| Course | ACC-6010 Intermediate Accounting III |
|---|---|
| Module | Module 6 |
| Paper type | Written Assignment 6: accounting changes and error analysis |
| Length | About 753 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | M.S. in Management in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6010 Module 6
Palisades Optical Corp.: Leaving LIFO, Fixing a Counterbalancing Error and Revising a Warranty Estimate
Student Name
M.S. in Management in Accounting, Thomas Edison State University
ACC-6010: Intermediate Accounting III
Mentor Name
Month Day, Year
Palisades Optical Corp.: Leaving LIFO, Fixing a Counterbalancing Error and Revising a Warranty Estimate
Introduction
Accounting changes fall into three categories, and each has its own treatment. A new accounting principle is pushed back through every year presented, so the statements look as though FIFO had been in place all along. A revised estimate only touches this year and the years ahead; nothing earlier is reopened. Errors are corrected by restating the periods affected (Kieso et al., 2012). The hardest part of each problem is deciding which category applies.
Problem 1: A Change From LIFO to FIFO
Palisades decided in 2026 to switch from LIFO to FIFO, arguing that FIFO better reflects the flow of its short-lived optical components and makes its results comparable with competitors that report under IFRS. Its comparative statements present 2026 and 2025.
The change raises pretax income by the increase in the difference each year: $70,000 for 2025 and $30,000 for 2026. The cumulative effect before the earliest period presented, the $350,000 difference at the end of 2024, adjusts opening retained earnings for 2025, net of 21% tax: $350,000 x 0.79 = $276,500.
The 2025 statements are restated to FIFO, the notes explain why FIFO is preferable and the effect on each line item, and earnings per share for both years reflects the new method. Because companies using LIFO for taxes must use it in their books, Palisades must also change its tax method, which spreads the tax effect of the $450,000 difference over future returns. Jennings et al. (1996) showed that LIFO cost of sales explains equity values better than FIFO cost of sales, even though FIFO gives the more current inventory figure, a trade-off the switch makes visible.
| Inventory at December 31 | LIFO | FIFO | Difference |
|---|---|---|---|
| 2024 | $2,400,000 | $2,750,000 | $350,000 |
| 2025 | 2,600,000 | 3,020,000 | 420,000 |
| 2026 | 2,900,000 | 3,350,000 | 450,000 |
| Restatement | 2025 | 2026 | |
| Pretax income increase | $70,000 | $30,000 | |
| Net income increase after 21% tax | 55,300 | 23,700 | |
| Opening retained earnings adjustment | $276,500 at January 1, 2025 | Carries forward |
Problem 2: A Counterbalancing Inventory Error
During 2026, Palisades discovered that its December 31, 2025 inventory had been understated by $60,000 because a warehouse of finished lenses was missed in the count.
The error counterbalances: by the end of 2026, retained earnings would be right even if nothing were done. But Palisades' 2026 books are still open, so the 2026 income statement would be wrong without a correction, and the 2025 comparatives must be restated. The correcting entry debits Inventory, the beginning balance, $60,000, credits Retained Earnings $47,400 as a prior period adjustment and credits Income Taxes Payable or a deferred tax account $12,600. Hennes et al. (2008) found that deliberate misstatements, unlike innocent slips such as an uncounted warehouse, cost far more executives their jobs, so the note should say plainly what kind of error occurred.
| Effect | 2025 | 2026, if not corrected |
|---|---|---|
| Ending inventory | Understated $60,000 | Correct |
| Cost of goods sold | Overstated $60,000 | Understated $60,000, because beginning inventory was too low |
| Net income after 21% tax | Understated $47,400 | Overstated $47,400 |
| Retained earnings at year end | Understated $47,400 | Correct |
Problem 3: A Change in Estimate
Palisades had accrued warranty costs at 2% of sales, but claims on its newest sensors are running at 3%. The change applies to 2026 and later years only: 2026 warranty expense is 3% of $18,000,000 of sales, or $540,000, and no earlier year is restated. A change in estimate that results from new information is not an error, because the earlier estimate was reasonable when made.
IFRS Application
The frameworks treat the three categories the same way. The difference for Palisades is the starting point: under IFRS, it could never have used LIFO, so Problem 1 would not arise. U.S. companies that adopt IFRS, or IFRS reporters that buy U.S. businesses, face exactly this change.
One change sits between the categories. A switch in depreciation method, for example from double-declining balance to straight line, is treated under both frameworks as a change in estimate effected by a change in principle, so it is applied prospectively rather than by restating prior years. Palisades would disclose why the new method better reflects how the asset's benefits are consumed, along with the effect on current income.
| Item | U.S. GAAP | IAS 8 and IFRS |
|---|---|---|
| Change in principle | Retrospective, with justification that the new method is preferable | Retrospective, if it gives reliable and more relevant information |
| Change in estimate | Prospective | Prospective |
| Correction of an error | Restatement of prior periods | Restatement of prior periods, with an exception only when impracticable |
| LIFO | Permitted | Prohibited |
References
Hennes, K. M., Leone, A. J., & Miller, B. P. (2008). The importance of distinguishing errors from irregularities in restatement research: The case of restatements and CEO/CFO turnover. The Accounting Review, 83(6), 1487-1519. https://doi.org/10.2308/accr.2008.83.6.1487
Jennings, R., Simko, P. J., & Thompson, R. B., II. (1996). Does LIFO inventory accounting improve the income statement at the expense of the balance sheet? Journal of Accounting Research, 34(1), 85-109. https://doi.org/10.2307/2491333
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate accounting (14th ed.). John Wiley & Sons.
Reading the ACC 6010 Module 6 assignment instructions
Accounting changes and error analysis make up Module 6, and its written set ends with the IAS 8 view of the same changes. Expect to classify changes as principle, estimate or entity changes, apply retrospective restatement with a cumulative effect, analyze counterbalancing and noncounterbalancing errors and their effects on several years, prepare correcting entries and compare with IAS 8. The exercise uses invented figures; they continue the invented company from earlier assignments, so the inventory figures fit its earlier statements. Many prompts mix one item of each kind so students must classify before they compute. Expect at least one counterbalancing inventory error that must be traced across two years and one change in estimate that only touches the current year forward.
Inside the ACC 6010 Module 6 example
The introduction states the three categories and their treatments, then stresses that classification is the key decision. Problem 1 lays out inventory under both methods in a table, computes the yearly income effects and the cumulative effect on opening retained earnings, and lists the disclosures and the tax consequence of leaving LIFO. Problem 2 traces a counterbalancing error across two years in a table and gives the correcting entry while the books are open, with research on why the nature of an error matters. Problem 3 applies a change in estimate prospectively. The IFRS application compares treatments and points out that IFRS would have prohibited the starting method.
ACC 6010 Module 6 rubric: what earns full marks
Changes and errors form one of nine assignments sharing the course's 60 percent written share. Mentors look first at whether each change lands in the right category, then at whether the LIFO switch reaches back to the earliest year shown with its after-tax cumulative effect, whether each restated year is right, whether the inventory error is followed through two years of income and retained earnings and whether the correction runs through a prior period adjustment. IFRS answers should note both the similarities and the LIFO prohibition. Tables that show effects by year make complex problems easy to follow and protect partial credit. Restated columns that show prior amounts, the adjustment and the restated amounts make retrospective treatment easy to follow and grade.
Common ACC 6010 Module 6 mistakes, and how to avoid them
Marks slip away when a revised estimate is pushed back into earlier years, when the cumulative effect is measured at the wrong date and when the retained earnings adjustment ignores tax. Ask first which category the change belongs to. For retrospective changes, find the difference at the start of the earliest year presented. An inventory count that is wrong at December 31 flips sign the following year, because it becomes that year's opening figure. Show effects by year in a table. Keep a note of which year each error first affected, since that decides which balances must be restated. A first sample worked on your own restatement figures is free.
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ACC 6010 Module 6 questions, answered
Where can I find a free ACC 6010 Module 6 sample paper?
Palisades Optical's changes and errors assignment is reproduced above: a LIFO to FIFO restatement, a counterbalancing inventory error, a change in estimate and an IAS 8 comparison.
How is a change from LIFO to FIFO reported?
Retrospectively: prior periods presented are restated, and the cumulative effect before the earliest period adjusts that period's opening retained earnings, net of tax.
What is a counterbalancing error?
An error, such as a misstated ending inventory, that reverses in the next period, so retained earnings become correct after two years even without correction.
How is a change in accounting estimate reported?
Prospectively, in the period of change and future periods, without restating earlier years.
Does IFRS allow LIFO?
No. IAS 2 prohibits LIFO, so companies moving to IFRS must change to FIFO or weighted average.