As an audit assistant for Aegis, provide Honey Crunch with this information. For each issue write a note for the audit file (3-5 sentences) identify the type of accounting change or error, the appropriate accounting treatment, include amounts where applicable and how net income would be impacted if the issue
Honey Crunch Limited started business in 2018. It is now 2021 and the Board of
Directors of Honey Crunch Limited hired Aegis Solutions to recommend how
each of the following types of accounting changes or errors should be dealt with.
As an audit assistant for Aegis, provide Honey Crunch with this information. For
each issue write a note for the audit file (3-5 sentences) identify the type of
accounting change or error, the appropriate accounting treatment, include
amounts where applicable and how net income would be impacted if the issue
needs correcting.
a) In early 2019, Honey Crunch changed its estimate from 5% to 4% of
receivables on the amount of
operations. Bad debt expense for 2018, if a 4% rate had been used, would
have been $8,000. The company adjusted Net Income in 2018 to reflect
the change. (5 marks)
b) The company changed its method of inventory pricing from FIFO to
Average Cost in 2020. The change was made from 2020 onwards. Just to
see the impact, the company also did an analysis of the change for the
previous years.
2018 2019 2020 2021
Net income
unadjusted— FIFO
basis
$140,000 $160,000 $215,000 $250,000
Net income
unadjusted—Average
cost basis
150,000 165,000 200,000 215,000
$(10,000) $(5,000) $15,000 $35,000
(4 marks)
c) (i) In 2020, the company incorrectly understated the ending inventory by
$12,000 (3 marks)
(ii) A dispute developed in 2020 with the tax authorities over the
deductibility of training expenses. In 2019, the company was not permitted
these deductions, but a tax settlement was reached in 2021 that allowed
these expenses. As a result of the court’s finding, tax expenses in 2019,
2020 and 2021 were reduced by $50,000, $20,000 and $10,000
respectively
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