The date is February 15, Year 5. Year-end is December 31, and the Year 4 books have been closed, but Year 4 financial statements have not yet been released. The income tax rate is 30%. For the following situations, describe the appropriate accounting treatment.

Instructions

State whether the item should be accounted for prospectively or retrospectively. Then specifically state whether the item should be accrued in the Year 4 accounting records and adjusted on the financial statements; only be adjusted on the financial statements; only be disclosed in the Year 4 notes to the financial statements, or not be disclosed. Provide your reasons. If the scenario provides accounts and balances, state which accounts need to be adjusted, increase or decrease, and by how much.

• 1. You have a defined benefit pension plan. Your actuarial firm has just told you that the average life expectancy of your retirees has increased. Therefore, your defined benefit obligation has increased.

  2. At the beginning of Year 4, we borrowed $500,000. Payments of $100,000 towards principal plus accrued interest are due each year. When preparing the financial statements, we did not correctly separate the current portion of long-term debt from the long-term portion.

  3. We have a significant amount of receivables denominated in U.S. dollars. During February, due to factors beyond our control, the Canadian dollar weakened substantially against the U.S. dollar.

  4. During January, we determined that we recognized revenues of $400,000 for merchandise sold on account in Year 4 that should have been recognized in Year 5. Gross profit is 40% of sales.

  5. In February, your CEO died.

  6. One of your customers owes you a large amount of money on account from a sale made in November of Year 4. During January, you received notice that this customer has declared bankruptcy.

  7. At the end of January, one of our factories burned down. We have insurance, but it will be a long time before the plant can be rebuilt.

  8. We mistakenly accrued interest expense of $30,000 as a selling and administrative expense.

  9. An estimated legal liability of $100,000 was accrued during Year 4. In early February it was settled for $130,000.

  10. We had filed a notice of objection with the CRA in early Year 4. It was resolved in early February. We are required to pay substantially more tax than expected.

Answer rating: 100% (QA)

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