Question
Brackenfield Group is in the process of adjusting and correcting its books at the end of 2027. In reviewing its records, the following information has been compiled.
- Brackenfield has failed to accrue sales commissions payable at the end of each of the last 2 years.
- December 31, 2026 $4,200,000
- December 31, 2027 3,000,000
- In reviewing the December 31, 2027, inventory, Brackenfield discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows.
| December 31, 2025 | Understated | $19,200,000 |
| December 31, 2026 | Understated | $22,800,000 |
| December 31, 2027 | Overstated | $8,040,000 |
Brackenfield has already made an entry that established the incorrect December 31, 2027, inventory account. - At December 31, 2027, Brackenfield decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $120,000,000 when purchased on January 1, 2025. It has a 10-year useful life and no residual value. Depreciation expense recorded prior to 2027 under the double-declining-balance method was $43,200,000. Brackenfield has already recorded 2027 depreciation expense of $15,360,000 using the double-declining-balance method.
- Before 2021, Brackenfield accounted for its income from long-term construction contracts on the cost-recovery basis. Early in 2027, Brackenfield changed to the percentage-of-completion basis for accounting purposes. It continues to use the cost-recovery method for tax purposes. Income for 2027 has been recorded using the percentage-of-completion method. The information is available below.
| Pretax Income from |
|---|
| Percentage-of-Completion | Cost-Recovery |
| Prior to 2027 | $180,000,000 | $126,000,000 |
| 2027 | 72,000,000 | 24,000,000 |
Instructions: Prepare the journal entries necessary at December 31, 2027, to record the above corrections and changes. The books are still open for 2027. The income tax rate is 40%. Brackenfield has not yet recorded its 2027 income tax expense and payable amounts, so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.
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