Question
On January 2, 2019, Quo Inc. hired Reed as its controller. During the year, Reed, working closely with Quos president and outside accountants, made changes
On January 2, 2019, Quo Inc. hired Reed as its controller. During the year, Reed, working closely with Quos president and outside accountants, made changes in accounting policies, corrected several errors dating from 2018 and before, and instituted new accounting policies. Quos 2019 financial statements will be presented in comparative form with its 2018 financial statements. Items a through i represent Quos transactions.
Quo manufactures heavy equipment to customer specifications on a contract basis. Due to the issuance of a new Accounting Standard Update, it switched the accounting method for these long-term contracts because the former method is no longer acceptable.
As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
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.
Quo changed from LIFO to FIFO to account for its finished goods inventory.
Quo sells extended service contracts on its products. Because related services are performed over several years, in 2019, Quo changed from the cash method to the accrual method of recognizing income from these service contracts.
During 2019, Quo determined that an insurance premium paid and entirely expensed in 2018 was for the period January 1, 2018, through January 1, 2020.
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.
Quo instituted a pension plan for all employees in 2019 and adopted GAAP. Quo had not previously had a pension plan.
During 2019, Quo increased its investment in Worth Inc. from a 10% interest, purchased in 2018, 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.
Transaction | (1) Classification | (2) Accounting Treatment |
a. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
b. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
c. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
d. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
e. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period adjustment (restatement)ProspectiveRetrospective adjustment |
f. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period adjustment (restatement)ProspectiveRetrospective adjustment |
g. | Change in accounting estimateChange in accounting principle effected by change in accounting estimateCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
h. | Change in accounting estimateChange in accounting principleCorrection of an error Neither accounting change nor accounting error | Prior period (restatement)ProspectiveRetrospective adjustment |
i. | Change in accounting estimateChange in reporting entityCorrection of an error Neither accounting change nor accounting error |
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