FAR- Change in estimate question

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  • #188310
    Anonymous
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    Q. Timber Co., was evaluating the likelihood of collecting various accounts receivable currently on its books. This evaluation resulted in the decision to change from the direct recognition method to the installment method for recognizing receivables. The accounting treatment for this change is best characterized as:

    a.Prospective.

    b.Cumulative.

    c.Retroactive.

    d.Restatement.

    Explanation

    Choice “a” is correct. A change from direct recognition to the installment method is a change in accounting principle inseparable from a change in accounting estimate that is treated like a change in accounting estimate, prospectively.

    Choice “b” is incorrect. Although changes in accounting principle are often displayed as a cumulative effect adjustment to beginning retained earnings, a change on the face of the financial statements, a change in accounting principle inseparable from a change in accounting estimate is treated like a change in accounting estimate, prospectively.

    Choice “c” is incorrect. Changes in accounting principle inseparable from changes in accounting estimate are given prospective rather than retroactive treatment.

    Choice “d” is incorrect. Changes in accounting principle inseparable from changes in accounting estimate are given prospective rather than retroactive treatment requiring restatement.

    My question is shouldn’t it be treated as an error correction since this is a change from non GAAP (direct method) to GAAP (installment method).

    Please can anyone explain this question to me.

    Thanks

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  • #592093
    M.O.D.
    Member

    I think you are confusing bad debt write-off (direct method is not GAAP) with revenue recognition (both direct recognition and installment method are GAAP).

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

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