Chapter 20-2 - 1 ACG 3141: Chapter 20 Accounting Changes...

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Unformatted text preview: 1 ACG 3141: Chapter 20 Accounting Changes and Error Corrections Part 2 (Class 27) 2 Topics Explain how and why changes in estimates are treated prospectively. Describe the situations that constitute a change in reporting entity. Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery. 3 Learning Objectives Explain how and why changes in estimates are treated prospectively. 4 The prospective approach is used when it is: Impracticable to determine some period- specific effects. Impracticable to determine the cumulative effect of prior years. Mandated by authoritative pronouncements. FASB Statement Update Prospective Approach 5 The following items require estimates. 1. Uncollectible receivables. 2. Inventory obsolescence. 3. Useful lives and salvage values of assets. 4. Periods benefited by deferred costs. 5. Liabilities for warranty costs and income taxes. 6. Recoverable mineral reserves. 7. Change in depreciation methods. 8. Present Value of Pension Benefit Obligation Companies report prospectively changes in accounting estimates. Changes in Accounting Estimate 6 A change in depreciation method is considered to be a change in accounting estimate that is achieved by a change in accounting principle. It is accounted for prospectively as a change in accounting estimate. Prospective Approach 7 Universal Semiconductors switched from SYD depreciation to straight-line depreciation in 2006. The asset was purchased at the beginning of 2004 for $63 million, has a useful life of 5 years and an estimated residual value of $3 million. Sum-of-the-Years-Digits Depreciaton (millions) 2004 depreciation 20 $ ($60 x 5/15) 2005 depreciation 16 ($60 x 4/15) Accumulated depreciation 36 $ Changing Depreciation Methods 8 Calculation of Straight-Line Depreciation (millions) Asset's cost 63 $ Less accumulated depreciation to date of change 36 Undepreciated cost on January 1, 2006 27 $ Less estimated residual value 3 To be depreciated over remaining three years 24 Remaining life 3 years Annual straight-line depreciation (2006-2008) 8 Changing Depreciation Methods ÷ 9 Depreciation adjusting entry for 2006, 2007, and 2008. Changing Depreciation Methods 10 Changing an Estimate Changes in accounting estimates are also accounted for prospectively. Let’s look at an example of a change in a depreciation estimate. 11 On January 1, 2002, Towing, Inc. purchased specialized equipment for $243,000. The equipment was depreciated using straight-line and had an estimated life of 10 years and salvage value of $3,000. In 2006 the total useful life of the equipment was revised to 6 years. The 2006 depreciation expense is a. $24,000 b. $48,000 c. $72,000 d. $73,500 Changing an Estimate 12 On January 1, 2002, Towing, Inc. purchased specialized equipment for $243,000. The equipment was depreciated using straight-line...
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This note was uploaded on 10/28/2009 for the course ACG 3141 taught by Professor Graybeal during the Spring '08 term at University of Central Florida.

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Chapter 20-2 - 1 ACG 3141: Chapter 20 Accounting Changes...

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