company collected $10,000 for
two years’ rental income in advance and failed to set up an unearned
revenue account at year-end. It credited all the rent to Rent Revenue
when received.
(3) A three-year insurance policy costing $12,000 was charged to
expense when paid in advance on January 1, 2011.
(4) Ending inventory was overstated by $7,000 on December 31,
2011, and understated by $3,000 on December 31, 2012, due to
computational errors.
(5) Accrued wages expense was omitted in the amount of $7,000 on
December 31, 2011, and $8,000 on December 31, 2012.
Net income as corrected
Case study 5 During 20X7 Lubi Co discovered that certain items had been included in inventory at
31 December 20X6, valued at $4.2m, which had in fact been sold before the year end. The following
figures for 20X6 (as reported) and 20X7 (draft) are available.
20X6 20X7 (draft)

$'000 $'000
Sales 47,400 67,200
Cost of goods sold (34,570) (55,800)
Profit before taxation 12,830 11,400
Income taxes (3,880) (3,400)
Net profit 8,950 8,000
Reserves at 1 January 20X6 were $13m. The cost of goods sold for 20X7 includes the $4.2m error in
opening inventory. The income tax rate was 30% for 20X6 and 20X7.
Required Show the statement of profit or loss and other comprehensive income for 20X7, with the
20X6 comparative, and retained earnings.
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