ethics case 20 Judgment Case 20-10 Accounting changes; independent situations LO
ID: 2548704 • Letter: E
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ethics case 20
Judgment Case 20-10 Accounting changes; independent situations LO20-11 through L020-5 Sometimes a business entity will change its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Listed below are three independent, unrelated sets of facts relating to accounting changes. Situation I: A company determined that the depreciable lives of its fixed assets are presently too long to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by five years Situation 11: On December 31, 2017, Gary Company owned 51% of Allen Company, at which time Gary reported its investment on a nonconsolidated basis due to political uncertainties in the country in which Allen was located. On January 2, 2018, the management of Gary Company was satisfied that the political uncertainties were resolved and the assets of the company were in no danger of nationalization. Accordingly. Gary will prepare consolidated financial statements for Gary and Allen for the year ended December 31, 2018 Situation III: A company decides in January 2018 to adopt the straight-line method of depreciation for plant equipment previously acquired plant equipment. depreciation had been provided on an accelerated basis Required For each of the situations described above, provide the information indicated below. Complete your discussion of each situation before going on to the next situation 1. Type of accounting change 2. Manner of reporting the change under current generally accepted accounting principles, including a discussion, where applicable, of how amounts are computed 3. Effect of the change on the balance sheet and income statement . Footnote disclosures that would be necessaExplanation / Answer
Situation I:
Type of Accounting Change = Change in "Consistency" princilples of Accounting.
Reporting mannner wil remain same as because only time has changes not the method, but calculated value of depreciation will cahnge and the value of depreciation will increase.
For e.g. if i purchased a Fixed assets for $ 1000 and depreciation will be charged for 8 years under straight line method and and now it has come down to 3 years and reduced by five years. Assumed that depreciation for first year has been charged then depreciation will be $ 125 ($1000/8). for Second year $ 333($1000/3) and for third year it will again same i.e. $ 333($1000/3).
Effects will come in the balance sheet the real book value of assets will change and income will also reduce.
Footnotes: at the end of Balance Sheetnotes needs to be given in detail the compnay has changed the life of the assets by 5 years. The company might give the reason also for that.
Situation II:
Accounting Change: Gary Company will show the assets of the allen company together in their consilidated balance sheet together.
Mannner of Reporting: Yes manner of reporting will change earlier they have shown seperately in their respective company's balance sheet now under Gary Company's Consilidated balance Sheet it will be shown together.
For e.g. Gary Co. Building stood at $ 12000 ans Allen Co. Building stood at $ 13000. Now under the heading Fixed Assets it will Shown $ 25000 ($ 12000 + $13000).
Changes will come in the balance sheet has shown above and any major footnotes are not required for this.
Situation III:
Changes in the role of "Consisyency" principles.
As far as the new Plant is concerned the comapny can charge depreciation directly under straight line method. but for the old palnt the amount of depreciation will change now. the amout of deporeciation will remain smame this time.
For e.g. A plant purchased for $10000 in 2015, the company decided to charge depreciation @ 10% for two years under straight line method. Earlier compnay has purchased a plant of $ 5000 on 2013 and decided to charge depreciation @ 10% for 4 years under reducing balance method. But from 2015 straight line method will be followed by the company.
Solution: First plant $ 5000
Less: Depreciation for Year 2013 $ 500
Plant Value in 2014 $ 4500
Less: Depreciation for Year 2014 $ 450
Plant Value in 2015
($ 4050 + $ 10000) = $ 14050
Less: Depreciation for Year 2015 $ 1405
Plant Value in 2016 $ 12645
Less: Depreciation for Year 2016 $ 1265
Plant Value in 2017 $ 11380
Footnotes: at the end of Balance Sheetnotes needs to be given in details information about why they have change the method of charging depreciation and changes will also come in income statement of the company.
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