Question
On January 1, 2026 Quenby Printworks leased a printing press for 3 years at $30,000 payable at the end of each year. Quenby's incremental borrowing rate is 7%. The lease is not short-term and the press is not a low-value asset, so IFRS 16 applies in full. The right-of-use asset is depreciated straight-line over 3 years.
A junior accountant recorded the only 2026 entry as follows:
| December 31, 2026 | Debit | Credit |
|---|
| Rent Expense | 30,000 | |
| Cash | | 30,000 |
| Present-value factor at 7%, 3 periods | Factor |
|---|
| Present value of an ordinary annuity of 1 | 2.624316 |
The 2026 books have not yet been closed. Round to the nearest dollar.
Required:
- Effect of the Error — before any correction, how is each element of the 2026 financial statements misstated, and by how much?
- Correcting Entries — the entries on December 31, 2026 that put the books right. Use Right-of-Use Asset, Lease Liability, Rent Expense, Interest Expense, Depreciation Expense and Accumulated Depreciation - Right-of-Use Asset.
Statements in this challenge
- Effect of the ErrorStatement Impact
- Correcting EntriesJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors
A prior-period error is corrected retrospectively: restate the comparatives and adjust the opening balance of retained earnings, rather than running the correction through the current year's profit. Establish first whether the error is prior-period or current-period, because that decides everything that follows.
Common mistakes
- Putting a prior-period correction through current profit or loss instead of opening retained earnings.
- Correcting only one side of a two-sided error, or correcting an error that has already counterbalanced itself.
- Confusing an error with a change in estimate — estimates are adjusted prospectively and are never restated.
Further readingIAS 8: policies vs estimates vs errors