Question
During 2026 Oakmere Software paid $80,000 for feasibility studies and market surveys to explore whether a new product line was worth pursuing. No decision to proceed has been taken, and none of the IAS 38 development criteria can yet be demonstrated.
A junior accountant recorded the $80,000 as Development Costs (an intangible asset) and, at December 31, 2026, amortised 10% of it:
| December 31, 2026 | Debit | Credit |
|---|
| Amortisation Expense | 8,000 | |
| Accumulated Amortisation - Development Costs | | 8,000 |
The 2026 books have not yet been closed.
Required:
- Effect of the Error — how each element of the 2026 statements is misstated before correction, and by how much.
- Correcting Entry — one entry at December 31, 2026. Use Research Expense, Accumulated Amortisation - Development Costs, Development Costs and Amortisation Expense.
Statements in this challenge
- Effect of the ErrorStatement Impact
- Correcting EntryJournal 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