CH 22 Class Notes - CHAPTER 22 Accounting Changes and Error...

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CHAPTER 22 – Accounting Changes and Error Analysis I. Accounting Changes A. Change in Accounting Principle 1. 2. 3. If it is impracticable to determine the cumulative effect of the change, the entity shall apply the new principle as if the change was made prospectively (i.e. change to LIFO). 4. Required Disclosures: a. The nature of and justification for the change b. The effect of the change on each financial statement line item c. A statement that comparative information has been retroactively adjusted or that retrospective application is impracticable 1
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CHANGE IN ACCOUNTING PRINCIPLE In 2009, Denson Construction Company elected to change from the completed-contract method to the percentage-of-completion method for accounting for income from long-term construction contracts. The company will continue to use the completed- contract method for tax purposes. The income tax rate is 40%. Income under each of the two methods is presented below: Year Percentage of Completion Completed- Contract Difference Prior to 2009 $780,000 $560,000 $220,000 In 2009 $200,000 $190,000 $ 10,000 The 2009 journal entry to record the change in principle would be: Construction in Process 220,000 Deferred Tax Liability 88,000 Retained Earnings ($220,000 * 60%) 132,000 2
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1. 2. 3. For changes in estimates that are material, a disclosure note should describe the nature of the change and the effect on current income. 4. Change in Estimate Effected by Change in Principle C. Change in Reporting Entity 1. 2. 3. A disclosure note shall describe the nature of and justification for the change, as well as the effect of the change on income before extraordinary items, net income and related per share amounts. 3
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CH 22 Class Notes - CHAPTER 22 Accounting Changes and Error...

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