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Lesson 6: Discussion Forum

Each of the following situations occurred during 2016 for one of your audit clients, The Stride Well Company:

1. The write-off of inventory due to obsolescence.

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2. Discovery that depreciation expenses were omitted by accident from 2015’s income statement.

3. The useful lives of all machinery were changed from 8 to 5 years

4. The depreciation method used for all equipment was changed from the declining balance to the straight-line method.

5. Restructuring costs were incurred.

6. The Stride Well Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered a component of the entity.

7. The inventory costing method was changed from FIFO to average cost.

Select one situation from above, and identify the appropriate reporting treatment from the list below (consider each event to be material):

1. As an unusual gain or loss.

2. As a prior period adjustment.

3. As a change in accounting principle.

4. As a discontinued operation.

5. As a change in accounting estimate.

6. As a change in accounting estimate achieved by a change in accounting principle.

Explain how the situation would be included in the income statement

1. in continuing operations,

2. below continuing operations, or

3. appearing as an adjustment to retained earnings.

Explain how the situation is calculated and if the financial reporting should be retrospective or prospective.

You must post your initial response to the discussion board by Wednesday at 11:59 p.m.

You will reply to 4 peers by Sunday at 11:59 p.m. who answered a situation different from the one you have chosen.

1.The Stride Well Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered a component of the entity. A disposal of a component of an entity is required to be reported as a discontinued operation. The result of discontinued operations may be reported separately below the income from continuing operations total. An example of this is as follows:

Income from continuing operations                                                  xxx

Discontinued operations:

       Loss from operation of discontinued equipment                      xxx

       Income tax benefit                                                                       xxx

Loss on discontinued operations                                                       xxx

Financial reporting of discontinued operations is done prospectively. 

2. Scenario (3): The useful lives of all machinery were changed from 8 to 5 years.

This situation is (6) a change in accounting estimate achieved by a change in accounting principle.

It would be included in the income statement in (1) continuing operations (depreciation expense).

The change is accounted for prospectively.  The current book value will be depreciated over the remaining years of the revised useful life.

A justification for the new method must be provided. 

An example of why a company may change the useful life, the machinery wears out sooner than originally estimated.

3.I select 4. The depreciation method used for all equipment was changed from the declining balance to the straight-line method. The appropriate reporting treatment from the list below is 5. As a change in accounting estimate. A change in accounting estimate from a change in the method of calculating depreciation will impact the income statement in continuing operations and will impact the profit and loss of the organization. The situation is calculated by calculating the value of the depreciation since the beginning as per the straight-line method and then find the difference between the amount of depreciation through declining balance to the straight-line method. At last, charge the difference to the Profit and Loss A/c.  A change in accounting estimate from the change in the method of calculating depreciation should always be prospective.

4.For this discussion I am choosing scenario 2, “Discovery that depreciation expenses were omitted by accident from 2015’s income statement.”

This mistake will need number 2, a prior period adjustment, as an appropriate reporting treatment. Assuming the prior period is open, an adjustment to the 2015 Balance sheet and Income statement is needed. A debit to Depreciation expenses on the income statement for the amount omitted is needed and also a credit to Accumulated Depreciation on the Balance Sheet for the same amount. 

This will be included in the income statement as an adjustment to retained earnings, decreasing it.

This debit to depreciation expense and credit to accumulated depreciation will be retrospective financial reporting because it will effect the financial statements for a previous period.

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