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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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Berkeley Company, a manufacturer of many different products, changed its inventory method from FIFO to LIFO. The LIFO method was determined to be preferable.

In addition, Berkeley changed the residual values used in computing depreciation for its office equipment. It made this change on January 1, 2019, because it obtained additional information.

On December 31, 2019, Berkeley changed the specific subsidiaries comprising the group of companies for which consolidated financial statements are presented.

Required:

1. What kind of accounting change is each of the preceding three situations? For each situation, indicate whether or not the company should show:

  1. a. retrospective application of a new accounting principle
  2. b. effects on the financial statements of the current and future periods
  3. c. restatement of the financial statements of all prior periods

2. Why does the company have to disclose a change in accounting principle?

1.

To determine

Indicate the type of accounting change as referred in the three given situations, and explain the method of reporting the accounting change.

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
  • Change in an accounting estimate
  • Change in a reporting entity

Types of accounting changes and methods used to report these changes:

  1. 1. Since Company B could justify a change in accounting principle from (FIFO to LIFIO) that a new principle (FIFO) is more preferable to the old (LIFO), and that FIFO is improved and more suitable for the business operations in the current conditions, the company applies retrospective adjustment method...

2.

To determine

Explain the need to disclose the changes in accounting principle.

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