Evaluate each of the following independent situations to determine the type of accounting change (correction of error, change in accounting policy, or change in estimate) and the appropriate accounting treatment (retrospective or prospective).
Required:
a. A furniture maker decreases bad debts expense from 3% to 2% of credit sales.
b. A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days.
c. A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days.
d. A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means “free on board,” and it refers to the point at which custody transfers from seller to buyer.)
e. An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer.
f. A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank’s demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.