Question

Roundtree Manufacturing Co. is preparing its year-end financial statements and is considering the accounting for the following items. 1. The vice president of sales had indicated that one product line has lost its customer appeal and will be phased out over the next 3 years. Therefore, a decision has been made to lower the estimated lives on related production equipment from the remaining 5 years to 3 years. 2. The Hightone Building was converted from a sales office to offices for the Accounting Department at the beginning of this year. Therefore, the expense related to this building will now appear as an administrative expense rather than a selling expense on the current year’s income statement. 3. Estimating the lives of new products in the Leisure Products Division has become very difficult because of the highly competitive conditions in this market. Therefore, the practice of deferring and amortizing preproduction costs has been abandoned in favor of expensing such costs as they are incurred. Identify and explain whether each of the above items is a change in principle, a change in estimate, or an error.

Short answer

The first part is a change in estimate, the second part is an error, and the third part is the change in estimates

Step-by-step solution

First Part

It is a change in estimate. Change in the estimate is usually an adjustment to the carrying value or amount of the assets or liability of the company.

Second Part

It is an error. The expenses incurred on the building should go under their respective heads.

Third Part

It is a change in estimate. In this case, there is an adjustment to the value of the assets or the liabilities of the company as the amortization is involved.