During the audit of Keats Island Brewery for the fiscal year ended June 30, 2022, the auditors identified the following issues: 

a. The company sells beer for $1 per bottle, plus $0.10 deposit on each bottle. The deposit collected is payable to the provincial recycling agency. During 2022, the company recorded $8,000 of deposits as revenue. The auditors believe this amount should have been recorded as a liability.

b. The company had been using the first-in, first-out cost flow assumption for its inventories. In fiscal 2022, management decided to switch to the weighted-average method. This change reduced inventory by $20,000 at June 30, 2021, and $35,000 at June 30, 2022.

c. The company has equipment costing $5,000,000 that it has been depreciating over 10 years on a straight-line basis. The depreciation for fiscal 2021 was $500,000 and accumulated depreciation on June 30, 2021, was $1,000,000. During 2022, management revises the estimate of useful life to 12 years, reducing the amount of depreciation to $400,000 per year.

Required:

For each of the three issues described above, using the following table, identify:

a. The type of accounting change;

b. The treatment required;

c. The effect of the accounting change on the financial statements of June 30, 2022.

For (c), identify both the direction (increase or decrease) and the amount of the effect relative to the amount without the accounting change.

Transcribed Image Text:

a. b. Type of accounting change Treatment Effect of accounting change on the financial statements of June 30, 2022 (indicate both direction and amount) Assets Liabilities Equity Income