Question
Fernhollow Publishing bought a printing press for $60,000 on January 1, 2025. A junior accountant recorded the whole amount as Repairs Expense. The press should have been capitalised and depreciated straight-line over 5 years with no residual value.
The error is discovered in 2026, after the 2025 financial statements were issued. Fernhollow reported 2025 profit of $210,000. The error is material. Ignore income tax.
Required:
- Effect of the Error — how the error misstated the 2025 financial statements as issued.
- Restated 2025 Profit — the 2025 profit shown as the comparative in the 2026 financial statements.
- Journal Entries — the January 1, 2026 correcting entry and the December 31, 2026 depreciation. Use Equipment, Accumulated Depreciation, Retained Earnings and Depreciation Expense.
Statements in this challenge
- Effect of the ErrorStatement Impact
- Restated 2025 ProfitNumeric Answer
- Journal 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
Classify the change before accounting for it. A change of accounting policy is applied retrospectively with comparatives restated; a change in an accounting estimate is applied prospectively from the date of change, with nothing restated.
Common mistakes
- Restating comparatives for what is really a change in estimate, such as a revised useful life.
- Applying a policy change prospectively when retrospective application is required and practicable.
- Omitting the adjustment to the opening balance of retained earnings on a retrospective change.
Further readingIAS 8: policies vs estimates vs errors