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Question 7

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Intermediate Accounting (Kieso)
Found in: Page 1305

Short Answer

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

Marketing costs refer to the cost of showing goods to its future customers, and they should be reported immediately.

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Step by Step Solution

Definition of marketing costs

Marketing costs are defined as the cost incurred on presenting the goods and services of the company to their prospective customers.

Treatment of accounting change

This situation is an example in which it is difficult to differentiate between a change in accounting principle and a change in estimate. In this situation, the change is considered the change in estimates, which should be handled currently and prospectively. Therefore, all the costs which are capitalized should be expensed immediately.

Most popular questions for Business-studies Textbooks

On March 5, 2018, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company’s records for 2016 and 2017, you discover that no adjustments have yet been made for the following items. Items

1. Interest income of $14,100 was not accrued at the end of 2016. It was recorded when received in February 2017.

2. A computer costing $4,000 was expensed when purchased on July 1, 2016. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.

3. Research and development costs of $33,000 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,000 was recorded for 2016 and $11,000 for 2017.

4. On January 2, 2016, Hemingway leased a building for 5 years at a monthly rental of $8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit $20,000 First month’s rent 8,000 Last month’s rent 8,000 $36,000

5. The company received $36,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.

6. Merchandise inventory costing $18,200 was in the warehouse at December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions

Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.

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