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E 20-18 – P 21-14 Week 5 Assignment

E 20-18 Classifying accounting changes

Indicate the appropriate letter the nature of each situation described below:

Type of Change

PR – Change in principle reported retrospectively

PP – Change in principle reported prospectively

E – Change in estimate

EP – Change in estimate resulting from a change in principle

R – Change in reporting entity

N – Not an accounting change

  1. Change from declining balance depreciation to straight- line.  ——
  2. Change in the estimated useful life of office equipment.   ————
  3. Technological advance that renders worthless a patent with an unamortized cost of 45,000.   ———–
  4. Change from determining lower of cost or market for the inventories by the individual item approach to the aggregate approach.   ——
  5. Change from LIFO inventory costing to the weighted-average inventory costing.
  6. Settling a lawsuit for less than the amount accrued previously as a loss contingency.  —–
  7. Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years.  ———-
  8. Change by a retail store from reporting based debt expense on a pay-as-you-go basis to the allowance method.  ———–
  9. A shift of certain manufacturing overhead cost to inventory that previously were expensed as incurred to more accurately measure cost of goods sold. (Either method is generally acceptable.)  ——
  10. Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated.   ———-

Analysis Case 20-10 Various changes

DRS Corporation changed the way it depreciates it computers from the sum-of-the-year’s digits method to the straight-line method beginning January 1, 2011.  DRS also changed the estimated residual value used in computing depreciation for its office building.  At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.


  1. For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be Specific
  2. Why should companies disclose changes in accounting principles?

P 21-11 Prepare a statement of cash flows; direct method

The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company.  Additional information from Arduous’s accounting records is provided also.

See Excel worksheet that is attached.

Additional information from the account records:

  1. During 2011, $6 million of customer accounts were written off as uncollectible.
  2. Investment revenue includes Arduous Company’s 6 million share of the net income of Demur Company, an equity method investee.
  3. Treasury bills were sold during 2011 at a gain of 2 million.  Arduous Company classifies its investments in Treasury bills as cash equivalents.
  4. A machine originally costing 70 million that was one-half depreciated was rendered unusable by a rare flood.  Most major components of the machine were unharmed and were sold for 17million.
  5. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by 3 million.
  6. The preferred stock of Tory Corporation was purchased for 25 million as long-term investment.
  7. Land costing 46 million was acquired by issuing 23 million cash and a 15%, four-year, 23 million note payable to the seller.
  8. A building was acquired by a 15-year capital lease; present value of lease payments, 82 million
  9. 60 million of bonds were retired at maturity.
  10. In February, Arduous issued a 4% stock dividend (4 million shares).  The market price of the $5 par value common stock was $7.50 per share at the time.
  11. In April, 1 million shares of common stock were repurchase as treasury stock at a cost of 9 million.   


Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2011.  Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.)

P 21-14 Statement of cash flows; indirect method; limited information

The comparative balance sheets for 2011 and 2010 are given below for Surmise Company. Net income for 2011 was 50 million.

Please see the attached excel worksheet for this problem


Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2011.  Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method.  You will need to make reasonalbe4 assumptions concerning the reasons for changes in account balances.  A spreadsheet or T-account analysis will be helpful.

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