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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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During 2019, White Company determined that machinery previously depreciated over a 7-year life had a total estimated useful life of only 5 years. An accounting change was made in 2019 to reflect the change in estimate. If the change had been made in 2018, accumulated depreciation at December 31, 2018, would have been $1,600,000 instead of $1,200,000. As a result of this change, the 2019 depreciation expense was $100,000 greater than it would have been if no change were made. Ignoring income tax considerations, what is the proper amount of the adjustment to White’s January 1, 2019, balance of retained earnings?

  1. a. $0
  2. b. $100,000
  3. c. $280,000
  4. d. $400,000

To determine

Find the correct option, the option which explains the correct type of 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

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...

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