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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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The following are independent events:

  1. a. Changed from the FIFO to the LIFO inventory cost flow assumption.
  2. b. Wrote off patent due to the introduction of a competing product.
  3. c. Changed accounting policy of not accruing interest on notes payable to accruing interest.
  4. d. Increased allowance for uncollectible accounts from 2% to 4% of credit sales.
  5. e. Changed from straight-line to double-declining-balance method.
  6. f. Increased the rate used to compute warranty costs.
  7. g. Purchased another company that requires the presentation of consolidated financial statements in place of unconsolidated financial statements.

Required:

  1. 1. Indicate what type of accounting change or error, if any, is represented by each of the preceding items and the method of accounting (retrospective adjustment, prospective, or prior period adjustment) for the item in the financial statements of the current year.
  2. 2. Next Level Indicate the effect on the financial statements of the item (e.g., which accounts or line items are affected and can increases or decreases generally be expected).

1.

To determine

Identify the type of accounting change, or error, represented in the given events, and the method of accounting required to report the adjustment.

Explanation

Accounting changes: When a company requires to sacrifice the consistent accounting methods and procedures, to enhance the usefulness and relevance of the accounting information, those changes are referred to as accounting changes. Such inevitable accounting changes decrease the comparability and consistency of accounting information. The reasons for accounting changes could be new methods introduced by FASB (Financial Accounting Standards Board), changes in accounting principles, and changes in accounting estimates.

The following are the three types of accounting changes:

  • Change in an accounting principle: This change occurs when a company decides to change from an accounting principle to another, like change from LIFO to FIFO. A change in accounting principle effects the values that impact the figures of previous and current years, thus, impairs the consistency and comparability. Hence, the changes in accounting principle should be adjusted with a retrospective effect to impact the previous financial statements, to increase the comparability and the consistency of the values between the previous and current accounting periods.
  • Change in an accounting estimate: This change occurs when a company decides to change the estimates based on the additional information or future events. A change in accounting estimate results out of new experiences and effects the values of current and future period only, but not the previous periods. Hence, the changes in accounting estimates should be accounted for prospectively.
  • Change in a reporting entity: A change in reporting entity occurs due to changes in ownership and operating control due to acquisition. Hence, the changes in reporting entity should be adjusted with a retrospective effect to represent the parent and subsidiary companies as one entity.

Methods of reporting accounting changes:

  • Retrospective adjustment method: This method requires that the previously reported financial statements should be revised to reflect the current accounting change...

2.

To determine

Mention the effect of the events on the financial statements.

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