Question
Rockhaven Ltd reports under IFRS and pays income tax at 20%. Its 2024 financial statements have been issued and the books for 2024 are closed. The following three independent situations must be dealt with during 2025.
- Change in accounting policy. Effective January 1, 2025 the company changed its inventory cost formula from weighted average to FIFO. Inventory at December 31, 2024 was carried at $48,000 under weighted average; under FIFO it would have been $54,000. Record the retrospective adjustment on January 1, 2025, including the deferred tax effect (the tax base of inventory is unchanged).
- Change in accounting estimate. A machine that cost $60,000 on January 1, 2022 is being depreciated straight-line over 10 years with no residual value. On January 1, 2025 the total useful life was revised to 8 years (5 years remaining) with a residual value of $4,000. Record depreciation for 2025 on December 31, 2025. Use the account "Accumulated Depreciation - Machinery".
- Prior-period error. In 2024 a three-year insurance premium of $4,500 paid on January 1, 2024 was expensed in full. Record the correcting entry on January 1, 2025, including the deferred tax effect, and then record the 2025 insurance expense on December 31, 2025.
Required: Prepare all journal entries for 2025 arising from the three situations. Adjustments to prior-year profits go through Retained Earnings.
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