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Chap020 - Chapter 20 Accounting Changes and Errors Chapter...

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Chapter 20 - Accounting Changes and Errors Question 20-1 Accounting changes are categorized as: 1. Changes in principle (when companies switch from one acceptable accounting method to another) 2. Changes in estimate (when new information causes companies to revise estimates made previously) 3. Changes in reporting entity (the group of companies comprising the reporting entity changes) Question 20-2 Accounting changes can be accounted for: 1. Retrospectively (prior years revised), or 2. Prospectively (only current and future years affected). Question 20-3 In general, we report voluntary changes in accounting principles retrospectively. This means revising all previous period’s financial statements as if the new method were used in those periods. In other words, for each year in the comparative statements reported, we revise the balance of each account affected. Specifically, we make those statements appear as if the newly adopted accounting method had been applied all along. Also, if retained earnings is one of the accounts whose balance requires adjustment (and it usually is), we revise the beginning balance of retained earnings for the earliest period reported in the comparative statements of shareholders’ equity (or statements of retained earnings if they’re presented instead). Then we create a journal entry to adjust all account balances affected as of the date of the change. In the first set of financial statements after the change, a disclosure note would describe the change and justify the new method as preferable. It also would describe the effects of the change on all items affected, including the fact that the retained earnings balance was revised in the statement of shareholders’ equity. 20-1 Chapter 20 Accounting Changes and Errors QUESTIONS FOR REVIEW OF KEY
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Chapter 20 - Accounting Changes and Errors Answers to Questions (continued) Question 20-4 Lynch should report its change in depreciation method as a change in estimate, rather than as a change in accounting principle. This is because a change in depreciation method is considered a change in accounting estimate reflected by a change in accounting principle. In other words, a change in the depreciation method is adopted to reflect a change in (a) estimated future benefits from the asset, (b) the pattern of receiving those benefits, or (c) the company’s knowledge about those benefits. The effect of the change in depreciation method is inseparable from the effect of the change in accounting estimate. Such changes frequently are related to the ongoing process of obtaining new information and revising estimates and, accordingly, are actually changes in estimates not unlike changing the estimated useful life of a depreciable asset. Logically, the two events should be reported the same way.
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