Question
The unadjusted trial balance of Dovetail Services at December 31, 2025 (2025 depreciation not yet recorded; 2024 financial statements already issued) is shown below.
| Account | Debit | Credit |
|---|
| Cash | 18,300 | |
| Accounts Receivable | 22,000 | |
| Allowance for Doubtful Accounts | | 900 |
| Supplies | 3,500 | |
| Equipment | 97,500 | |
| Accumulated Depreciation - Equipment | | 36,000 |
| Accounts Payable | | 12,400 |
| Share Capital - Ordinary | | 40,000 |
| Retained Earnings (January 1) | | 13,500 |
| Service Revenue | | 89,100 |
| Salaries and Wages Expense | 41,000 | |
| Rent Expense | 9,600 | |
| 191,900 | 191,900 |
The following matters must be dealt with before the 2025 statements are prepared:
- The only depreciable asset is a machine that cost $90,000 on January 1, 2021, depreciated straight-line over 10 years with no residual value. At the beginning of 2025, management revised the machine's total useful life to 8 years and its residual value to $6,000 (a change in accounting estimate under IAS 8 — apply prospectively). Record 2025 depreciation.
- In late December 2024, an invoice for $7,500 of repairs was incorrectly debited to Equipment. No depreciation has been recorded on this amount. Correct this prior-period error through retained earnings.
- Services of $3,000 performed in December 2024 were never accrued; the amount was recorded as 2025 revenue when the cash was collected in January 2025. Correct this prior-period error through retained earnings.
- An aging of accounts receivable shows that the Allowance for Doubtful Accounts should have a balance of $2,100 at December 31, 2025.
Instructions:
- Prepare the four entries at December 31, 2025 (the revised depreciation, the two error corrections, and the bad debt adjustment).
- Prepare the adjusted trial balance at December 31, 2025.
Statements in this challenge
- Correcting and Adjusting EntriesJournal Entry
- Adjusted Trial BalanceTrial Balance
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