Some business events and accounting decisions may affect both prior-year and current-year results. These events and decisions

Fantastic news! We've Found the answer you've been seeking!

Question:

Some business events and accounting decisions may affect both prior-year and current-year results. These events and decisions may or may not need disclosure in or revision of the financial statements.

The following business events and accounting decisions affect the financial reporting of Carolina, Inc., for Year 9. Carolina presents comparative financial statements for Years 8 and 9 only. For each of the events and decisions listed, indicate the appropriate general accounting treatment required for Carolina's financial reporting by selecting the appropriate circle.

Cumulative-effect approach -- Include the cumulative effect of the adjustment of prior-period statements as a separate component of income for Year 9. Do not revise the Year 8 financial statements.

Retrospective-application approach -- Reflect the item in the Year 9 statements and revise the Year 8 financial statements.

Current and prospective approach -- Reflect the item in Year 9 and future financial statements. Do not revise the Year 8 financial statements.

Restatement approach -- Make a prior-period adjustment to correct an error in accounting.

Event or Decision	A	B	C	D
1. As a result of a product improvement, Carolina determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
2. The equipment that Carolina manufactures is sold with a 5-year warranty. This warranty cannot be purchased separately by customers. Because of a production breakthrough, Carolina reduced its computation of warranty costs from 3% of sales to 1% of sales.
3. Carolina changed from LIFO to FIFO to account for its finished goods inventory.
4. Carolina changed from FIFO to average cost to account for its raw materials and work-in-process inventories.
5. Carolina sells extended service contracts on its products. Because related services are performed over several years, in Year 9 Carolina changed from the cash method to the accrual method of recognizing income from these service contracts.
6. During Year 9, Carolina determined that an insurance premium paid and entirely expensed in Year 7 was for the period January 1, Year 7, through January 1, Year 9.
7. Carolina changed its method of depreciating office equipment from an accelerated method to the straight-line method to reflect costs more accurately in the later years of its useful life.
8. Carolina instituted a pension plan for all employees in Year 9 and adopted the relevant GAAP. Carolina had not previously had a pension plan.