In 2014, Lotan decided to change its policy on accounting for certain marketing

Question

In 2014, Lotan decided to change its policy on accounting for certain marketing costs. Previously, the company had chosen to defer and amortize all marketing costs over at lest 5 years because Lotan believed that a return on these did not occur immediately recently, however the time differential has considerably shortened, and Lotan is now expensing the marketing costs as incurred. One division of Lotan Corp., Hawthorne Co., has consistently shown an increasing net income from period to period. On closer examination of its operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventor)-. In 2014, the company purchased new machinery that should increase production dramatically. The company has decided to depreciate this machinery on an accelerated basis, even though other machinery is depredated on a straight-line basis All equipment sold by Lotan is subject to a 5-year warranty. It has boon estimated that the expense ultimately to be incurred on these machines is 1% of sales. In 2014, because of a production breakthrough, it is now estimated that V: of 1% of sales is sufficient. In 2012 and 2013, warranty expense was computed as $64,000 and $70,000, respectively. The company now believes that these warranty costs should be reduced by 50%. In 2014, the company decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $65,000 and increase 2013 income by $20,000.

Explanation / Answer

Statement showing appropriate accounting treatment 1 Marketing costs Account                            Dr Balance left in Account    To      differed marketing Expenses Balance left in Account 2 Since the company want to change the estimated useful life, it must be given effected prospectively over the balance life at revised estimate. 3 The Account receivable must be shown at the fair value showing / reducing appropriate provision for Baddebts based on the availability of information and Estimate. 4 As per IFRS, The company can follow the different method of depreciation for different classes of assets except based on Revenue and hence it can depreciate the machinery on accelerated Rate 5 The warranty costs must be estimated on a reasonable base at the end of each year depend on the situation and must be provided as appropriate. & Hence warranty costs must be reduced by 50%. 6 In case of change in Accounting principle like method of inventory valuation, the effect must be given retrospectively & the figure is to be adjusted with the opening reserves. Hence $65000 should be adjusted with the opening reserves of 2013 & the comparitive figures of 2013 be increased by $20000.

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