Answer to Question #114391 in Accounting for Zoya

Question

Scenario 1: Rabbit Ltd has, in the past always depreciated its factory buildings over 25 years. As a result of new information obtained by the company during the current year a decision was made to reduce the expected life of the buildings to 18 years.
Scenario 2: During the preparation of the financial statements it was discovered that a flood occurred in the previous financial year that destroyed some raw materials which were stored off-site and that were expected to have a long useful life. The materials were uninsured. No expense was recorded in the previous year in relation to the flood damage. The material was valued at $75000 and the expense is considered to be material and will be permitted as a deduction for tax purposes. The tax rate is 30 per cent.
Required
Identify which of the two scenarios outlined above is a change in accounting estimate and which is a prior period error. Also provide any necessary journal entries.

Answer 1

Scenario 1 is a change in accounting estimate

Scenario 2 is a prior period error

necessary journal entries Scenario 1:

The asset was discounted in excess of the revaluation amount:

Debit Other income and expenses, sub-account Other expenses credit fixed assets

Reflected depreciation from other income

Debit depreciation credit Other income and expenses, sub-account Other income

necessary journal entries Scenario 2:

Fixed a significant error detected after the approval of the annual financial statements:

Debit Retained earnings (uncovered loss) credit materials - 75 000

Profit tax decreased based on the results of a significant error:

Debit calculation of taxes and levies APO credit profit and loss - 22500

Adjusted net loss resulting from a material error:

Debit profit and loss credit Retained earnings (uncovered loss) - 25 000