Check your answer
Write your response and explain your reasoning.
Linden Peak manufactures sensors. Its accountant proposes crediting Equipment for a $72,000 supplier credit and debiting Equipment for $68,000 of installation invoices. The reason for the supplier credit and the nature of the installation work have not yet been checked. Draft total assets before the entry are $81.4 million.
The controller, who oversees financial reporting, calls the proposed entry immaterial because its net effect is below 0.1 percent of total assets.
- Calculate the net change in Equipment and 0.1 percent of total assets.
- Explain why that comparison does not settle materiality. Identify at least two reporting effects that should be checked.
- Name the records needed to decide how to account for the two transactions. State what you can conclude now and what remains unresolved.
Compare your reasoning with the worked answer
The net credit is $72,000 - $68,000 = $4,000. The controller's comparison amount is $81,400,000 × 0.001 = $81,400. The net and each separate amount are below that comparison amount, but this does not establish immateriality.
Determine what each transaction represents and whether it belongs in Equipment before combining them. For example, check whether an amount should change an expense instead of an asset, whether it belongs in this reporting period, and whether it affects an important reported subtotal or a loan requirement. These are questions to investigate, not facts established by this prompt. Obtain the supplier's credit explanation, installation invoices, related contracts, and earlier entries.
Then apply the accounting requirements to the transactions and assess any errors, separately and together, in the company's circumstances. The facts support rejecting the automatic percentage conclusion, not declaring the entry material or immaterial.