Question 12 9+3-12 marks) West Zone Company changed its accounting policy in 201

Question

Question 12 9+3-12 marks) West Zone Company changed its accounting policy in 201 to 2015, inventories were valued using a weighted-average cost (WAC) method. In changed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and flow of inventories in the economie cyele. The impact on inventory valuation was determined to be Soo ,go wwer 6 with respect to the valuation of inventories. Up 2016 the method was At December 31, 2014, a decrease of $11,000 At December 31, 2015, an increase of $10,000 At December 31, 2064, a decrease of $12,000 The internal auditor of the company noticed in 2016 that in 2015 the entity had omitted to record in its books amortization expense amounting to $25,000 relating to an intangible asset. An extract from the statemert of comprehensive income for the years ended December 31, 2015 and 2016, before correction of the erro follows. Descriptiorn Sales Revenue Less: Cost of Sales Gross profit General and administrative expenses Selling and distribution expenses Amortization Net income before income taxes Income taxes Net profit 2016 S500,000 (150,000) 350,000 (80,000) (20,000) (25,000) 225,000 45,000 180,000 2015 $400,000 (140,000) $260,000 (70,000) (20,000) 170,000 34,000 136,000 The income tax rate was 20% for both years. Not PrOvided? Required: Present the change in the Statement of Comprehensive Income and Retained

Explanation / Answer

Description 2016 2015 Sales Revenue $500,000 $400,000 Cost of Sales $150,000 $140,000 Gross Profit $350,000 $260,000 General and Administration Expenses $80,000 $70,000 Selling and Distribution Expenses $20,000 $20,000 Amortisation $25,000 $0 Earnings before taxes $225,000 $170,000 Taxes @ 20% on EBT $45,000 $34,000 Net Income $180,000 $136,000 Impact of Change in Accounting Policies of Inventories: Description 2016 2015 Impact on Opening Inventories $10,000 ($11,000) Impact on Closing Inventories ($12,000) $10,000 Impact on Cost of Sales ($22,000) $21,000 Notes 1 Decrease in Closing Valuation of Dec 2014 will have positive impact on 2015 2 Increase in Closing Valuation of Dec 2015 will have positive impact on 2015 3 Increase in Closing Valuation of Dec 2015 will have negative impact on 2016 4 Decrease in Closing Valuation of Dec 2016 will have negative impact on 2016 Revised Statement of Comprehensive Income: Description 2016 2015 Sales Revenue $500,000 $400,000 Cost of Sales (Original + Impact above) $128,000 $161,000 Gross Profit $372,000 $239,000 General and Administration Expenses $80,000 $70,000 Selling and Distribution Expenses $20,000 $20,000 Amortisation $25,000 $25,000 Earnings before taxes $247,000 $124,000 Taxes @ 20% on EBT $49,400 $24,800 Net Income $197,600 $99,200 Changed Numbers are indicated in Bold and Italic for easy reference

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