The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on 30 June 2023.
Question:
The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on 30 June 2023.
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 useful 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 $75 000 and the expense is considered to be material and will be permitted as a deduction for tax purposes. The tax rate is 30 percent.
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.
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Scenario 1 is a change in an accounting estimate The decision to reduce the expected useful life of factory buildings involves the application of judg...View the full answer
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