In: Accounting
Question 33
For each of the following situations, identify the type of change, and whether the change (or correction) should be made prospectively or retrospectively.
Type of Change | Change (or
correction) to be Made |
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(a) | When the company purchased its equipment, it estimated that the equipment would have a useful life of ten years. Now, eight years later, it appears that the equipment will be useful for an additional five years from the current date. |
Correction of a Prior Period ErrorChange of Accounting EstimateChange of Accounting Policy |
ProspectivelyRetrospectively |
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(b) | When the company purchased land several years ago, the accounting clerk posted the journal entry to “buildings” instead of “land.” This was only discovered this year. Depreciation has been recorded on the total value in the buildings account each year. |
Correction of a Prior Period ErrorChange of Accounting PolicyChange of Accounting Estimate |
ProspectivelyRetrospectively |
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(c) | Management has elected to change from the double declining balance depreciation to the straight-line method, because the pattern of benefits has changed. |
Correction of a Prior Period ErrorChange of Accounting PolicyChange of Accounting Estimate |
ProspectivelyRetrospectively |
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(d) | Management has decided to change from the weighted average method of inventory valuation to specific identification due to an improved ability to track each item of inventory. The specific identification is considered reliable and more relevant. |
Correction of a Prior Period ErrorChange of Accounting EstimateChange of Accounting Policy |
ProspectivelyRetrospectively |
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(e) | In 2021 all supplies were expensed as purchased. In 2022 it was discovered that $25,000 of supplies were still on hand that had been purchased in 2021. When the discovery was made, the books for 2021 were already closed. |
Change of Accounting PolicyChange of Accounting EstimateCorrection of a Prior Period Error |
ProspectivelyRetrospectively |
Type of Change | Change (or correction) | ||||
to be Made | |||||
(a) | When the company purchased its equipment, it estimated that the equipment would have a useful life of ten years. Now, eight years later, it appears that the equipment will be useful for an additional five years from the current date. | Change of Accounting Estimate | Prospectively | ||
(b) | When the company purchased land several years ago, the accounting clerk posted the journal entry to “buildings” instead of “land.” This was only discovered this year. Depreciation has been recorded on the total value in the buildings account each year. | Correction of a Prior Period Error | Retrospectively | ||
(c) | Management has elected to change from the double declining balance depreciation to the straight-line method, because the pattern of benefits has changed. | Change of Accounting Estimate | Prospectively | ||
(d) | Management has decided to change from the weighted average method of inventory valuation to specific identification due to an improved ability to track each item of inventory. The specific identification is considered reliable and more relevant. | Change of Accounting Policy | Retrospectively | ||
(e) | In 2021 all supplies were expensed as purchased. In 2022 it was discovered that $25,000 of supplies were still on hand that had been purchased in 2021. When the discovery was made, the books for 2021 were already closed. | Correction of a Prior Period Error | Retrospectively |