Other Reporting IssuesAccounting Changes and ErrorsLO 6 Understand the reporting of accounting changes and errors.Changes in Accounting Principle
4-41Change in Accounting Principle:Gaubert Inc. decided in March 2014 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2014, is $30,000. Illustration 4-20Calculation of a Change inAccounting PrincipleIllustration 4-21Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Pretax Income DataAccounting ChangesAdvance slide in presentation mode to reveal answers.LO 6
4-42Accounted for in the period of change or the period of and the future periods if the change affects both.Not handled retrospectively.Not considered errors.Examplesinclude:►Useful lives and salvage values of depreciable assets.►Allowance for uncollectible receivables.►Inventory obsolescence.Change in Accounting EstimatesAccounting ChangesLO 6 Understand the reporting of accounting changes and errors.
4-43Change in Estimate:Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2014 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Questions:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2014.Change in Accounting Estimate LO 6 Understand the reporting of accounting changes and errors.
4-44Equipment$510,000Fixed Assets:Accumulated depreciation350,000Net book value (NBV)$160,000Balance Sheet(Dec. 31, 2013)After 7 yearsEquipment cost $510,000Salvage value- 10,000Depreciable base500,000Useful life (original)10 yearsAnnual depreciation$ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.First, establish NBV at date of change in estimate.Change in Accounting Estimate LO 6 Understand the reporting of accounting changes and errors.
4-45Net book value $160,000Salvage value (new) 5,000Depreciable base155,000Useful life remaining8 yearsAnnual depreciation$ 19,375Depreciation Expense calculation for 2014.Depreciation Expense calculation for 2014.Depreciation Expense 19,375Accumulated Depreciation 19,375Journal entry for 2014After 7 yearsChange in Accounting Estimate LO 6 Understand the reporting of accounting changes and errors.
4-46Result from:►mathematical mistakes.►mistakes in application of accounting principles.►oversight or misuse of facts.Corrections treated as prior period adjustments.Adjustment to the beginning balance of retained earnings.Corrections of ErrorsAccounting ErrorsLO 6 Understand the reporting of accounting changes and errors.