Intermediate Accounting 2 ass 5

E 20-18: Classifying accounting changes

Indicate with the appropriate letter the nature of each situation described below

  1. EP
  2. E
    3. E
  3. PR
  4. PR
    6. E
    7. R
    8. N
    9. PR
    10. E

Analysis Case 20-11: Various Changes

Ray solutions decided to make the following changes in its accounting policies on January 1, 2011:

  1. Changed from the cash to the accrual basis of accounting for recognizing revenue on its service contracts.

The Ray’s change from the cash basis to the accrual basis recognition for service contract revenue refers to a change to a generally accepted accounting principle from an unacceptable accounting principle. Therefore, such a change is regarded as an error correction.  Ray should report the change by restating the financial statements of the prior period and then adjusting retained earnings for the effect on January 1, 2011. In addition, Ray should disclose the nature as well as the details of the corrections in disclosure notes.

 

  1. Adopted straight-line depreciation for all future equipment purchases, but continued to use accelerated depreciation for all equipment acquired before 2011.

The Ray’s change to straight-line depreciation for all future equipment purchases from accelerated depreciation for all future acquisitions is a change in accounting principle. Therefore, Ray should disclose the nature as well as the justification in the disclosure notes for such a change in depreciation methods to the 2011 financial statements. Also, Ray should disclose the effect of such a change on income for the current year. Since the change was made just for the equipment acquired after January 1, 2011, there is no retrospective application.

 

  1. Changed from the LIFO inventory method to the FIFO inventory method.

 

The change from the LIFO inventory method to the FIFO inventory method by Ray refers to a change in accounting principle for which the company should recast the financial statements for the prior periods to appear as if the company has been using FIFO all along. In addition, Ray should state the nature as well as the justification for the change in the inventory method together with the effects of such a change on the components of financial statement for all the presented accounting periods.

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