Question

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with “Retirement benefits” on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year’s financial statements should be recast when presented in comparative form with the current year’s financial statements

Short answer

The required changes are indicated.

Step-by-step solution

Part 1

The change from the completed contract method to the percentage method of accounting for long-term, construction type contracts. It is a change in accounting principle. Thus, the prior change should be recorded by recasting the financial statement when presented in the comparative form.

Part 2

The change in the estimated useful life of the asset which is previously recorded as a result of newly acquired information will be considered as the change in estimates, hence, there will be no recast to the financial statements of the company

Part 3

The change from deferring and amortizing preproduction costs to recording such as costs as an expense when incurred is a change in accounting estimate

Thus, the change will be shown in current period. There will be no change to recast when the comparative statements are prepared.

Part 4

The change from including the employer share of FICA taxes with payroll tax expenses to including this in the retirement benefits on the income statement of the company. It will not be considered as an accounting change. So, the financial statement will not be recast.

Part 5

The correction of the mathematical error in inventory pricing made in a prior period will be considered as the accounting error. Hence, there will be restatement of the financial statements to represent the comparative statements

Part 6

The change from presentation of statements of individual companies to presentation of consolidated statements, this is the change in accounting entity and there should be restatement of financial statement.

Part 7

The change in method of accounting for the leases for the tax purposes to conform with the financial accounting method is neither a change in accounting principle which means this is not the change in accounting. So, there is no need to recast the financial statement for preparing the comparative form of financial statement.

Part 8

The change from FIFO method of inventory pricing to the LIFO method of pricing will be considered as the change in accounting method. SO, there should be recast of financial statements of the company to present it comparative form.