Creighton, Inc.determined that it had incorrectly estimated both the useful life and the estimated residual value of equipment which it purchased 2 years ago.When accounting for the change in its accounting estimates, Creighton must
A) correct the financial statements of prior years affected by the errors in the estimates.
B) determine the book value at the point of change and depreciate that amount over the remaining useful life.
C) add the amount of the error to the amount of the current year's depreciation expense.
D) determine the effect of the error and report it as a loss on the income statement in Other Revenues and Expenses.

Question

Quizplus · Accepted Answer

When there is a change in accounting estimates, the company must adjust the related asset's carrying amount in the period of the change, rather than correcting prior financial statements. In this case, Creighton needs to determine the new book value of the equipment and depreciate that amount over the remaining useful life. This will result in a change in depreciation expense in the current year's income statement.