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Chapter 22: Question 1 (page 1305)

In recent years, the Wall Street Journal has indicated that many companies have changed their accounting principles. What are the major reasons why companies change accounting methods?

Short Answer

Expert verified

The Accounting principles are the rules and regulations, and the reasons to change them are to bring change to the whole company and produce better accounting reports.

Step by step solution

01

Definition of accounting principles

Accounting principles refer to the rules and regulations which the companies have to follow when recording and reporting the financial data.

02

Explanation of reasons

The companies change accounting methods because of the following reasons:

  1. There is a requirement of change in accounting methods of the whole organization and its standards of accounting
  2. If the new accounting method shows more reliable and relevant accounting reports

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Most popular questions from this chapter

Simmons Corporation owns stock of Armstrong, Inc. Prior to 2017, the investment was accounted for using the equity method. In early 2017, Simmons sold part of its investment in Armstrong, and began using the fair value method. In 2017, Armstrong earned net income of \(80,000 and paid dividends of \)95,000. Prepare Simmons’s entries related to Armstrong’s net income and dividends, assuming Simmons now owns 10% of Armstrong’s stock.

Identify and describe the approach the FASB requires for reporting changes in accounting principles.
  1. On January 1, 2014, Jackson Company purchased a building and equipment that have the following useful lives, salvage values, and costs. Building, 40-year estimated useful life, \(50,000 salvage value, \)800,000 cost Equipment, 12-year estimated useful life, \(10,000 salvage value, \)100,000 cost The building has been depreciated under the double-declining-balance method through 2017. In 2018, the company decided to switch to the straight-line method of depreciation. Jackson also decided to change the total useful life of the equipment to 9 years, with a salvage value of $5,000 at the end of that time. The equipment is depreciated using the straight-line method.
  2. Instructions (a) Prepare the journal entry(ies) necessary to record the depreciation expense on the building in 2018.
  3. (b) Compute depreciation expense on the equipment for 2018.

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to reporting accounting changes.
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