On January 2, 2010, Quo, Inc. hired Reed as its controller. During the year, Reed, working closely with Quo’s president and outside accountants, made changes in accounting policies, corrected several errors dating from 2009 and before, and instituted new accounting policies. Quo’s 2010 financial statements will be presented in comparative form with its 2009 financial statements. Items 1 through 10 represent Quo’s transactions.
1. Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, it switched accounting for these long-term contracts from the completed-contract method to the percentage-of-completion method.
2. As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
3. The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
4. Quo changed from LIFO to FIFO to account for its finished goods inventory.
5. Quo sells extended service contracts on its products. Because related services are performed over several years, in 2010 Quo changed from the cash method to the accrual method of recognizing income from these service contracts.
6. During 2010, Quo determined that an insurance premium paid and entirely expensed in 2009 was for the period January 1, 2009 through January 1, 2011.
7. Quo changed its method of depreciating office equipment from an accelerated method to the straight-line method to more closely reflect the pattern of benefits.
8. Quo instituted a pension plan for all employees in 2010 and adopted GAAP. Quo had not previously had a pension plan.
9. During 2010, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 2009, to 60%. As a result of its increased investment, Quo changed its method of accounting for investment in subsidiary from the fair value method to the consolidation method.
1. Indicate whether Quo should classify each transaction as: (a) a change in accounting principle, (b) a change in accounting estimate, (c) a correction of an error in previously presented financial statements, or (d) neither an accounting change nor an accounting error.
2. Indicate the accounting treatment for each transaction as: (a) a retrospective adjustment approach, (b) a prior period restatement approach, or (c) a prospective approach.