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Chapter 22: Q4CE (page 1325)

If a company registered with the SEC justifies a change in accounting method as preferable under the circumstances, and the circumstances change, can that company switch back to its prior method of accounting before the change? Why or why not?

Short Answer

Expert verified

The registrant must not change back to a principle previously used.

Step by step solution

01

Definition of SEC

SEC stands for securities and exchange commission and is defined as the independent federal government regulatory agency responsible for protecting investors.

02

Switching back to the prior methods

At any time, a registrant makes a change in accounting method, the change must be justified as preferable under the circumstances. Thus, a person may not change back to a principle previously used unless it can justify that the previously used principle is preferable in the circumstances as they currently exist.

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Most popular questions from this chapter

At January 1, 2017, Beidler Company reported retained earnings of \(2,000,000. In 2017, Beidler discovered that 2016 depreciation expense was understated by \)400,000. In 2017, net income was \(900,000 and dividends declared were \)250,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Beidler Company

Holtzman Company is in the process of preparing its financial statements for 2017. Assume that no entries for depreciation have been recorded in 2017. The following information related to depreciation of fixed assets is provided to you.

1. Holtzman purchased equipment on January 2, 2014, for \(85,000. At that time, the equipment had an estimated useful life of 10 years with a \)5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2017, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a \(3,000 salvage value.

2. During 2017, Holtzman changed from the double-declining-balance method for its building to the straight-line method. The building originally cost \)300,000. It had a useful life of 10 years and a salvage value of \(30,000. The following computations present depreciation on both bases for 2015 and 2016. 2016 2015 Straight-line \)27,000 \(27,000 Declining-balance 48,000 60,000

3. Holtzman purchased a machine on July 1, 2015, at a cost of \)120,000. The machine has a salvage value of \(16,000 and a useful life of 8 years. Holtzman鈥檚 bookkeeper recorded straight-line depreciation in 2015 and 2016 but failed to consider the salvage value.

Instructions (a) Prepare the journal entries to record depreciation expense for 2017 and correct any errors made to date related to the information provided. (Ignore taxes.)

(b) Show comparative net income for 2016 and 2017. Income before depreciation expense was \)300,000 in 2017, and was $310,000 in 2016. (Ignore taxes.)

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin鈥檚 common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd鈥檚 accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd鈥檚 long-term investment in Martin Company securities.

Indicate how the following items are recorded in the accounting records in the current year of Coronet Co. (a) Impairment of goodwill. (b) A change in depreciating plant assets from accelerated to the straight-line method. (c) Large write-off of inventories because of obsolescence. (d) Change from the cash basis to accrual basis of accounting. (e) Change from LIFO to FIFO method for inventory valuation purposes. (f) Change in the estimate of service lives for plant assets

IFRS requires companies to use which method for reporting changes in accounting policies?

(a) Cumulative effect approach.

(b) Retrospective approach.

(c) Prospective approach.

(d) Averaging approach.
See all solutions

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