PROBLEM 5-9

1. The new estimate would be used in computing depreciation expense for 2011. No adjustment of the balance in accumulated depreciation at the beginning of the year would be made. Instead, the remaining depreciable cost would be divided by the estimated remaining life. This is not a change in accounting principle, but rather a change in an estimate, which requires a prospective treatment. Disclosure in the notes to the financial statements is appropriate, if material.

2. The additional assessment should be shown on the current period's income statement. If material it should be shown separately; if immaterial it could be included with the current year's tax expense. Only if the additional assessment were from the correction of an error should it appear on the statement of retained earnings and any comparative numbers that would appear in the financial statements. If the assessment was due to an error, details should be discussed in the financial statement notes.

3. The effect of the error at December 31, 2010, should be shown as an adjustment of the beginning balance of retained earnings on the retained earnings statement (net of applicable income taxes). The current year's expense should be adjusted (if necessary) for the possible carry forward of the error into the 2011 expense computation. Any comparative figures appearing on the financial statements would also have to be retroactively adjusted, as well as details of the error should be discussed in the notes.

4. The declaration of the cash dividend will be reflected as a reduction in retained earnings in the statement of retained earnings and will be also result in a current liability on the balance sheet at December 31, 2011 as the payment date is February 1, 2012.
PROBLEM 5-9 (Continued)

5. The fact that the change in accounting principle took place should be disclosed together with