Hange in Accounting Principles, Change in Estimates, and Errors Correction
Submit the responses to the following questions in a three page MS Word document. Make sure your responses are well written
1. Your company has recently decided to change its method of depreciating long-term assets to be consistent with major competitors. Your company has always used the straight-line method while most other companies in the industry use a declining-balance method. Preliminary computations indicate that changing this accounting principle will reduce Earnings per Share by about 10% in the current year. Naturally, those to whom you report would like to know if there is any way to lessen the impact of this change.
You know that other factors in computing depreciation expense are the estimates of useful life and salvage value. You reason that if the estimated useful life of long-term assets is reassessed with minor modifications to the estimated lives, then switching the depreciation method will not decrease net income this period.
a. Can the plan of reassessing the estimated lives of long-term assets achieve the desired result of allowing the company to change depreciation accounting methods to a declining-balance method without reducing net income this period?
b. Will the company have a higher cash inflow as a result of either the change in principle or the change in estimate?
c. Should the level of a companys income determine the accounting methods that it uses and the accounting estimates that it makes? Why or why not?
2. Most accounting-related errors are detected and corrected in the current period. Of those that go undetected, some will fix themselves over two periods, while other errors may remain undetected for years.
What is difference between those errors that will counterbalance and those that carry over from period to period?
Identify these differences considering such issues as whether the accounts involved are balance sheet and/ or income statement accounts, whether they are current and/ or noncurrent accounts, and whether they involve revenue or expense accounts. Finally, provide a systematic method for analyzing an error to determine if it counterbalances or if a journal entry is necessary to correct the books.