On January 2, 2016, Quo Inc. hired Reed as its controller.During the year, Reed, working closely with Quo's president andoutside accountants, made changes in accounting policies, correctedseveral errors dating from 2015 and before, and instituted newaccounting policies. Quo's 2016 financial statements will bepresented in comparative form with its 2015 financial statements.Items a through i represent Quo's transactions.
Quo manufactures heavy equipment to customer specifications on acontract basis. Due to the issuance of a new Accounting StandardUpdate, it switched the accounting method for these long-termcontracts because the former method is no longer acceptable.
As a result of a production breakthrough, Quo determined thatmanufacturing equipment previously depreciated over 15 years shouldbe depreciated over 20 years.
The equipment that Quo manufactures is sold with a five-yearwarranty. Because of a production breakthrough, Quo reduced itscomputation of warranty costs from 3% of sales to 1% of sales.
Quo changed from LIFO to FIFO to account for its finished goodsinventory.
Quo sells extended service contracts on its products. Becauserelated services are performed over several years, in 2016 Quochanged from the cash method to the accrual method of recognizingincome from these service contracts.
During 2016, Quo determined that an insurance premium paid andentirely expensed in 2015 was for the period January 1, 2015,through January 1, 2017.
Quo changed its method of depreciating office equipment from anaccelerated method to the straight-line method to more closelyreflect the pattern of benefits.
Quo instituted a pension plan for all employees in 2016 andadopted GAAP. Quo had not previously had a pension plan.
During 2016, Quo increased its investment in Worth Inc. from a10% interest, purchased in 2015, to 60%. As a result of itsincreased investment, Quo changed its method of accounting forinvestment in subsidiary from the fair value method to theconsolidation method.
Required
1. Indicate how Quo should classify each transaction.
2. Indicate the proper accounting treatment (retrospectiveadjustment, prior period adjustment, prospective) for eachtransaction.
Transaction (1)
Classification (2)
Accounting Treatment a. b. c. d. e. f. g. h. i.
On January 2, 2016, Quo Inc. hired Reed as its controller.During the year, Reed, working closely with Quo's president andoutside accountants, made changes in accounting policies, correctedseveral errors dating from 2015 and before, and instituted newaccounting policies. Quo's 2016 financial statements will bepresented in comparative form with its 2015 financial statements.Items a through i represent Quo's transactions.
Quo manufactures heavy equipment to customer specifications on acontract basis. Due to the issuance of a new Accounting StandardUpdate, it switched the accounting method for these long-termcontracts because the former method is no longer acceptable.
As a result of a production breakthrough, Quo determined thatmanufacturing equipment previously depreciated over 15 years shouldbe depreciated over 20 years.
The equipment that Quo manufactures is sold with a five-yearwarranty. Because of a production breakthrough, Quo reduced itscomputation of warranty costs from 3% of sales to 1% of sales.
Quo changed from LIFO to FIFO to account for its finished goodsinventory.
Quo sells extended service contracts on its products. Becauserelated services are performed over several years, in 2016 Quochanged from the cash method to the accrual method of recognizingincome from these service contracts.
During 2016, Quo determined that an insurance premium paid andentirely expensed in 2015 was for the period January 1, 2015,through January 1, 2017.
Quo changed its method of depreciating office equipment from anaccelerated method to the straight-line method to more closelyreflect the pattern of benefits.
Quo instituted a pension plan for all employees in 2016 andadopted GAAP. Quo had not previously had a pension plan.
During 2016, Quo increased its investment in Worth Inc. from a10% interest, purchased in 2015, to 60%. As a result of itsincreased investment, Quo changed its method of accounting forinvestment in subsidiary from the fair value method to theconsolidation method.
Required
1. Indicate how Quo should classify each transaction.
2. Indicate the proper accounting treatment (retrospectiveadjustment, prior period adjustment, prospective) for eachtransaction.
| Transaction | (1) Classification | (2) Accounting Treatment |
|---|---|---|
| a. | ||
| b. | ||
| c. | ||
| d. | ||
| e. | ||
| f. | ||
| g. | ||
| h. | ||
| i. |
