Summary Changes in estimates, accounting policies and correction of errors
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Course
Accounting (ACCT2B)
Institution
University Of KwaZulu-Natal (UKZN)
Book
Gripping GAAP
This document entails key concepts under changes in estimates, accounting policies and correction of errors and its disclosures. It also includes examples on changes in estimates.
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University of KwaZulu-Natal (UKZN)
Accounting (ACCT2B)
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ACCOUNTING POLICIES, ESTIMATES AND ERRORS
Changes in estimates
This is an adjustment to the carrying amount of an asset or liability or
the way in which an asset is consumed (e.g. depreciation) that
results from the assessment of the way in which the asset will be
consumed or the way in which the obligations of liabilities are
expected to be settled.
Examples of changes in estimates:
Change in the useful life of an asset
Change in the residual value of an asset
Changes in estimates are adjusted for prospectively which means
that only current and future period amounts will be affected and not
prior period figures.
The adjustment is made by either using the cumulative catchup
method or the reallocation method.
The cumulative catch-up method still maintains the prospective
adjustment but prior year figures are also affected in calculating the
effect on the current and future periods (this is not an adjustment to
prior year figures)
The reallocation method does not take into account what the effect
on prior year figures would be. Under this method, you would simply
reallocate the current carrying amount of the asset or liability over
its remaining useful life after taking into account the estimate
, Example 1
A vehicle was purchased on 1 January 2017 for an amount of
R650 000 with a useful life of 7 years. Management have re-assessed
it to be 6 years on 1 January 2021. The effects of this entry have not
been journalised for the 2021 year. The vehicle is depreciated on
straight line method
Required: Prepare the journal entries for the 2021 year:
1. Assuming that the reallocation method is used
2. Assuming that the cumulative catch-up method is used
Solution
1. Workings
Carrying amount on 1 Jan 2021= 650 000-650 000x4/7= 278 571
Remaining useful life on 1 Jan 2021 based on new estimate= 6
years- 4 years already used= 2 years
Depreciation for 2021= 278 571/2= 139 286
Journal entry
31 December 2021 R R
Dr Depreciation (P/L:E) 139 286
Cr Accumulated depreciation (-A) 139 286
Depreciation for the 2021 year
2. Workings
Carrying amount on 1 Jan 2021 based on old useful life= 650000-
650000x4/7= 278 571
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