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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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It is important in accounting theory to be able to distinguish the types of accounting changes.

Required:

  1. 1. If a public company desires to change from the sum-of-the-years’-digits depreciation method to the straight-line method for its fixed assets, what type of accounting change would this be? Discuss the permissibility of this change.
  2. 2. If a public company obtained additional information about the service lives of some of its fixed assets that showed that the service lives previously used should be shortened, what type of accounting change would this be? Include in your discussion how the change is reported in the year of the change and what disclosures are made in the financial statements or notes.
  3. 3. If a company discovers halfway through a building’s life that it ignored the residual value of the building in computing the straight-line depreciation, what type of accounting change would this be? Include in your discussion how the change is reported in the year of the change, and what disclosures are made in the financial statements or notes.
  4. 4. Changing specific subsidiaries comprising the group of companies for which consolidated financial statements are presented is an example of what type of accounting change? What effect does it have on the consolidated income statements?

1.

To determine

Explain change in accounting principle in the given situation, and the way this change is reported by the company.

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

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...

2.

To determine

Explain change in accounting estimate in the given situation, and the way this change is reported by the company.

3.

To determine

Explain the way in which the error in the given situation is reported by the company.

4.

To determine

Explain change in reporting entity in the given situation, and the way this change is reported by the company.

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