Changes in Accounting Policy Problem

During 2015, Delta Power Company changed its accounting policy for the treatment of borrowing costs that are
directly attributable to the construction costs of a hydro-electric power station that is now under operation. On
December 31, 2014 at the end of construction the Hydro-Electric power satiation shows a balance of $1,284,000.
In previous periods, Delta had capitalized such costs. It has now decided to treat them as expense, rather than
capitalize them. Management judges that the new policy is preferable, because it results in a more transparent
treatment of finance costs and is consistent with local industry practice, making Delta’s financial statement more
comparable.
Delta Power capitalized borrowing costs incurred of $36,000 during 2014 and $48,000 in periods just prior to
2014.
The accounting records for 2015 show earnings before interest and taxes of $420,000 and interest expense of
$24,000 (which relates to 2015). The power station is under operation from the beginning of 2015, during 2015
the entity has recognized depreciation of $50,000 on the power station because it is now in use. In 2014, Delta
reported; earnings before interest expense and taxes 250,000 and no interest expenses. 2014 opening retained
earnings was $120,000 and closing retained earnings was $253,000. Delta had $1,000,000 of share capital (par
value $10) throughout, during 2015 Delta issued new equity of $800,000 at a premium of 20% to support its
working capital needs. Delta has no other components of equity and is subject to 30% tax bracket.
Required:
a. Restated income statement for the year ended 2014 and income statement for the year ended 2015.
b. Prepare the statement of changes in stockholders’ equity showing the effect of changes in accounting
policy.
c. Tabulate the effect of above change on Hydro-Electric Power Station.
d. What information should be disclosed in the financial statement for the above changes in accounting
policy?

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