Question # 3

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).

	Situation	Type of Change	Treatment	Explanation
A	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. The retailer has never accrued for product guarantees.
B	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.
C	A retailer increases bad debts expense from 2.5% to 3% of credit sales.
D	A fashion designer decides to set up an allowance for doubtful accounts at 3% of amounts over 90 days.