Chapter 22: Accounting Changes Flashcards
What are the three categories of accounting changes?
Three categories of accounting changes:
- Change in accounting principle
- Change in accounting estimate
- Change in reporting entity
How are changes in accounting principle handled?
Report changes retrospectively:
- Adjust financial statements for each prior period presented
- Adjust the carrying amounts of assets and liabilities, and the cumulative effect of prior income effects, as of the beginning of the first year presented.
————————– BACKGROUND ——————————–
Underwriters Lab Inc. purchased for $300,000 a building that it originally estimated to have a useful life of 15 years and no salvage value. It recorded depreciation for 5 years on a straight-line basis.
On January 1, 2020, Underwriters Lab revises the estimate of the useful life.
It now considers the asset to have a total life of 25 years. Ignore book-tax differences.
——————————— [Q1]———————————-
What is the book value of the building at the beginning of the sixth year?
——————————— [Q2]———————————-
How does Underwriters Lab record depreciation expense for 2020?
——————————— [Q1]———————————-
Five years of depreciation have been taken:
Buildings $300,000
Less: Accumulated Depr (100,000) [=300,000 / 15 x 5 yrs]
Book Value 200,000
——————————— [Q2]———————————-
200,000 book value remains
20 years of useful life remain (25 year useful life and 5 years have passed)
Depreciation = 200,000 / 20 = 10,000
Dr. Depreciation Expense 10,000
Cr. Accumulated Depreciation 10,000
How are “changes in reporting entity” reported?
Report changes to the financial statements for all prior periods presented.
This change would be disclosed in the notes to financial statements (likely in the note on
accounting policies).
How are “accounting errors” reported?
Case 1: Material errors result in restatement of financial statements.
Case 2: Not material errors are reported as corrections to errors and are reflected as an adjustment to retained earnings
(“prior period adjustments”).
