Flamingo Enterprises has a patent that Flamingo would like to expense over the p
ID: 2469236 • Letter: F
Question
Flamingo Enterprises has a patent that Flamingo would like to expense over the patent's useful life. Which of the following accounts would Flamingo credit to record this expense over the patent's life? (Points : 2) Accumulated depreciation. Accumulated depletion. Accumulated amortization or the patent. Amortization expense. Question 2.2. Which of the following statements regarding making changes in accounting principles is least accurate? (Points : 2) Changes in accounting estimates are now treated the same as changes in accounting principles. The general rule is retrospective application. A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted principle. The firm making the change must justify the change. The reported prior year statements should be restated to reflect the new accounting principle.
Explanation / Answer
Patent is a right to use some formula or guidelines owned by somebody. In order to use such patented right a person has to buy it from its owner by paying money. The cost of such purchase is debited in patent account. It is treated like asset. The value of patent is gradually written off over the life of years. Here life of patent will mean number of years the person can use purchased right. Process of writing off patent value is known as amortization.
On amortization, patent account is credited and patent amortization expenses is debited.
------------------------------------------------------------------------------------------------------------------------------------------------------
Point 2:
Accounting principles are basic guidelines of preparing accounting records. At the time of preparing accounts it is not possible to know exact amount. Estimation is required in some cases like depreciation calculation, goodwill valuation etc.
In estimation different rule are availalble. A firm has to follow the same rule once it is adopted. For instance, if a company is using straight line method for depreciation, then it should follow the same in the years to come. If the method is changed then it can be made after considering understated points-
1. Change must be justified on the ground that it will represent in a better way the state of affairs of the concern.
2. It should be carried out with retrospective effect.
3. There should be proper explanation in the form of notes to reflect possible impact on past years results.
All these guidelines are applicable when a firm wants to change accounting principles. Thus changes in accounting estimates are now treated the same way as accounting principle.
However change in accounting principle does not mean firm is changing from one generally accepted principle to another generally accepted principle. It is for representing financial state of affairs in a better way. Thus this statement is less accurate.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.