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Chapter 22: Question 14 (page 1306)

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

Short Answer

Expert verified

The counterbalancing errors can be offset in 2 weeks, and non-counterbalancing errors offset in the next accounting period.

Step by step solution

01

Difference between counterbalancing and non-counterbalancing errors

The counterbalancing errors are those errors that will be offset or corrected over two periods. But on the other hand, non-counterbalancing errors do not offset in the next accounting period.

02

Examples

Counterbalancing Errors- Failure to record accrued wages or prepaid expenses

Non-counterbalancing errors- Failure to capitalize equipment and record depreciation.

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Most popular questions from this chapter

  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.

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

Identify and describe the approach the FASB requires for reporting changes in accounting principles.

Parsons Inc. has proposed a change from one inventory accounting method to another for financial reporting purposes. The auditor indicates that a change would be permitted only if it is to a preferable method. What difficulties develop in assessing preferability?

(Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fastgrowing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really see your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”

Instructions Answer the following questions.

(a) What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets?

(b) Who could be harmed by Frost’s unusual accounting changes?

(c) What should Crane do in this situation?
See all solutions

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