Reference no: EM132926286

Question - The following are three independent scenarios. For all cases, the fiscal year end is on December 31. Ignore income taxes.

a) Full Belly Ltd. (FBL) purchased new ovens at the beginning of 2016 for $50,000 cash. FBL originally estimated the ovens have a useful life of 6 years and residual value of 14,000. FBL depreciate similar assets using the straight-line method. In 2019, FBL adjusted the useful life and residual value estimates to 8 years and $12,000, respectively.

i. What type of accounting change is this?

ii. How would it be applied?

iii. Prepare the journal entry to record the depreciation expense for 2019.

b) On January 3, 2017, Beaver Corp. purchased machinery for $135,000. The entire cost was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The issue was discovered in July 2019.

i. What type of accounting change is this?

ii. How would it be applied?

iii. Prepare journal entries (if any) to be made in 2019 to reflect the change.

c) On January 1, 2018, Selam Co. leased an equipment with a four-year, non-cancellable term. The present value of the minimum lease payments required was $116,025. Also at lease inception, it was estimated that the equipment's economic life was eight years, and that its fair value was $150,000. The lease does not transfer title or contain a bargain purchase option and it is not for specialized equipment. The discount rate is 10%. Selam initially treated the lease as an operating lease under IAS 17. On January 1, 2019, after the books for 2018 have been closed, Selam adopted IFRS 16. Under the new standard the lease is treated as a finance/capital lease.

i. What type of accounting change is this?

ii. How would it be applied?

iii. Prepare journal entries (if any) to be made in 2019 to reflect the change.