Chapter 20 Accounting Changes
20–52 Spiceland/Sepe/Nelson, Intermediate Accounting, Eighth Edition
118. Lindy Company’s auditor discovered two errors. No errors were corrected during 2015. The
errors are described as follows:
(1.) Merchandise costing $4,000 was sold to a customer for $9,000 on December 31, 2015, but
it was recorded as a sale on January 2, 2016. The merchandise was properly excluded
from the 2015 ending inventory. Assume the periodic inventory system is used.
(2.) A machine with a five-year life was purchased on January 1, 2015. The machine cost
$20,000 and has no expected salvage value. No depreciation was taken in 2015 or 2016.
Assume the straight-line method for depreciation.
Required:
Prepare appropriate journal entries (assume the 2016 books have not been closed). Ignore
income taxes.
Answer:
Chapter 20 Accounting Changes
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
119. Name and briefly describe the three categories of accounting changes.
120. Describe the approaches of reporting changes in accounting principles.
121. There is not always a clear-cut distinction between a change in estimate and a change in
principle or a simultaneous change in estimate and change in principle. How are such
situations accounted for?
Chapter 20 Accounting Changes
122. How may accounting changes detract from accounting information?
123. How are accounting errors treated?
124. Describe in detail the way companies report most voluntary changes in accounting principle.
125. A company changes depreciation methods. Briefly describe the steps the company should take
to report this accounting change in its current comparative financial statements.
126. On December 1, 2016, LCD Distributing Company (“LCD or “Company”) issued a press
release announcing its financial results for the fiscal year ended November 30, 2016. Included
was the following information regarding a change in inventory method (in part):
In the fourth quarter of fiscal 2016, the Company changed its inventory valuation
method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO)
method. The change is preferable as it provides a more meaningful presentation of the
Company’s financial position as it values inventory in a manner which more closely
approximates current cost; better represents the underlying commercial substance of
selling the oldest products first; and more accurately reflects the Company’s realized
periodic income.
As required by U.S. generally accepted accounting principles, this change in
accounting principle has been reflected in the consolidated statements of financial
position, consolidated statements of operations, and consolidated statements of cash
flows through retroactive application of the FIFO method. Previously reported net
income (loss) available to common shareholders’ for the fiscal years 2016 and 2015
were increased by $0.4 million and $2 million after income taxes, respectively.
Required:
1. Why does GAAP require LCD to retrospectively adjust prior years’ financial statements
for this type of accounting change?
2. Assuming that the quantity of inventory remained stable during 2015, did the cost of
LCD’s inventory move up or down during that period?
Chapter 20 Accounting Changes
127. Branch Industries changes from declining balance depreciation to straight-line depreciation for
existing assets. Describe in detail the way Branch would account for the change and include
reasons for the accounting.
128. We record and report most changes in accounting principle retrospectively, but sometimes
report the changes prospectively. Explain when it is appropriate to report the changes
prospectively. Provide examples.
129. Describe the way we account for a change in estimate. What is the appropriate accounting if
we are unable to determine whether a change is a change in estimate or a change in principle?
130. What are the situations deemed to constitute a change in reporting entity? Describe the way
changes in reporting entity are reported.
131. Describe the way we account for an error when that error is discovered in a subsequent
reporting period.
Chapter 20 Accounting Changes
132. What are the changes in accounting principle that require the prospective approach?
133. L Company discovered that a three-year insurance premium payment of $240,000 one year
ago was debited to insurance expense.
Required:
1. What action is required? Ignore taxes.
2. What action is required if the error is not discovered until four years after it occurred?
Answer:
Chapter 20 Accounting Changes
134. Some inventory errors are described as “self–correcting” in that they have the opposite
financial statement effect in the period following the errors, thereby “correcting” the original
account balance errors.
Required:
Given this “self–correcting” feature, discuss why these errors should not be ignored and
describe the steps needed to correct these errors.
135. If inventory is understated at the end of 2015 and the error is not discovered, how will net
income be affected in 2016?
Chapter 20 Accounting Changes
136. What is the difference between U.S. GAAP and IFRS with regard to the correction of
accounting errors?