| | | | | (1) | | (2) | |
1. | | At December 31, 2019, the client had a receivable of $805,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item. | Accounting principleAccounting estimateNo changesCorrection of an error | | Not appropriateNo changesAppropriate | |
2. | | The client proposes the following changes in depreciation policies. | | | | |
| | (a) | For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2019, would have been $235,000 less. The effect of the change on 2020 income alone is a reduction of $60,000. | | Correction of an errorAccounting principleAccounting estimateNo changes | | AppropriateNo changesNot appropriate | |
| | (b) | For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2020. If straight-line depreciation were used, 2020 income would be $90,000 greater. | | Correction of an errorNo changesAccounting principleAccounting estimate | | Not appropriateAppropriateNo changes | |
3. | | In preparing its 2019 statements, one of the clients bookkeepers overstated ending inventory by $223,500 because of a mathematical error. The client proposes to treat this item as a prior period adjustment. | Accounting estimateNo changesAccounting principleCorrection of an error | | No changesNot appropriateAppropriate | |
4. | | In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the fad type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furnitures introduction. If the new accounting method had been used prior to 2020, retained earnings at December 31, 2019, would have been $366,000 less. | Accounting estimateCorrection of an errorAccounting principleNo changes | | Not appropriateNo changesAppropriate | |
5. | | For the nursery division, the client proposes to switch from FIFO to LIFO inventories because it believes that LIFO will provide a better matching of current costs with revenues. The effect of making this change on 2020 earnings will be an increase of $310,000. The client says that the effect of the change on December 31, 2019, retained earnings cannot be determined. | Correction of an errorNo changesAccounting principleAccounting estimate | | Not appropriateAppropriateNo changes | |
6. | | To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the completed-contract method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2019, would have been $1,054,000 greater. | Correction of an errorNo changesAccounting principleAccounting estimate | | Not appropriateNo changesAppropriate | |