Question

For each of the situations described below, provide the information indicated below assuming it is December 2017. 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 2017, 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 2017, 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 2017.

Answer 1

Case -1

Type of accounting change ios from Cash system to mercantile system

Manner of reporting : In notes to the account , auditor have to mention that accounting system has changed

Effect - In balance sheet and income statement , effect should be given for previous year that in case if mercantile was used in p.y, than how much was the profit/loss.

As stated - effect on profit and fact of change - auditor have to report.

Case 2 -            Bank account Dr.        240000

                          To revenue                                 60000

                           To accrued revenue                  180000

in remaining three years :           Accrued revenue account Dr -60000

                                                 To revenue                                        60000

(3) Auditor have to mention contingent liability - in case if liabikity is contingent , if the amount is fixed than liability must be booked .

In 2017   amount 125000 paid , thirs relates to previouus period , auditor have to mention as prior period expenses. in final accounts.

(4) Notes to the accounts must contain the fact that Depreciation menthod changed , further effect on profit/loss assuming double declining since beginning -/+ depreciation as per staright line booked . Auditor have to mention effect on profit /loss in final accounts.