Creighton,Inc.determined that it had incorrectly estimated both the useful life and the estimated residual value of equipment that it purchased two 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 estimate, such as in this case where the useful life and estimated residual value of equipment have been incorrectly estimated, the company should adjust the depreciation of the remaining useful life based on the revised estimates. This means that the company should determine the book value at the point of change and depreciate that amount over the remaining useful life. Choice A is incorrect because only the financial statements of the period of change need to be adjusted, not prior years. Choice C is incorrect because simply adding the error to the current year's depreciation expense would not accurately reflect the past years' errors. Choice D is incorrect because reporting the effect of the error as a loss on the income statement is not the correct way to handle a change in accounting estimate.