Shawn Kimble Enterprises Ltd follows IFRS and reported income before
Shawn Kimble Enterprises Ltd. follows IFRS and reported income before income taxes of $176,000, $180,000, and $198,000 in each of the years 2009, 2010, and 2011, respectively. The following information is also available.
1. In 2011, Shawn Kimble lost a court case in which it was the defendant. The case was a patent infringement suit, and Shawn Kimble must now pay a competitor $25,000 to settle the suit. No previous entries had been recorded in the books relative to this case as Shawn Kimble’s management felt the company would win.
2. A review of the company’s provision for uncollectible accounts during 2011 resulted in a determination that 1% of sales is the appropriate amount of bad debt expense to be charged to operations, rather than the 1.5% used for the preceding two years. Bad debt expense recognized in 2010 and 2009 was $25,000 and $17,500, respectively. The company would have recorded $22,500 of bad debt expense under the old rate for 2011. No entry has yet been made in 2011 for bad debt expense.
3. Shawn Kimble acquired land on January 1, 2008, at a cost of $40,000. 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.
4. During 2011, the company changed from the double-declining-balance method of depreciation for its building to the straight-line method. Shawn Kimble changed to the straight-line method because its parent company uses straight-line, and it was required to match its policies to those of its parent company. Total depreciation under both methods for the past three years is as follows. Double-declining-balance depreciation has been used in 2011.
5. Late in 2011, Shawn Kimble determined that a piece of specialized equipment purchased in January 2008 at a cost of $54,000 with an estimated life of five years and residual value of $4,000 is now expected to continue in use until the end of 2015 and have a residual value of $2,000 at that time. The company has been using straight-line depreciation for this equipment, and depreciation for 2011 has already been recognized based on the original estimates.
6. The company has determined that a $225,000 note payable that it issued in 2009 has been incorrectly classified on its balance sheet. The note is payable in annual instalments of $25,000, 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.
(a) For each of the accounting changes, errors, or transactions, present the journal entry(ies) that Shawn Kimble needs to make to correct or adjust the accounts, assuming the accounts for 2011 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 (a) but assume an income tax rate of 25% throughout the fiscal periods that are identified.
(c) For each of the accounting changes, identify the type of change involved and whether retrospective or prospective treatment is required.
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