Question

For each of the situations described below, provide the information indicated below assuming it is December 2018. Complete your discussion of each situation before going on to the next situation. These are not related and should be looked at separately.

1. Type of accounting change.

2. Manner of reporting the change under current generally accepted accounting principles including a discussion, where applicable, of how amounts are computed.

3. Effect of the change on the balance sheet and income statement.

4. Footnote disclosures that would be necessary.

Case 1- Mikes has been using the cash method for his business accounting records since 2013. In Dec of 2018, he requested that his books be audited. The auditors are requesting that he use accrual accounting.

Case 2 -Mike's accountant recorded $240,000, received on November 30th of 2015, as revenue. It represented an advance payment for a 4 year service contract starting December 1st of 2015.

Case 3- Mike's company received a bill on Dec 1st 2016 from workers compensation indicating that they had not classified their employees correctly and would have to pay fines of $300,000. After discussing it with his attorney's, he received a possible range of between $50,000 to $100,000 in liability for the violation. When the financial statements were issued in 2016, a settlement had not been made with state authorities, so they accrued a contingent liability of $50,000. Late in 2018, a settlement was reached with state authorities to pay a total of $125,000 in penalties.

Case 4 Mike's accountant decided to change from straight line to double declining balance for all tangible assets on January 1 2018.

Answer 1

Case-1

There is no change yet. But if he decides to change the accounting method, it would be a change in accounting principle. And the change should be accounted for retrospectively. The changes would come with balances existing in the balance sheet and income statement that need adjustment.

Case-2

Change in accounting principle and hence retrospectively.

The $240,000 under accrual concept should be accrued over the term of the contract evenly.

Hence, $5,000 per month

Year Change in existing records

2015 Revenue should decrease by $235,000 and Liability should increase by $235,000 Equity should decrease by $235,000

2016 Revenue should increase by $60,000 and Liability should increase by $175,000 Equity should decrease by $175,000

2017 Revenue should increase by $60,000 and Liability should increasee by $115,000 Equity should decrease by $115,000

2018 Revenue should increase by $60,000 and Liability should increasee by $55,000 Equity should decrease by $55,000

Case-3

Change in Accounting Estimate, hence change should be effected prospectively.

Recognise liability of $125,000 in the balance sheet as Workman's Compensation payable.

Case-4

Change in accounting principle and hence should be effecte retrospectively.

Good luck