Lion, Inc. purchased new equipment for $440,000 on January 1, 2018. The equipment has an estimated life of ten years and a salvage value of $4,000.

a)  Assume that Lion initially uses double declining balance depreciation. During 2020 (3^rd year), prior to preparing the financial statements, Lion decides that straight-line depreciation is more appropriate for this equipment. Is this a change in principle or a change in estimate under GAAP?  How should Lion account for depreciation on the equipment for the year ended December 31, 2020? Be specific, providing the entry for depreciation expense for 2020, and answering the questions below.  You may ignore income taxes.

Circle your response:  

change in principle             change in estimate    

change in principle effected as a change in estimate

12/31/2020 depreciation entry:

Balance Sheet	Book Value (12/31/2020)

Is an adjustment required in the beginning balance of retained earnings on 1/1/2020?  

          Yes       no

b)  Assume that Lion discovers errors and/or omissions in the financial

statements at year end as follows (ignore tax effects):

                                                                      2018                          2019_____

Ending inventory:                        understated $12,000     Overstated $ 8,500

Failed to accrue wages expense:        $10,600                       $7,400

Failed to accrue sales revenue:            $2,500                        $2,800

Unearned rent was incorrectly recorded

as revenue                                              $3,000                       $1,800

An asset was sold in 2019; the gain of

$4,000 was overstated by $2,000 (accum deprec removed was overstated $2,000)

What is corrected net income each year, given that these errors were not discovered or corrected, and that uncorrected net income is $275,000 for

2018, and $310,000 for 2019?

2018: _____________________________ 2019: ______________________________

Please provide a correcting entry for the gain situation when discovered in 2020.  Accumulated depreciation had $2,000 more removed than should have been removed.  Assume a tax rate of 25%, and that a tax refund is due to Lion.

Answer rating: 100% (QA)

Part A The change in the depreciation method is a change in estimate As per IAS 8 the changes in acc... View the full answer