Gary Company Case Study

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
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 their operations with their financial subsidiaries, which will then create a new entity that includes them both. With that said, SFAS No. 154 “requires that financial statements of prior period be retrospectively revised to report the financial information for the new reporting entity in all period” (McGraw-Hill Companies, 2010). The reports should show that the reporting entity exists in the prior period. So the “net income, income before extraordinary items, and related per share amounts should be indicated in all periods presented” (McGraw-Hill Companies,
They have also decided that it is feasible to revise their financial statements from the previous years. Although changes in accounting principle and changes in accounting estimates are not easy to distinguish, I feel that Situation I fits best under changes in accounting principle. Change in accounting principle is when a company decides to change from one general accepted accounting principle to a different one. This company is deciding to change their method of accounting. Under changing there accounting principle they must make the changes retrospective, which means they must change there prior financial statements to match the current accounting change they have chosen. As noted in the book, “financial statements issued in previous years are revised to reflect the impact of the change whenever there statements are presented again for comparative purposes” (McGraw-Hill Companies,