Ch 20 Case Study Domingo Corporation changed the way it depreciates its computer
ID: 2574711 • Letter: C
Question
Ch 20 Case Study
Domingo Corporation changed the way it depreciates its computers from the sum-of-the-year’s-digits method to the straight-line method beginning January 1, 2018. Domingo also changed its estimated residual value used in computing depreciation for its office building. At the end of 2018, Domingo changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.
Required:
For each accounting change Domingo undertook, indicate the type of change and how Domingo should report the change. Be specific.
Why should companies disclose changes in accounting principles?
Explanation / Answer
1, Change in the method of depreciation from sum of digits method to straight line method is a change in the accounting principle of the firm. The company must file a IRS Form 3115, Application for Change in Accounting Method which will include a justification for change in the method with supporting documents. Once IRS approves of the change in the method of depreciation, the change in the method of depreciation must be shown by way of footnote in the annual report and the reason for the change. Also accounting has to be done prospectively for the change in method.
2. Change in the estimate of the residual value is a change in accounting estimate. This has to be recognised prospectively in the profit and loss account of the company for the period of change and future periods if the change has effects on both the periods.The company has to diclose the same in the annual report, the nature of change in the estimate for residual value, the amount of change , the current and future effect it is expected to have on the financial position of the company.
3. The change in the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared is a change in the reporting entity. The change in the reporting entity has to be applied retrospectively for the prior periods for the financial effect to be perceived on the new reporting entity.