Honey Crunch Limited started business in 2018. It is now 2021 and the Board of Directors of Honey Crunch Limited hired Aegis Solutions to recommend how each of the following types of accounting changes or errors should be dealt with. As an audit assistant for Aegis, provide Honey Crunch with this information. For each issue write a note for the audit file (3-5 sentences) identify the type of accounting change or error, the appropriate accounting treatment, include amounts where applicable and how net income would be impacted if the issue needs correcting. 1. In early 2019, Honey Crunch changed its estimate from 5% to 4% of receivables on the amount of bad debt expense to be charged to operations. Bad debt expense for 2018, if a 4% rate had been used, would have been $8,000. The company adjusted Net Income in 2018 to reflect the change. 2. The company changed its method of inventory pricing from FIFO to Average Cost in 2020. The change was made from 2020 onwards. Just to see the impact, the company also did an analysis of the change for the previous years. 2018 2019 2020 2021 Net income unadjusted— FIFO basis $140,000 $160,000 $215,000 $250,000 Net income unadjusted—Average cost basis 150,000 165,000 200,000 215,000 $(10,000) $(5,000) $15,000 $35,000 3. (i) In 2020, the company incorrectly understated the ending inventory by $12,000 (ii) A dispute developed in 2020 with the tax authorities over the deductibility of training expenses. In 2019, the company was not permitted these deductions, but a tax settlement was reached in 2021 that allowed these expenses. As a result of the court’s finding, tax expenses in 2019, 2020 and 2021 were reduced by $50,000, $20,000 and $10,000
Honey Crunch Limited started business in 2018. It is now 2021 and the Board of Directors of Honey Crunch Limited hired Aegis Solutions to recommend how each of the following types of accounting changes or errors should be dealt with.
As an audit assistant for Aegis, provide Honey Crunch with this information. For each issue write a note for the audit file (3-5 sentences) identify the type of accounting change or error, the appropriate accounting treatment, include amounts where applicable and how net income would be impacted if the issue needs correcting.
1. In early 2019, Honey Crunch changed its estimate from 5% to 4% of receivables on the amount of
2. The company changed its method of inventory pricing from FIFO to Average Cost in 2020. The change was made from 2020 onwards. Just to see the impact, the company also did an analysis of the change for the previous years.
|
|
2018 |
2019 |
2020 |
2021 |
|
Net income unadjusted— FIFO basis |
$140,000 |
$160,000 |
$215,000 |
$250,000
|
|
Net income unadjusted—Average cost basis |
150,000 |
165,000 |
200,000 |
215,000
|
|
|
$(10,000) |
$(5,000) |
$15,000 |
$35,000
|
3. (i) In 2020, the company incorrectly understated the ending inventory by $12,000
(ii) A dispute developed in 2020 with the tax authorities over the deductibility of training expenses. In 2019, the company was not permitted these deductions, but a tax settlement was reached in 2021 that allowed these expenses. As a result of the court’s finding, tax expenses in 2019,
2020 and 2021 were reduced by $50,000, $20,000 and $10,000
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