Depreciation Method

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Depending on the depreciation method that they choice to use, it will reflect the estimate. As noted in the book, “when a company changes the way it depreciates an asset in midstream, the change would be made to reflect a change in, either an estimated future benefit from the asset, the patterns of receiving those benefits, or the company’s knowledge about those benefits” (McGraw-Hill Companies, 2010). When this company changes there previous estimate, they don’t have to amend their prior financial statements because they are using the prospectively approach. The company would just show the change on the financial statements from then on.

As noted in the book and also under the new pronouncements of FASB, changes in accounting estimates are accounted for prospectively. Any change in depreciation method, the company in situation 1 must give an explanation for the change in principle as preferable to the previous method. These changes will affect the balance sheet and the income statement in the current period and in the future periods. A disclosure note should be added to the financial statements to show the change in accounting estimates. The “disclosure note should describe the effect of a change in estimates on income before extraordinary items, net income and related per share for the current period” (McGraw-Hill Companies, 2010).

Situation II.

In this situation Gary Company has decided to make a change in reporting entity. Gary Company was unsure of doing consolidated financial statements because of the political uncertainties of where Allen Company was located. As of December 31, 2009 all changes were made and consolidated financial statements were issued to both Gary Company and Allen Company. These consolidated financial reports would report the financial position and results of operations for both Gary Company and Allen Company.

When changing a reporting entity as listed under SFAS No. 94 requires that the two companies consolidate...
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