Question

Each of the following situations occurred during 2021 for one of your audit clients: 

1. An inventory write-down due to obsolescence. 

2. Discovery that depreciation expenses were omitted by accident from 2020’s income statement. 

3. The useful lives of all machinery were changed from eight to five years. 

4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method. 

5. Restructuring costs were incurred. 

6. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered a component of the entity. 

7. The inventory costing method was changed from FIFO to average cost. 

 

Require:

1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material): 

a. As an unusual gain or loss 

b. As a prior period adjustment 

c. As a change in accounting principle 

d. As a discontinued operation 

e. As a change in accounting estimate 

f. As a change in accounting estimate achieved by a change in accounting principle 

2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2. 

 

 

Answer 1

Situation	Treatment (a-f)	Financial statement presentation(CO,BC or RE)
1.	As a change in accounting estimate.(e)	It will be included in continuing operations.(CO)
2.	As a prior period adjustment.(b)	It would appear as an adjustment to Retained Earnings.(RE)
3.	As change in accounting estimate.(e)	It will be included in continuing operations.(CO)
4.	As a change in accounting estimate achieved by a change in accounting principle.(f)	It will be included in continuing operations.(CO)
5.	As an unusual or infrequent gain or loss.(a)	It will be included in continuing operations.(CO)
6.	As a discontinued operation.(d)	It will be included below continuing operations.(BC)
7.	As a change in accounting principle.(c)	It would appear as an adjustment to Retained Earnings.(RE)

Situation	Treatment (a-f)	Financial statement presentation(CO,BC or RE)
1.	As a change in accounting estimate.(e)	It will be included in continuing operations.(CO)