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Topic
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I’m having trouble grasping what an inseparable Change in Accounting Principle is. In the Becker lecture, he just grazed over it and didn’t explain what it is. I know that a change in estimate is prospective, but how can I tell when a change in accounting principle is inseparable from a change in estimate. Here’s a question over it that I missed:
“At December 31, Year 2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, Year 1, $300,000 of which were to be written off in Year 2 and the remainder in Year 3. Off-Line’s income tax rate is 30%. In its Year 3 financial statements, what amount should Off-Line report as cumulative effect of change in accounting principle?
a. $200,000
b. $500,000
c. $350,000
d. $0
Explanation
Choice “d” is correct. A change in method of accounting for demo costs is a change in accounting principle inseparable from a change in estimate. When a change in accounting principle is considered inseparable from a change in estimate, the change is handled as a change in estimate – prospectively. No cumulative effect adjustment is made.
Choices “a”, “c”, and “b” are incorrect since no cumulative effect adjustment is made. “
Can someone explain it so I can recognize when it is inseparable?
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