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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. A partnership is preparing to become a corporation and sell stock to the public. At this time, it decides to switch from accelerated to straight-line depreciation.
  2. b. A company has been debiting half its advertising costs to an intangible asset account and amortizing these costs over 3 years.
  3. c. A company has been using accelerated depreciation. It now estimates that the pattern of benefits to be received in the future will be equal each period, so it decides to change to the straight-line depreciation method.
  4. d. A company has been using straight-line depreciation for its property, plant, and equipment. It is now buying a new type of machine and elects to use accelerated depreciation on the new machine.
  5. e. A company switches from capitalizing certain expenditures to expensing them due to the issuance of an Accounting Standards Update that makes capitalization of these expenditures no longer generally accepted.

Required:

Identify the correct accounting treatment for the changes (if any) related to the preceding events.

To determine

Indicate the accounting treatment of the given accounting changes and errors.

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. The change in a reporting entity and change in accounting principle are accounted for retrospectively.
  • Prospective method: This method requires that the current financial statements should be accounted for the changes, and the previously reported financial statements need not be revised...

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