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CA22-4 (Analysis of Various Accounting Changes and Errors)
Katherine Irving, controller of Lotan Corp., is aware of a pronouncement
on accounting changes. After reading the pronouncement, she is
confused about what action should be taken on the following items
related to Lotan Corp. for the year
2014.
1. In 2014, Lotan decided to change its policy on accounting for certain
marketing costs. Previously, the company had chosen to defer and
amortize all marketing costs over at least 5 years because Lotan believed
that a return on these expenditures did not occur immediately. Recently,
however, the time differential has considerably shortened, and Lotan is
now expensing the marketing costs as
incurred.
2. In 2014, the company examined its entire policy relating to the
depreciation of plant equipment. Plant equipment had normally been
depreciated over a 15-year period, but recent experience has indicated
that the company was incorrect in its estimates and that the assets should
be depreciated over a 20-year
period.
3. One division of Lotan Corp., Hawthorne Co., has consistently shown
an increasing net income from period to period. On closer examination
of its operating statement, it is noted that bad debt expense and inventory