Chapter 11, Problem 18QS

Accounting for changes in estimates; error adjustments  C3  
For each situation, identify whether it is treated as a prior period adjustment or change in accounting estimate.

1. A review of notes payable discovers that three years ago the company reported the entire amount of a payment (principal and interest) on an installment note payable as interest expense. This mistake had a material effect on net income in that year.
2. After using an expected useful life of seven years and no salvage value to depreciate its office equipment over the preceding three years, the company decided early this year that the equipment will last only two more years.
3. Upon reviewing customer contracts, the company realizes it mistakenly reported $150,000 in revenue instead of the actual amount earned of $15,000. This mistake occurred two years ago and had a material effect on financial statements.