Reference no: EM13150682
Sometimes a business entity will change its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Listed below are three independent, unrelated sets of facts relating to accounting changes.
Situation I: A company determined that the depreciable lives of its fixed assets are presently too long to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years.
o Situation II: On December 31, 2008, Gary Company owned 51% of Allen Company, at such time Gary reported its investment on a nonconsolidated basis due to political uncertainties in the country in which Allen was located. On January 2, 2009, the management of Gary Company was satisfied that the political uncertainties were resolved and the assets of the company were in no danger of nationalization. Accordingly, Gary will prepare consolidated financial statement for Gary and Allen for the year ended December 31, 2009.
Situation III: A company decided in January 2009 to adopt the straight-line method of depreciation for plant equipment. The straight-line method will be used for new acquisitions as well as for previously acquired plant equipment for which depreciation had been provided on an accelerated basis.
Required:
For each of the situations, discuss the following and provide support for your conclusions:
The type of accounting change.
The manner of reporting the change under current generally accepted accounting principle.
Where applicable, discuss how amounts are computed.
The effect of the change on the balance sheet and income statement.
The footnote disclosures that would be necessary.
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