Accounting changes are categorized as:
1. Changes in principle.
2. Changes in estimate.
3. Changes in reporting entity.
Q20 – 4
Lynch should report its change in depreciation method as a change in estimate instead of a change in accounting principle. This is because a change in depreciation method is considered a change in accounting estimate reflected by a change in accounting principle.
The company employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight line over the remaining useful life. A disclosure note should justify that the change is preferable and describe the effect of a change on any financial statement line items and per share amounts affected for all periods reported.
Q 20 – 7
Accounting records of previous years usually are not enough to determine the cumulative income effect of the change for the previous years when a company changes to the LIFO inventory method from another inventory method. The beginning inventory in the year the LIFO method is adopted becomes the base year inventory for all future LIFO calculations. A disclosure note would be included in the financial statements describing the nature of and justification for the change as well as an explanation as to why retrospective application was impracticable.
Q 20 – 12
When discovering an error, previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. Any account balances that currently are incorrect as a result of the error should be corrected by a journal entry.
BE 20 - 3
When a company changes to the LIFO inventory method from another inventory method, accounting records of previous years often are inadequate to determine the cumulative income effect of the change for prior years. Usually, a company changing to LIFO generally does not revise the balance in retained earnings.
BE 20 – 6
Receiving more royalty revenue in…