Other Reporting Issues
Accounting Changes and Errors
LO 6
Understand the reporting of accounting changes and errors.
Changes in Accounting Principle
441
Change in Accounting Principle:
Gaubert Inc. decided in March
2014 to change from FIFO to weightedaverage inventory pricing.
Gaubert’s income before taxes, using the new weightedaverage
method in 2014, is $30,000.
Illustration 420
Calculation of a Change in
Accounting Principle
Illustration 421
Income Statement
Presentation of a Change
in Accounting Principle
(Based on 30% tax rate)
Pretax Income Data
Accounting Changes
Advance slide in presentation
mode to reveal answers.
LO 6
442
Accounted 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.
Examples
include:
►
Useful lives and salvage values of depreciable assets.
►
Allowance for uncollectible receivables.
►
Inventory obsolescence.
Change in Accounting Estimates
Accounting Changes
LO 6
Understand the reporting of accounting changes and errors.
443
Change 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 straightline 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.
444
Equipment
$510,000
Fixed Assets:
Accumulated depreciation
350,000
Net book value (NBV)
$160,000
Balance Sheet
(Dec. 31, 2013)
After
7 years
Equipment cost
$510,000
Salvage value

10,000
Depreciable base
500,000
Useful life (original)
10 years
Annual depreciation
$ 50,000
x
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.
445
Net book value
$160,000
Salvage value (new)
5,000
Depreciable base
155,000
Useful life remaining
8 years
Annual depreciation
$ 19,375
Depreciation
Expense calculation
for 2014.
Depreciation
Expense calculation
for 2014.
Depreciation Expense
19,375
Accumulated Depreciation
19,375
Journal entry for 2014
After
7 years
Change in Accounting Estimate
LO 6
Understand the reporting of accounting changes and errors.
446
Result 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 Errors
Accounting Errors
LO 6
Understand the reporting of accounting changes and errors.
447