On January 2, 2013, Quo Inc. hired Reed as its controller.
During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 2012 and before, and instituted new accounting policies. Quo's 2013 financial statements will be presented in comparative form with its 2012 financial statements. Items a through i represent Quo's transactions.
a. Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, it switched accounting for these long-term contracts from the completed-contract method to the percentage- of-completion method.
b. As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
c. The equipment that Quo manufactures is sold with a 5-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
d. Quo changed from LIFO to FIFO to account for its finished goods inventory.
e. Quo sells extended service contracts on its products. Because related services are performed over several years, in 2013 Quo changed from the cash method to the accrual method of recognizing income from these service contracts.
f. During 2013, Quo determined that an insurance premium paid and entirely expensed in 2012 was for the period January 1, 2012, through January 1, 2014.
g. Quo changed its method of depreciating office equipment from an accelerated method to the straight-line method to more closely reflect the pattern of benefits.
h. Quo instituted a pension plan for all employees in 2013 and adopted GAAP. Quo had not previously had a pension plan.
i. During 2013, Quo increased its investment in Worth Inc. from a 10% interest, purchased in 2012, to 60%. As a result of its increased investment, Quo changed its method of accounting for investment in subsidiary from the fair value method to the consolidation method.
Required:
1. Indicate how Quo should classify each transaction.
2. Indicate the proper accounting treatment (retrospective adjustment, prior period adjustment, prospective) for each transaction.