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Chapter 22: Question 6 (page 1305)

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

Short Answer

Expert verified

An accounting estimate is a simple change in the realizability of an asset or liability. The second part occurs when the change in accounting estimates is inseparable from the effect of related change in principle.

Step by step solution

01

Definition of change in estimate

The change in estimate is defined as a simple change in how an individual perceives the realizability of an asset or liability—for example, changes in estimates of warranty costs.

02

Change in accounting estimate affected by the change in accounting principle

This situation occurs when the change in accounting estimates is inseparable from the effect of a related change in accounting principle.

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Most popular questions from this chapter

In recent years, the Wall Street Journal has indicated that many companies have changed their accounting principles. What are the major reasons why companies change accounting methods?

Sesame Company purchased a computer system for \(74,000 on January 1, 2016. It was depreciated based on a 7-year life and an \)18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.

Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.

Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 \(100,000 \) 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000

Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?

(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?

(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?

(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?

Identify and describe the approach the FASB requires for reporting changes in accounting principles.

Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.
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