Bridge Ltd: three accounting judgements
Bridge Ltd, a wholesaler with a 31 December year end and a 30% gross margin, has prepared draft 2025 accounts. The new finance director disputes three items.
On 1 January 2023 Bridge bought delivery vehicles for £480,000 (nil residual value) and depreciated them over eight years on a straight-line basis. Accumulated depreciation at 1 January 2025 was £120,000. In November 2025 the board decided the fleet will be kept only five years in total. The accountant has restated the 2023 and 2024 comparatives as though a five-year life had always applied and has charged £96,000 in 2025 on that basis.
In December 2025 Bridge received a signed order for £150,000 of goods; delivery is scheduled for 10 February 2026. The accountant has recognised the revenue and its 30% margin in 2025.
Bridge holds 400 units of a supplier's goods on its premises. Under the agreement Bridge pays nothing until a unit is sold on and may return unsold units. The accountant has included the units at £60 each in inventory and in trade payables.
1. For each item, state the correct treatment and name the qualitative characteristic or accounting concept that decides it. Calculate the correct 2025 depreciation charge.
Read the worked answer
1. Change in useful life. Original charge was £60,000 a year, so carrying amount at 1 January 2025 is 480,000 − 120,000 = £360,000 over the three remaining years of the revised five-year life = £120,000 for 2025. A revision of useful life is a change in accounting estimate, applied prospectively. Restating comparatives is wrong: it removes the effect of a decision taken in 2025 from the year in which it was taken and destroys comparability between periods. The restatement must be reversed - accumulated depreciation at 31 December 2024 returns to £120,000 and opening retained earnings increase by £72,000 (the excess depreciation of £36,000 in each of 2023 and 2024).
2. The February order. No performance obligation has been satisfied: Bridge still controls the goods and the customer has no unconditional obligation to pay. Revenue and the £45,000 margin must be reversed. Decided by the accruals concept - revenue is recognised when the performance obligation is satisfied, not when an order is signed.
3. Consignment stock. The supplier retains the risks and rewards of ownership; Bridge cannot be obliged to pay for unsold units. The stock is not Bridge's asset and there is no liability. Remove £24,000 from inventory and £24,000 from payables. Decided by substance over form - legal possession is not the test, economic control is.
2. Quantify the total correction to 2025 profit and to the statement of financial position, and reconcile the two.
Read the worked answer
| Item | Profit 2025 | Assets | Liabilities |
|---|---|---|---|
| 1 - depreciation raised from 96,000 to 120,000 | (24,000) | (24,000) PPE | - |
| 2 - revenue and margin reversed | (45,000) | (45,000) receivables | - |
| 3 - consignment stock removed | - | (24,000) inventory | (24,000) |
| Total | (69,000) | (93,000) | (24,000) |
Net assets fall by 93,000 − 24,000 = £69,000, exactly equal to the profit reduction - as it must, since the only items moving are profit and the balance sheet components it touches.
Do not overlook the prior-year side of item 1. Reversing the restatement also increases opening retained earnings by £72,000 and increases accumulated depreciation by the same amount, so it does not change net assets at 1 January 2025; it only reallocates profit between years.
3. The board argues that restating comparatives makes the trend 'easier for the bank to read'. How should the finance director respond?
Read the worked answer
The finance director should concede the aim but reject the method. The board is right that a change in useful life makes the years less comparable; the answer is disclosure, not retrospective restatement. The 2025 charge of £120,000 should be shown on the revised basis, with a note stating that the fleet's total life was reduced from eight to five years and that this increased the 2025 charge by £60,000 over the previous basis. A reader can then adjust the trend themselves.
Restating comparatives would breach two characteristics at once: comparability, because prior-year figures would no longer be the numbers actually reported and audited, and neutrality (freedom from bias), because the restatement moves £72,000 of past expense out of the earlier years into a year the board would rather improve. Consistency is served by keeping prior figures as reported and explaining the change; verifiability is served by leaving an audit trail intact. If the board wants the trend smoothed, the legitimate route is a clear note, not a rewritten history.