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Chapter 22: Question 7 (page 1305)

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

Short Answer

Expert verified

Marketing costs refer to the cost of showing goods to its future customers, and they should be reported immediately.

Step by step solution

01

Definition of marketing costs

Marketing costs are defined as the cost incurred on presenting the goods and services of the company to their prospective customers.

02

Treatment of accounting change

This situation is an example in which it is difficult to differentiate between a change in accounting principle and a change in estimate. In this situation, the change is considered the change in estimates, which should be handled currently and prospectively. Therefore, all the costs which are capitalized should be expensed immediately.

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Most popular questions from this chapter

What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.

Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2017 net income and 2018 net income. 2017 2018 (a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015. (b) Wages payable were not recorded at 12/31/17. (c) Equipment purchased in 2017 was expensed. (d) 2017 ending inventory was overstated. (e) Patent amortization was not recorded in 2018.

(Error Analysis) When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.

2017 2018 Over- Under- No Over- Under- No Item statement statement Effect statement statement Effect

1. Failure to record amortization of patent in 2018.

2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.

3. Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.

4. Failure to record accrued interest on notes payable in 2017; that amount was recorded when paid in 2018.

5. Failure to reflect supplies on hand on the balance sheet at end of 2017.

IFRS requires companies to use which method for reporting changes in accounting policies?

(a) Cumulative effect approach.

(b) Retrospective approach.

(c) Prospective approach.

(d) Averaging approach.

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

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