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Chapter 22: Question 7 (page 1305)

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

Short Answer

Expert verified

Marketing costs refer to the cost of showing goods to its future customers, and they should be reported immediately.

Step by step solution

01

Definition of marketing costs

Marketing costs are defined as the cost incurred on presenting the goods and services of the company to their prospective customers.

02

Treatment of accounting change

This situation is an example in which it is difficult to differentiate between a change in accounting principle and a change in estimate. In this situation, the change is considered the change in estimates, which should be handled currently and prospectively. Therefore, all the costs which are capitalized should be expensed immediately.

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Most popular questions from this chapter

What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.

What is the indirect effect of a change in accounting policy? Briefly describe the approach to reporting the indirect effects of a change in accounting policy under IFRS.

Sesame Company purchased a computer system for \(74,000 on January 1, 2016. It was depreciated based on a 7-year life and an \)18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame鈥檚 entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.

(Change in Estimate鈥擠epreciation) Peter M. Dell Co. purchased equipment for \(510,000 which was estimated to have a useful life of 10 years with a salvage value of \)10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2018, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

Instructions (a) Prepare the entry (if any) to correct the prior years鈥� depreciation.

(b) Prepare the entry to record depreciation for 2018
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