Question

The three presentation options for accounting changes and error analysis are listed below::

   a.    Change in accounting principle.

              b.    Change in accounting estimate.

              c.    Change in reporting entity.

              d.    Error correction.

INSTRUCTIONS

    Following are a series of situations.  You are to select the letter that corresponds with the best presentation of the item on the financial statements for 20x1.

1.) In 20x1, the company incurred interest expense of $36,000 on a 20-year bond issue

2.) In 20x1, the company changed its method of recognizing income from the completed-contract method to percentage-of-completion method.

3.) In 20x1, the company changed its method of depreciating plant assets from the double-declining balance method to the straight-line method.

4.) In 20x1, the company discovered it was using an unaccepted accounting principle to account for certain items and adopts an accepted principle.

5.) A computer that was purchased in 20x1 was estimated to have a ten-year life. In 20x4 it is now considered to have a 2 year remaining life.

6.) After careful consideration, the % used in calculating estimated warranty costs is increased.

7.) During 20x1, a long-term bond with a book value of $4,500,000 was retired at a cost of $5,140,000.

8.) In computing the depreciation in 20x1 for equipment, an error was made which overstated income in that year $95,000. The error was discovered in 20x4.

9.) At the end of 20x1, an audit revealed that the corporation's allowance for doubtful accounts was too large and should be reduced to 3%. When the audit was made in 20x0, the allowance seemed appropriate.

10.) Depreciation on a truck, acquired in 20x1, was understated because the service life had been overestimated. The under-statement had been made in order to show higher net income in 20x1, 20x2, and 20x3.

Answer 1

1) This is just a transaction, no accounting change occurred as a result of this transaction.

2) a. Change in accounting principle.

3) a. Change in accounting principle.

4) d. Error correction

5) b. Change in accounting estimate.

6) b. Change in accounting estimate.

7) This is just a transaction, no accounting change occurred as a result of this transaction.

8) d. Error correction.

9) b. Change in accounting estimate.

10) d. Error correction.