You were assigned as an accounting consultant to review, analyze and evaluate the accounting documents and records

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Question:

You were assigned as an accounting consultant to review, analyze and evaluate the accounting documents and records of the following two companies, namely Jacky Limited and Orange Limited. Jacky Company starts its operation on 1 January 2018. It has used average cost for the year 2018. On January 1, 2019, Jacky Limited changed its inventory method to FIFO from average cost for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2019 inventory. Assume that Jacky Limited is adopting periodic inventory system, and the income tax rate for all years is 30%. Wendy Limited’s main operation is trading of electronic projects. Due to the poor internal control system, you have discovered some problems as below, when you review the operation and record in 2020.

(i) It has purchased patent by cash at a cost of $Z at the beginning of year 2018. But such entry is missing in the accounting record. The useful life of patent is 10 years

(ii) The rent payable balance on 31 Dec 2018 was understated.

(iii) Cash payment for a truck (useful life, 6 years) was wrongly charged to repair and maintenance expense in 2018

Requirement

(a) Explain how the change in inventory method would affect the Retained earnings beginning balance on January 1, 2019 for Jacky Limited.

(b) Explain whether Jacky Limited should have undergone a period of inflation or deflation during the year 2018.

(c) Explain how each of the problems (i) to (iii) above would affect the income statement and statement of financial position for the year 2018 and 2019 for Wendy Limited.

(d) A junior accountant askes you why the change in depreciation method should be under change in accounting estimate but not under change in accounting policy. Please advise him.