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At a meeting on 16 June 2019, the directors of Swan Ltd decided to change the company’s accounting policy in regard to research and development expenditure
- At a meeting on 16 June 2019, the directors of Swan Ltd decided to change the company’s accounting policy in regard to research and development expenditure. In previous years, research and development expenditure had been capitalized and amortized over 3 years. In line with this policy, $75 000 was capitalized on 1 January 2018. The new policy is to write off all research and development to expense when incurred. During the year ended 30 June 2019, the company spent a further $62 000 on research and development which was capitalized on 1 January 2019. Research and development expenditure is allowable as a deduction for tax purposes when incurred.
- Journalize transactions, post, and prepare a trial balance (50 2,4,6,7) Instructions Journalize the April transactions. P2-2A Desiree Clark is a licensed CPA. During the first month of operations of her business, the following events and transactions occurred. May 1 Clark invested $20,000 cash in her business. 2 Hired a secretary-receptionist at a salary of $2,000 per month. 3 Purchased $2,500 of supplies on account from Read Supply Company. 7 Paid office rent of $900 cash for the month. 11 Completed a tax assignment and billed client $3,200 for services provided. 12 Received $3,500 advance on a management consulting engagement. 17 Received cash of $1,200 for services completed for C. Desmond Co. 31 Paid secretary-receptionist $2,000 salary for the month. 31 Paid 60% of balance due Read Supply Company. Desiree uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No.209 Unearned Service Revenue, No. 301 Owner's Capital, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. Instructions (a) Journalize the transactions. (b) Post to the ledger accounts. (c) Prepare a trial balance on May 31, 2012. epair service, which had the following trial Trial balance totals $28,900.
Expert Solution
1. As per IAS 8 – Change in Accounting Policy, The Change is accepted only if such change:
- As required by statutory Requirement
- As the presentation and disclosure will be more reliable and relevant
Thus in the given case concerned, Capitalizing Research and Development expenses, without satisfying the criteria of IAS 38 Intangible Asset, is not supporting steps as per Accounting Standards and guidance.
Hence Expenditure in the name of Research and Development shall be charged to Income Statement on Retrospective basis, as it is Accounting error and not change in accounting policy.
As per IAS 8 states that Accounting policy must be in coherence with the Accounting standard and guidance , no organization can made accounting policy which are not in coherence with Accounting Standards as issued by the Board.
Hence from above the action is rectification of earlier posted entry and not the change in accounting policy.
Hence here Company will rectify retrospectively the wrongly capitalization of research and Development cost.
Hence 75000$ and 62000$ shall be reversed and charged to Income Staement.
Secondly earlier amortization expenses to be reversed also.
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