Intermediate accounting 2, chapter 21: accounting for changes and errors

for double declining balance, how do you find the rate to use to find book value and perform the problem?

(1/useful life)*2 and then (100-rate)= rate to use then multiply that times cost, and that is your new book value to multiply times cost for the next year

what are the steps to the retrospective approach

1) adjust the carrying amount of affect assets and liabilities (adjust in current year to A,L,RE) 2) recast the financial statements for each prior period presented 3) opening balance of RE is adjusted to show to cumulative effect of the change in prior periods not listed 4) prepare disclosure detailing the change

what are the conditions to determine if something is impracticable?

1) company cannot determine the effects of retrospective application 2) requires assumptions about management in prior period 3) requires significant estimates that cannot be redeveloped

what is change in reporting entity

a change from reporting as one type of entity to another type of entity (change from individual consolidated reporting, change subsidiaries for which company prepares financial statements)

what is an example of a direct effect?

an adjustment to inventory balance due to chaneg in inventory valuation method

what are indirect effects?

any change of current and future cash flows from making accounting changes that does not change prior period amounts

how should we treat errors?

as prior period adjustments and report them in current year as adjustments to beginning retained earnings

if error already counterbalances and the books are NOT closed...what do you do?

entry to correct error in current period and adjust balance of beginning RE

if we were presenting three years of financial statements, where would the cumulative effect go?: 2024, 2025, 2026

beginning retained earnings of 2024

if we were presenting one year of financial statements, where would the cumulative effect go?: 2024, 2025, 2026

beginning retained earnings of 2026

what is the formula to find new depreciation?

book vale of asset/remaining useful life

define out of period adjustments

errors are immaterial

what an accounting change

change from one GAAP principle to another

define prior period adjustments

correct error in current year beginning balance of retained earnings as adjustment based on correction of errors from past periods

how to report changes currently?

do not recast financial statements, instead apply new principle in current year and report cumulative effect with adjustment to opening balance of retained earnings

what is big "r"

errors are material to prior periods: prior periods adjustment required

if error not yet counterbalances and the books are closed.. what do you do?

entry to adjust present balance of retained earnings

define reclassification errors

errors that only effect presentation of items on balance or income statement but does not effect balance sheet totals or net income (interest revenue as part of sales, purchase as bad debt expense, short term receivable in investments)

What are noncounterbalancing errors?

errors that take longer than two periods to correct themselves so they must have correcting entries even if the books are closed

what are counterbalancing errors?

errors that will correct after two periods

what is little "r"

immaterial to prior period but material in current period financial statements: prior periods adjustment required

What is impractibility

is considered impracticable if company cannot determine the prior period effects using every effort to do so

if error not yet counterbalances and the books are NOT closed...what do you do?

make an entry to adjust beginning balance of retained earnings

what is the prospective approach

no changes to prior year financial statements and no reporting cumulative effect of change, apply new principle to current and future years only

if error already counterbalances and the books are closed.. what do you do?

no entry

if reclassification error is in prior period, do we need an adjustment?

no. only if error effects current year or if comparative statements are made

when are changes in accounting principle appropriate?

only when new principle is deemed preferable to old one on basis of improving financial reporting, not other incentives

what is retrospective approach

previous financial statements must be recast (adjust prior years statements using new principle) and adjust beginning balance of retained earnings for the earliest year presented

define restatement

process of revising previously issue financial statements

how do you record change in estimates

prospectively (do not adjust previous reported results, instead account for change in period and future periods if it affects the future)

what is a change in estimate

result of new information (ex: change in useful life, estimates an accrued warranty expenditure)

how do you report change in entity?

retrospective approach

what is the only approach that has an adjusting entry?

retrospective approach

what do you do if it is impossible to decipher if it is a change in principle or change in estimate

treat it as a change in estimate

for non-counterbalancing errors, are there different adjusting entries if the books were closed vs open

yes (look at example 21.14, 21.15)

if comparative statements are prepared, do we have to restate prior periods?

yes (same requirements as change in accounting principle)

For counterbalancing errors, restatement of comparative financial statements is necessary?

yes, even if a correcting entry is not required

what do you do if something is impracticable?

you do not use the retrospective approach, instead use prospective