Question 1 Leader Enterprises Ltd. follows IFRS and has provided the following i

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Question 1 Leader Enterprises Ltd. follows IFRS and has provided the following information: 1. In 2016, Leader was sued in a patent infringement suit, and in 2017, Leader lost the court case. Leader must now pay a competitor $50,000 to settle the suit. No previous entries had been recorded in 2. A review of the company's provision for uncollectible accounts during 2017 resulted in a determination that 1.5% of sales is the appropriate amount of bad debt expense to be charged to operations, the books relative to this case because Leader's management felt the company would win. rather than the 2% used for the preceding two years. Bad debt expense recognized in 2016 and 2015 was $33,200 and $15,300, respectively. The company would have recorded $18,000 of bad debt expense under the old rate for 2017. No entry has yet been made in 2017 for bad debt expense 3. Leader acquired land on January 1, 2014 at a cost of $70,000. The land was charged to the equipment account in error and has been depreciated since then on the basis of a five-year life with no residual value, using the straight-line method. Leader has already recorded the related 2017 depreciation expense using the straight-line method. During 2017, the company changed from the double-declining-balance method of depreciation for its building to the straight-line method because of a change in the pattern of benefits received. The building cost $1,400,000 to build in early 2015, and no residual value is expected after its 40-year life. Total depreciation under both methods for the past three years is as follows. Double-declining- balance depreciation has been recorded for 2017 4. Straight-Line Double-Declining- Balance 2015 2016 2017 $35,000 35,000 35,000 $70,000 66,500 63,175 Late in 2017, Leader determined that a piece of specialized equipment purchased in January 2014 at a cost of $75,000 with an estimated useful life of five years and residual value of $5,200 is now expected to continue in use until the end of 2021 and have a residual value of $3,000 at that time. The company has been using straight-line depreciation for this equipment, and depreciation for 2017 has already been recognized based on the original estimates. The company has determined that a $375,000 note payable that it issued in 2015 has been incorrectly classified on its statement of financial position. The note is payable in annual instalments of $50,000, but the full amount of the note has been shown as a long-term liability with no portion shown in current liabilities. Interest expense relating to the note has been properly recorded. 5. 6. ? (al) For each of the accounting changes, errors, or transactions, present the journal entries that Leader needs to make to correct or adjust the accounts, assuming the accounts for 2017 have not yet been closed. Ignore income tax considerations. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.

Explanation / Answer

The following journal entries needs to be passed in Leader's books of accounts :

1. Related to law suit -

Lawsuit Loss account Dr. $50,000

To Lawsuit Liability account $50,000

(Being loss on account of law suit booked in the books of account)

When the company pays off the Liability the entry will be -

Lawsuit Liability account Dr. $50,000

To Cash/Bank Account $50,000

(Being liability on account of law suit settled)

2. The accounting entry for bad debt would be passed as per the new estimate by the management. Since $18,000 was as per the old estimate, the new estimate amount will be - ($18000/2*1.5) = $13,500, the follwing entry will be passed -

Bad debts account Dr. $13,500

To Allowance for Doubtful debts account $13,500

(Being provision for bad debts created as per the new estimate of the management being 1.5% of sales)

3. Two mistakes have been made here, first is wrong account has been debited and the other is depreciation has been charged. First we will have to bring the equipment account equal to the amount of land account and then transfer the balance. Thus, the following entry will be passedd

A. Equipment account Dr. $56000 (depreciation from 2014 to till end of 2017)

To Depreciation account $14000 (depreciation for curremt year reveresed as books of accounts are not closed)

To Retained earnings $42000 (As the previous years income statement was understated due to excess charge of depreciation)

(Being depreciation wrongly charged on land considering it as equipment now rectified for the year 2014 to year 2017)

B. Land account Dr. $70000

To Equipment account $70000

(Being rectification entry passed on account of wromg debit of equipment account instead of land account)

4. Since this is a change in the Accounting policy by the management we need to make retrospective adjustments by making adjustments to the opening balance of the retained earnings.

Firstly, since books of accounts for 2017 haven't been closed we will rectify the depreciation entry for 2017 by reversing the excess depreciation recorded as per the double declining method ($63,175) charged during the year to straight line depreciation method ($35000 - the amount that should has been charged) with an amount of $28175 (63,175-35000)

Building account Dr. $28175

To Depreciation account $28175

(Being excess depreciation for the year 2017 reversed due to change in accounting policy of the company)

Had the straight line method being used since 2015 the current book value of building would have been $1330000 ($1400000-$35000-$35000) in the start of 2017 intsead of $1263500 ($1400000-$70000-$66500), thus the current book value of building is understated by $66500 ($1330000 - $1263500) due to excess charge of depreciation in the years 2015 and 2016, thus we need to rectify the same by passing the following entry :

Building account Dr. $66500

To Retained Earnings account $66500

5. This is a case of change in accounting estimate and thus, will not be applied retrospectively. The amount of depreciation as per the previous estimate was $13960 (($75000-$5200)/5) per year for 2014, 2015 and 2016. Thus the current book value of equipment is $33120 ($75000 - ($13960*3)). As per the new estimate the remianing useful life of the equipment is 5 years (8years - 3years) with an estimate of $3000 residual value. Thus, the depreciation amount hence forth will be - $6024 (($33120-3000)/5)

Since the depreciation has already been provided as per the original estimate we need to rectify the same as per the new estimate -

Equipment Account Dr. $ 7936

To Depreciation account $7936

(Being amount of depreciation changed as per the new estimate on the remaining life and residual value of the asset)

6.This is change of accounting head, thus we will pass the following entry -  

Current Account payables account Dr. $50000

To Non-current account payables account $50000

(Being the current portion of the liability transferred)

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