|
1. Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of (LO 1) (a)materiality. |
(b) consistency. In theory, this may be a violation of the accounting concept of consistency. |
|
2. Which of the following is not one of the three types of accounting changes? (LO 1) (a)Change from LIFO to FIFO. |
(d) Correction of understated depreciation expense in a prior period. Errors in financial statements are not considered an accounting change. |
|
3. What approach does the FASB require when accounting for changes in accounting principle? (LO 1) (a)Cumulative. |
(b) Retrospective. The FASB requires the use of the retrospective approach. |
|
4. All of the following are examples of a change in accounting principle except a change from: (LO 2) (a)average cost to LIFO inventory pricing. |
(d) the double-declining balance method to the straight-line method of depreciation. All of the options are examples of a change in accounting principle except a change from the double-declining balance method to the straight-line method of depreciation. |
|
5. On January 1, 2017, Columbia Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $2,320,000 increase in the January 1, 2017 inventory. Assume that the income tax rate for all years is 25%. The cumulative effect of the accounting change should be reported by Columbia in its 2017 (LO 1) (a)retained earnings statement as a $1,740,000 addition to the beginning balance. |
(a) retained earnings statement as a $1,740,000 addition to the beginning balance. $2,320,000 × (100% − 25%) = $1,740,000. |
|
6. On December 31, 2017, Paiva, Inc. appropriately changed its inventory valuation method to weighted-average cost from FIFO cost for financial statement and income tax purposes. The change will result in a $1,480,000 increase in the beginning inventory at January 1, 2017. Assume a 35% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. |
(c) $962,000. $1,480,000 × (100% − 35%) = $962,000. |
|
7. On December 31, 2017, Dodd, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,300,000 increase in the beginning inventory at January 1, 2017. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. |
(c) $1,610,000. $2,300,000 × (100% − 30%) = $1,610,000. |
|
8. A change to LIFO inventory valuation from any other acceptable inventory valuation method: (LO 4) (a)requires restatement of all prior years’ income. |
(b) does not require restatement of prior years’ income. No restatement is required because it would be too difficult and therefore impractical. |
|
9. Which type of accounting change should always be accounted for in current and future periods? (LO 2) (a)Change in accounting principle |
(c) Change in accounting estimate. A change in an accounting estimate should always be accounted for in current and future periods. |
|
10. When a company changes from an accelerated method to the straight-line method of depreciation, this change should be handled as a (LO 2) (a)change in accounting principle. |
(b) change in accounting estimate. When a company changes from an accelerated balance method to the straight-line method of depreciation, this change should be handled as a change in accounting estimate. |
|
11. Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a: (LO 2) (a)change in principle. |
(c) change in estimate. Whenever it is impossible to determine the type of change that has occurred, it is to be considered a change in estimate. |
|
12. Which of the following describes a change in reporting entity? (LO 2) (a)A company acquires a subsidiary that is to be accounted for as a purchase. |
(d) Changing the companies included in combined financial statements. Changing the companies included in combined financial statements describes a change in reporting entity. |
|
13. In 2016, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2017, it will be accounted for: (LO 3) (a)using pro forma data. |
(c) as a prior period adjustment. Error correction is recorded as a prior period adjustment. |
|
14. Koppernaes Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors:
2017/2018 Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? (LO 4) (a)$42,000 overstatement |
(a) $42,000 overstatement $23,000 + $19,000 = $42,000 overstatement. |
|
15. The Chalet Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors:
2017/2018 Advertising expense: Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? (LO 4) (a)$20,500 understatement |
(a) $20,500 understatement $11,000 + $9,500 = $20,500 understatement. |
|
16. On July 1, 2016, Elberta Corp. acquired equipment at a cost of $1,020,000. It is to be depreciated on the straight-line method over a four-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Elberta’s 2016 financial statements. The oversight was discovered during the preparation of Elberta-s 2017 financial statements. Which of the following accounts will not be affected by correcting the error that occurred in 2016, assuming comparative financial statements are not prepared? (LO 3) (a)Depreciation Expense. |
(a) Depreciation Expense. Only depreciation expense will be unaffected by the correction. |
|
17. Which of the following is a reason why companies prefer certain accounting methods? (LO 3) (a)Bonus payments. |
(a) Bonus payments. Companies prefer certain accounting methods for bonus payments among other issues not listed here. |
|
18. Which of the following is not a counterbalancing error? (LO 4) (a)Failure to record accrued wages. |
(b) Failure to record depreciation. Errors that are not offset in the next accounting period are noncounterbalancing errors. |
|
19. All of the following involve counterbalancing errors except the (LO 4) (a)failure to record prepaid expenses. |
(b) failure to adjust for bad debts. Failure to adjust for bad debts is a noncounterbalancing error. |
|
20. All of the following involve counterbalancing errors except the: (LO 4) (a)failure to record prepaid expenses. |
(b) failure to record depreciation. All of the options involve counterbalancing errors except the failure to record depreciation. |
|
1. At the beginning of 2017, Day IT Consulting changed from the recognition over time (percentage-of-completion) to the completed-contract method for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $240,000, and completed-contract $190,000. The tax rate is 30%. Prepare Day IT’s 2017 journal entry to record the change in accounting principle. |
Deferred Tax Liability [($240,000 − $190,000) × 30%]…15,000 Retained Earnings…35,000 …..Construction in Process ($240,000 − $190,000)…50,000 |
|
2. Trivino, Inc. changed depreciation methods in 2017 from straight-line to double-declining-balance. Depreciation prior to 2017 under straight-line was $120,000, whereas double-declining-balance depreciation prior to 2017 would have been $180,000. Trivino’s depreciable assets had a cost of $450,000 with a $30,000 salvage value, and a 5-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Trivino’s depreciable assets. |
This is a change in estimate effected by a change in accounting principle. Cost of depreciable assets…$450,000 Accumulated depreciation…(120,000) = Carrying value at January 1, 2017…330,000 * Double-declining depreciation rate (1 / 5 × 200% = 40%)…40% = Depreciation in 2017…$132,000 Depreciation Expense…132,000 …..Accumulated Depreciation…132,000 |
|
3. In 2017, Elite Company discovered that equipment purchased on January 1, 2016, for $60,000 was expensed at that time. The equipment should have been depreciated over 6 years using the straight-line method, with a $6,000 value. The effective tax rate is 40%. Prepare Elite’s 2017 journal entry to correct the error. |
Equipment…60,000 …..Accumulated Depreciation—Equipment…9,000 …..Deferred Tax Liability…20,400 …..Retained Earnings…30,600 ($60,000 − $6,000 = $54,000; $54,000 / 6 = $9,000) ($60,000 − $9,000 = $51,000; $51,000 × 40% = $20,400) |
|
4. When the records of Padron Corporation were reviewed at the close of 2018, it was discovered that the company failed to record accrued salary expense for the last week in 2017; that amount was recorded when paid in 2018. Indicate whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018. |
2017: overstatement 2018: understatement |
|
CHAPTER LEARNING OBJECTIVES 1. Identify types of accounting changes and understand the accounting for changes in accounting principles. |
… |
|
1. Chapter 22 discusses the different procedures used to report accounting changes and error corrections. The use of estimates in accounting as well as the uncertainty that surrounds many of the events accountants attempt to measure may make adjustments to the financial reporting process necessary. The accurate reporting of these adjustments in a manner that facilitates analysis and understanding of financial statements is the focus of this chapter. |
… |
|
Types of Accounting Changes 2. (L.O. 1) The FASB has standardized the manner in which accounting changes are reported. The three types of accounting changes are as follows: a. Change in accounting principle. A change from one generally accepted accounting principle to another one. |
… |
|
Errors in Financial Statements 3.Errors result from mathematical mistakes, mistakes in applying accounting principles, or oversight or misuse of facts that existed when preparing financial statements. |
… |
|
Changes in Accounting Principle 4. A change in accounting principle is not considered to result from the adoption of a new principle in recognition of events that have occurred for the first time or that were previously |
… |
|
Changes in Accounting Principle 8. Prospective treatment of a change in accounting principle requires no change in previously reported results. Opening balances are not adjusted and no attempt is made to compensate for prior events. Advocates of this position contend that financial statements based on acceptable accounting principles are final since management cannot change prior periods by |
… |
|
Changes in Accounting Principle 5. Three approaches are suggested for recording the effect of changes in accounting principles: (a) currently, (b) retrospectively, and (c) prospectively. The FASB requires that companies use the retrospective approach. |
… |
|
Changes in Accounting Principle 6. Treating a change in accounting principle currently requires computation of the cumulative effect of the change on financial statements in the current year’s income statement as an irregular item. Advocates of this method contend that investor confidence is lost by a retrospective adjustment of financial statements for prior periods. |
… |
|
Changes in Accounting Principle 7. Retrospective Application refers to the application of a different accounting principle to recast previously issued financial statements as if the new principle had always been used. The company shows any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. |
… |
|
Retrospective Changes 9. A retrospective adjustment of the financial statements presented is made by recasting the statements of prior years on a basis consistent with the newly adopted principle. Any part of the cumulative effect attributable to years prior to those presented is treated as an adjustment of beginning retained earnings of the earliest year presented. |
… |
|
Retrospective Changes 10. When a company makes a change in accounting principle, the FASB takes the position that all direct effects should be presented retrospectively, but indirect effects should not be shown retrospectively. The indirect effects are reported only in the current period. |
… |
|
Retrospective Changes 11. When a company cannot determine the prior period effects using every reasonable effort to do so, it is considered impracticable and the company should not use retrospective application. If any one of the following conditions exists, a company should not use retrospective application (a) the company cannot determine the effects of the retrospective application; (b) retrospective application requires assumptions about management’s intent in a prior period or (c) retrospective application requires significant estimates for a prior period and the company cannot objectively verify the necessary information to develop these estimates. |
… |
|
Changes in Estimates 12. (L.O. 2) The FASB requires that changes in estimates (for example, uncollectible receivables, useful lives, and salvage values of assets) should be handled prospectively. Opening balances are not adjusted and no attempt is made to "catch up" for prior periods. The effects of all changes in estimates are accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. |
… |
|
Changes in Estimates 13. For example (ignoring taxes), if an asset with a cost of $250,000 and no salvage value was originally depreciated on a straightline basis for the first 7 years of its 25 year useful life, the book value of the asset at the end of year 7 would be $180,000 ($250,000 – $70,000). If the estimated useful life was revised at the end of year 7, and the asset was assumed to have a remaining useful life of 9 years, the following journal entry would be made for depreciation at the Depreciation Expense ………………………………………….. 20,000* Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate. Also, some problems arise in differentiating between a change in an estimate and a correction of an error. The general rule is that careful estimates that later prove to be incorrect should be considered changes in estimates. |
… |
|
Change in an Entity 14. Reporting a change in an entity requires restating the financial statements of all prior |
… |
|
Corrections of Errors 15. (L.O. 3) The FASB requires that corrections of errors be (a) treated as prior period adjustments, (b) recorded in the year in which the error was discovered, and (c) reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error. |
… |
|
Corrections of Errors 16. The text includes a Summary of Accounting Changes and Corrections of Errors. This summary indicates the accounting to be accorded an accounting change or an error correction along with the financial statement presentation and disclosure requirements to be considered. This summary is an effective way to review the major concepts and to assess your understanding of the manner in which accounting changes and errors should be handled in the financial statements. |
… |
|
Motivations for Change of Accounting Method 17. Managers might have varying motives for reporting income numbers. Research shows some of these reasons involve political costs, capital structure, bonus payments, and to smooth earnings. To counter these pressures, the FASB has declared they will assess proposed standards from a position of neutrality. |
… |
|
Error Analysis 18. (S.O. 4) Errors occurring in the accounting process can result from mathematical mistakes, bad faith accounting estimates, misapplication of accounting principles, as well as numerous other causes. As indicated earlier, the profession requires that errors be treated as prior period adjustments and be reported in the current year as adjustments to the beginning balance of Retained Earnings. |
… |
|
Error Analysis 19. Counterbalancing errors are errors that occur in one period and correct themselves in the next period. Noncounterbalancing errors take longer than two periods to correct themselves and sometimes may exist until the item in error is no longer a part of the entity’s financial statements. In the case of counterbalancing errors, the necessity for preparing a correcting journal entry depends on whether or not the books have been closed. If the books have been closed for the period in which the error is found, no correcting entry is needed. Noncounterbalancing errors should always be corrected if discovered before they correct themselves, even if the books have been closed. The following indicates the accounting treatment for counterbalancing errors based on whether or not the books are closed. 1. The books have been closed for the current year. 2. The books have not been closed for the current year. |
… |
|
Error Analysis 20. Some examples of counterbalancing and noncounterbalancing errors are presented here: Counterbalancing Errors: Noncounterbalancing Errors: |
… |
|
Error Analysis 21. To demonstrate a counterbalancing error assume a building owner received a rent payment for the 2018 rent of $24,000 on December 31, 2017. The following entry was made on 12/31/17 and no adjustment was recorded: Cash 24,000 This would cause Rent Revenue to be overstated in 2017. If the error was found in 2018, the following entry would be made assuming the books had not been closed for 2018: Retained Earnings 24,000 This entry would reduce Retained Earnings for the overstatement of Rent Revenue in 2017 and properly state the Rent Revenue account for 2018. If this error were discovered after the books were closed in 2018, no entry would be made because the error is counterbalanced. |
… |
|
Error Analysis 22. In situations where a great many errors are encountered, use of a work sheet, as demonstrated in the text, can facilitate analysis and ultimate correction of account balances. When numerous accounting errors are encountered, it is important to have an organized approach in deciding on the account balances in need of adjustment. The work sheet provides the organization necessary to provide an orderly approach to error correction. Review of the comprehensive illustration on error correction at the end of the chapter will benefit the student’s understanding of the work sheet and the suggested approach to error analysis and correction. |
… |
|
Change from the Equity Method *23. (L.O. 5) If the investor level of influence or ownership falls below that necessary for continued use of the equity method, a change must be made to the fair value method. The earnings or losses that were previously recognized by the investor under the equity method should remain as part of the carrying amount of the investment with no retrospective application to the new method. |
… |
|
Change to the Equity Method *24. When converting to the equity method, retrospective application is necessary. Such a change involves adjusting the carrying amount of the investment, results of current and prior operations, and retained earnings of the investor as if the equity method had been in effect during all of the previous periods in which this investment was held. |
… |
|
IFRS Insights *25 (L.O. 6) One area in which GAAP and IFRS differ is the reporting of error corrections in previously issued financial statements. While both sets of standards require restatement, GAAP is an absolute standard. Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors. Under GAAP, this exception applies only to changes in accounting principle. |
… |
|
A change that occurs as the result of new information or as |
Change in accounting estimate. |
|
A change from one generally accepted accounting principle |
Change in accounting principle. |
|
A change from reporting as one type of entity to another type of entity. |
Change in reporting entity. |
|
Errors that will be offset or corrected over two periods. |
Counterbalancing errors. |
|
The cumulative effect of the use of the new method on the |
Current adjustment. |
|
Errors occur as a result of mathematical mistakes, mistakes |
Errors in financial statements. |
|
Errors that are not offset in the next accounting period. |
Noncounterbalancing errors. |
|
Supplementary statements that are shown on an "as if" basis. |
Pro Forma statements. |
|
Previously reported results remain; no change is made. |
Prospective adjustment. |
|
The cumulative effect of the use of the new method on the |
Retrospective adjustment. |
|
1. (L.O. 1) Accounting alternatives diminish the comparability of financial information true (T) or false (F) |
1. (T) |
|
2. (L.O. 1) A change in accounting principle results when a company adopts a new true (T) or false (F) |
2. (F) Adoption of a new principle in recognition of events that were previously immaterial is not an accounting change. |
|
3. (L.O. 1) A change in accounting principle results when a company changes from one GAAP to another GAAP. true (T) or false (F) |
3. (T) |
|
4. (L.O. 1) Instituting a policy whereby customers can now purchase merchandise on true (T) or false (F) |
4. (F) This is not a change in an accounting principle but rather a new transaction that results in the use of a principle not previously required. |
|
5. (L.O. 1) If the previously used accounting principle was not acceptable, a change true (T) or false (F) |
5. (F) If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a correction of an error. |
|
6. (L.O. 1) The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principle. true (T) or false (F) |
6. (F) The FASB requires companies to use the retrospective approach for reporting changes in accounting principle. |
|
7. (L.O. 1) When a company changes an accounting principle under the retrospective true (T) or false (F) |
7. (T) |
|
8. (L.O. 1) When a company changes an accounting principle it should not adjust true (T) or false (F) |
8. (F) When a company changes an accounting principle it adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented. |
|
9. (L.O. 1) When a company changes an accounting principle, one of the disclosure true (T) or false (F) |
9. (T) |
|
10. (L.O. 1) The FASB takes the position that companies should retrospectively apply true (T) or false (F) |
10. (F) The FASB takes the position that companies should not change priorperiod amounts for indirect effects of a change in accounting principle. |
|
11. (L.O. 1) Companies should use retrospective application if the company cannot determine the effects of the retrospective application. true (T) or false (F) |
11. (F) Companies should not use retrospective application if the company cannot determine the effects of the retrospective application. |
|
12. (L.O. 1) If it becomes impracticable to use retrospective application for a change in true (T) or false (F) |
12. (T) |
|
13. (L.O. 2) Changes in estimates must be handled prospectively. true (T) or false (F) |
13. (T) |
|
14. (L.O. 2) If a change in an accounting estimate affects current net income by an true (T) or false (F) |
14. (F) Changes in accounting estimates must be handled prospectively, that is, no changes should be made in previously reported results. Opening balances are not adjusted and no attempt is made to catchup for prior periods. |
|
15. (L.O. 2) Whenever it is impossible to determine whether a change in principle or a true (T) or false (F) |
15. (T) |
|
16. (L.O. 2) When it is impossible to differentiate between a change in estimate and true (T) or false (F) |
16. (F) When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a change in estimate. |
|
17. (L.O. 2) When a company makes changes that result in different reporting entities, true (T) or false (F) |
17. (T) |
|
18. (L.O. 3) A change from an accounting principle that is not generally accepted to an true (T) or false (F) |
18. (T) |
|
19. (L.O. 3) GAAP requires that corrections of errors be handled prospectively and true (T) or false (F) |
19. (F) The profession requires that corrections of errors be treated as prior period adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error. |
|
20. (L.O. 3) Counterbalancing errors are two separate errors that offset one another in true (T) or false (F) |
20. (F) Counterbalancing errors are errors that will offset or correct themselves over two periods. For example, the failure to record accrued wages in period one will cause (1) net income to be overstated, (2) accrued wages payable to be understated, and (3) wages expense to be understated. If no attempt is made to correct this error, then in period two net income will be understated, accrued wages payable will be correct, and wages expense will be overstated. The net effect of this error for the two years (at the end of the second year) is that net income, accrued wages payable, and wages expense will be correct. |
|
21. (L.O. 3) Recording the purchase of land as an expense is an example of a true (T) or false (F) |
21. (T) |
|
22. (L.O. 4) If accrued wages are overlooked at the end of the accounting period, true (T) or false (F) |
22. (T) |
|
23. (L.O. 4) If a counterbalancing error is discovered after the books are closed in the true (T) or false (F) |
23. (T) |
|
24. (L.O. 4) An understatement in ending inventory will result in a corresponding understatement of net income. true (T) or false (F) |
24. (T) |
|
*25. (L.O. 5) If an investor’s level of influence has changed requiring the investor to true (T) or false (F) |
*25. (F) If an investor’s level of influence has changed requiring the investor to change from the equity method to the fair value method, the earnings or losses that were previously recognized by the investor under the equity method should remain as part of the carrying amount of the investment with no retrospective adjustment to the new method. |
|
1. (L.O. 1) Which of the following financial statement characteristics is adversely |
1. (B) While the characteristics of usefulness and relevance may be enhanced by changes in accounting, the characteristic of consistency is adversely affected. Consistent financial statements and historical 5 and 10 year summaries particularly can be distorted by changes in accounting. When changes in accounting occur, proper treatment and full disclosure should enable readers of financial statements to comprehend and assess the effects of such changes. The timeliness of financial statements should be unaffected by accounting changes. |
|
2. (L.O. 1) A change in accounting principle is evidenced by: |
2. (C) Because current value accounting is not GAAP, alternatives A and D cannot be correct. A change in accounting principle is defined as a change from one GAAP to another GAAP. Alternative B is incorrect because adopting a principle for a new transaction does not constitute a change in accounting principle. |
|
3. (L.O. 1) Which of the following is not a change in accounting principle? |
3. (C) When a company uses a different method of depreciation for new plant assets, this is not considered a change in accounting principle. A, B, and D are all considered changes in accounting principle. |
|
4. (L.O. 1) Schoen Company experienced a change in accounting principle which it |
4. (A) The company has handled its accounting change prospectively. This method is required to be used for changes in accounting estimates. When a change is handled currently, the cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed. This adjustment is then reported in the current year’s income statement as an irregular item. A retrospective adjustment of the financial statements is made by recasting the financial statements of prior years on a basis consistent with the newly adopted principle and any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. There is no haphazard treatment advocated for accounting changes. |
|
5. (L.O. 1) A company that reports changes retrospectively would: |
5. (D) A company that reports changes retrospectively would adjust prior years’ statements on a basis consistent with the newly adopted principle. In addition the company should show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. |
|
6. (L.O. 1) According to the FASB, which approach is required for reporting changes |
6. (B) The FASB requires that companies use the retrospective approach for reporting changes in accounting principles. |
|
In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. 7. (L.O. 1) What journal entry should Skaggs report at the beginning of 2015? |
7. (A) A journal entry is necessary only for the current year to update the accounts to their corrected status. No journal entries are made in the books for previous years. |
|
In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income 8. (L.O. 1) What journal entry should Skaggs report at the beginning of 2018? |
8. (C) To adjust the financial records for the change from FIFO to average cost, previous year differences are accumulated as follows: Net Income Year…FIFO…Average Cost…Difference in Income 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 2016 79,000 78,000 (1,000) 2017 93,000 94,000 1,000 Total at beginning of 2018 $ 3,000 Therefore the journal entry for Skaggs should be as follows: Inventory 3,000 …..Retained Earnings 3,000 |
|
In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income 9. (L.O. 1) If Skaggs presents comparative statements for 2016, 2017 and 2018, then it should: |
9. (D) If a company changes accounting principles it must change the beginning balance of retained earnings of the earliest year presented. Since Skaggs is presenting comparative statements for 2016, 2017 and 2018, it must change the beginning balance of retained earnings at January 1, 2016. The cumulative effect of the prior years is calculated as follows: Net Income Year FIFO Average Cost Difference in Cost 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 Total at beginning of 2016 $3,000 |
|
10. (L.O. 1) Which of the following is not considered a direct effect of a change in |
10. (A) An employee profit sharing plan based on net income when a company uses the percentage-of-completion method is considered an indirect effect of a change in accounting principle. All the other answers are considered direct effects. |
|
11. (L.O. 1) Weaver Company changes from the LIFO method to the FIFO method in 2018. The increase in pretax income as a result of the difference in the two methods prior to 2016 is $ 100,000 and for the year 2016 is $40,000 and for the year 2017 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2017 should include. |
11. (D) The change in accounting principle from LIFO to FIFO would result in a direct effect adjustment to deferred taxes. Because income increased, there would be a 40% increase in Deferred Tax Liability which is done with a credit entry. The amount is calculated based on the sum of the prior years of $100,000 and $40,000 multiplied by 40%. |
|
12. (L.O. 1) In 2017 the Flynn Company has changed from the percentage-of-completion method to the completed-contract method for long-term construction contracts. The difference in pretax income prior to 2017 is a decrease of $60,000 A. Debit to Deferred Tax Liability of $24,000. |
12. (A) The change in accounting principles from percentage-of-completion method to completed-contract method for long-term construction contracts would result in a direct effect adjustment to deferred taxes. Because income decreased, there would be a 40% decrease in Deferred Tax Liability which is done with a debit entry. The amount is calculated by multiplying the difference in pretax income prior to 2017 by 40%. |
|
13. (L.O. 1) Which of the following is a condition in which retrospective application is A. The company cannot determine the effects of retrospective application. |
13. (C) Retrospective application is still practicable even though a company has changed auditors. All the other answers would make retrospective application impracticable. |
|
14. (L.O. 2) Which of the following is not a part of applying the current and prospective |
14. (B) Restating prior period financial statements is a part of the application of the retrospective approach. That approach is not appropriate for changes in accounting estimates. Alternatives A, C, and D represent the appropriate treatment for the current and prospective approach as applied to accounting for a change in an estimate. |
|
15. (L.O. 2) Changing specific subsidiaries that constitute the group of companies for |
15. (D) This is an example of a change in the reporting entity. This occurs when a company makes a change from reporting as one type of entity to another type of entity. This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods. |
|
16. (L.O. 2) Tang Corporation has a change in accounting that requires Tang to |
16. (C) The question describes most closely the accounting and disclosure requirements necessary for a change in reporting entity. Alternatives A, B and D are all changes in according estimates and do not require the disclosures indicated in the question. |
|
17. (L.O. 3) Julie Company has accounted for its inventory using the NIFO (next-in, A. income statement after income from continuing operations and before |
17. (D) When a company changes from an accounting principle that is not generally accepted (NIFO) to one that is generally accepted (FIFO), the change should be handled as a correction of an error. In considering this change as a correction of an error, it should be handled as a prior period adjustment. Thus, the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings. |
|
18. (L.O. 3) The general rule for differentiating between a change in an estimate and a |
18. (D) Distinguishing between a change in an estimate and a correction of an error is not necessarily determined by a GAAP being involved. Also, materiality is not one of the criteria to be used in differentiating between a change in an estimate and a correction of an error. The best basis for differentiating between a change in one estimate and a correction of an error is to follow the general rule that "careful estimates that later prove to be incorrect should be considered a change in an estimate." |
|
Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: 19. (L.O. 3) Assume that the 2017 errors were not corrected and that no errors |
19. (B) Effect on 2017 Income: Ending inventory $5,000 overstatement ………………. $5,000 over Depreciation expense $2,000 understatement …….. 2,000 over Net effect …………………………………………………….. $7,000 over |
|
Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: Depreciation expense: 20. (L.O. 3) Assume that no correcting entries were made at 12/31/17, or 12/31/18. Ignoring income taxes, by how much will retained earnings at 12/31/18 be |
20. (D) Effect on 2018 Retained Earnings 2017 Ending inventory ……………………………….. $5,000 overstatement …………………………… 0* 2018 Ending inventory ……………………………….. $8,000 understatement …………………………. 8,000 under 2017 Depreciation expense ………………………… $2,000 understatement …………………………. 2,000 over 2018 Depreciation expense ………………………… $4,000 overstatement …………………………… 4,000 under Net effect ………………………………………… $10,000 under *This is an example of a counterbalancing error. This error overstates income by $5,000 in 2017 and understates income by $5,000 in 2018. Thus, at the end of 2018, there is no effect on retained earnings. If the $8,000 inventory error is not corrected, it will correct itself at the end of 2019. The depreciation errors are noncounterbalancing and will cause retained earnings to be in error until specifically corrected. |
|
Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: 21. (L.O. 3) Assume that no correcting entries were made at 12/31/17 or 12/31/18 and |
21. (B) Net Income: 2018 Ending inventory ………………………………………. $8,000 understatement ……………………………… $8,000 over Net effect ………………………………………………. $8,000 over The 2017 and 2018 depreciation expense errors do not affect 2019 net income. |
|
22. (L.O. 4) On December 31, 2017, accrued wages in the amount of $6,500 were not A. No Effect Overstate Overstate No Effect |
22. (C) A failure to record accrued wages is a failure to make the following journal entry: Wages Expense 6,500 Wages Payable 6,500 Thus, the expenses would be understated and the liabilities would be understated. The retained earnings would be overstated because the expense was not recorded. Assets would be unaffected by the failure to record this entry. |
|
23. (L.O. 4) The December 31, 2017, physical inventory of Dunn Company COGS…Liabilities…Retained A. Overstate Overstate Understate Understate |
23. (D) The merchandise was correctly counted in the physical inventory and thus ending inventory and total assets are properly stated. The fact that the purchase was not recorded understates liabilities because accounts payable was not credited. Also, with the purchase not being recorded, the amount of merchandise available for sale is understated and results in an understatement of cost of goods sold. The understatement of cost of goods sold causes both net income and retained earnings to be overstated. |
|
Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost 24. (L.O. 4) Kielty’s income statement for the year ended December 31, 2017, should |
24. (D) The profession requires that corrections of errors be treated as prior period of adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. Therefore, Kielty’s income statement for the year ended December 31, 2017 will not be affected. |
|
Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost 25. (L.O. 4) Before the correction was made and before the books were closed on December 31, 2017, retained earnings was understated by: A. $300,000. |
25. (B) Corrections of errors are treated as prior period adjustments and are reported in the financial statements as an adjustment to the beginning balance of retained earnings. The company should have taken $32,000 for each year [($300,000 $12,000)/9 = $32,000]. Therefore, $64,000 ($32,000 × 2) should have been taken as depreciation expense and $300,000 should not have been recorded as an expense; therefore, the net effect is that retained earnings was understated by $236,000 ($300,000 $64,000). |
|
E2210. Instructions: |
1. a. 6. a. 2. b. 7. b. 3. a. 8. a. 4. b. 9. b. 5. b. 10. b. |
|
Q 22.1: A |
A |
|
Q 22.2: A |
C |
|
Q 22.3: A |
D |
|
Q 22.4: A |
C |
|
Q 22.5: A |
B |
|
Q 22.6: A |
C |
|
Q 22.7: Net Income Year/FIFO/Average Cost Which of the following should Morton do if it presents comparative statements for 2023, 2024 and 2025? A B |
D |
|
Q 22.8: A |
A |
|
Q 22.9: A |
C ($100,000 + $40,000) x 40% = $56,000 |
|
Q 22.10: A |
B |
|
Q 22.11: I. reporting current and future financial statements on a new basis. This is correct answer : |
A |
|
Q 22.12: A |
D |
|
Q 22.13: A |
A |
|
Q 22.14: A |
C |
|
Q 22.15: A |
D |
|
Q 22.16: 2018…..2019 Assume that the 2018 errors were not corrected and that no errors occurred in 2017. The 2018 income before income taxes will be A |
A |
|
Q 22.17:
A |
C |
|
Q 22.18: Expenses…..Retained Earnings…..Liabilities…..Assets A. Understate…..Overstate…..Understate…..No Effect A |
A |
|
Q 22.19: COGS…..Liabilities…..Retained…..Assets A. Understate…..Understate…..Overstate…..No Effect
A |
A |
|
Q 22.20: A |
C |
|
Q 22.21: A |
C |
|
Q 22.22: A |
C |
|
Q 22.23: A |
B To determine this answer, divide the cost of the machine by the estimated years useful. In this case: $700,000 / 5 =$140,000 |
|
Q 22.24: |
correction |
|
No entry will be required for an error if the books have already closed and the error is already __. |
counterbalanced |
|
Q 22.26: A |
A |
|
Q 22.27: A |
D |
|
Q 22.28: A |
D |
|
Q 22.29: Dec. 31, 2017…..Dec. 31, 2018 In addition, on December 31, 2018 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations. A |
A Assets – Liabilities = Working Capital; Understated = $146,000 + $28,800 = $174,800. |
|
Q 22.30: A |
C To determine this answer, first start by subtracting the original price from the original salvage value: $680,000 – $80,000 = $600,000. Then divide this number by the estimated useful life: $600,000/6 = $100,000. Now multiply the yearly depreciation by the number of years depreciation before the change in estimate in 2021: $100,000 X 3 = $300,000. Next, subtract the three year depreciation from the original cost of the equipment: $680,000 – $300,000 = $380,000, which is the book value of the equipment in 2021. The new book value should now be subtracted from the new estimated salvage value: $380,000 – $50,000 = $330,000, which can then be divided by 5 (the years of useful life left 8-3=5): $330,000 /5 = $66,000. |
|
Q 22.31: A |
B |
|
Q 22.32: |
counterbalancing |
|
Q 22.33: A |
D $600,000 – ($600,000 x 5/15) + ($600,000 x 4/15) + ($600,000 x 3/15)= $120,000 book value at Jan. 1, 2021. Straight-line after 3 years depreciation would be $120,000 / 2 = $60,000 for 2021 and 2022. Net Income = $500,000 – $60,000 – ($440,000 x 0.30) = $308,000 |
|
Q 22.34: A |
A Improper treatment of tax liabilities is an accounting error, so changes made to fix it would be considered changes due to error. |
|
Q 22.35: A |
A Companies motivated by political costs often look for accounting methods that will decrease their income. Companies motivated by capital structure will look for accounting methods that can increase their net income. |
|
Q 22.36: A |
C Book value in this case can be determined by subtracting the accumulated depreciation from the purchase price. |
|
Q 22.37:
A |
C |
|
Q 22.38: A |
A |
|
Q 22.39: |
income statement |
|
Q 22.40: A |
A |
|
Q 22.41: A : |
D A favorable profit picture can influence investors, and a strong liquidity position can influence creditors. Too favorable of a profit picture, however, can provide union negotiators and government regulators with ammunition during bargaining talks. |
|
Q 22.42: A : |
B To determine this answer, first start out with how much depreciation has accumulated in three years. To find this, divide the cost by the estimated life, then multiply that number by 3: $1,200,000 /10 = $120,000 X 3 = $360,000. Then subtract the accumulated depreciation from the cost to find the current book value in 2018: $1,200,000 – $360,000 = $840,000. Then using the double-declining balance method with 7 years left, the declining balance rate will be 2/7 (1/7 x 2). Multiply the book value by the declining balance rate to find the depreciation expense: $840,000 X 2/7 = $240,000 (rounded). |
|
Q 22.43: A : |
D Using the sum-of-the-years’-digits method, you would have 8+7+6+5+4+3+2+1 = 36, so $720,000/36 = $20,000. For year 1, you would have depreciation of 8 $20,000 = $160,000. In year 2, you would have depreciation of 7 $20,000 = $140,000. In year 3, you would have depreciation of 6 * $20,000 = $120,000. Therefore, at the end of year 3, you would have total depreciation of $160,000 + $140,000 + $120,000 = $420,000 for a remaining balance of $720,000 – $420,000 = $300,000. Divided over the remaining five years, this gives a new annual depreciation of $300,000/5 = $60,000. |
|
Q 22.44: A : |
C |
|
Q 22.45: A : |
A |
|
Q 22.46: A : |
D In the year in which a company changes a reporting entity, it should disclose in the financial statements the nature of the change and the reason for it. |
|
Q 22.47: A : |
A Changes in accounting estimate employ the current and prospective approach by reporting the current and future financial positions on the new basis and presenting prior period financial statements as previously reported. |
|
Q 22.48: 2018/2019 Ending inventory – $25,000 overstatement/$40,000 understatement Depreciation expense – 10,000/20,000 oveerstatement Assume that no correcting entries were made at 12/31/18, or 12/31/19. Ignoring income taxes, the retained earnings at 12/31/19 will be A : |
D To determine this answer, add the ending inventory understatement for 2019 and the depreciation expense overstatement for 2019 and deduct the depreciation expense understatement for 2018: $40,000 + $20,000 – $10,000 = $50,000. |
|
Q 22.49: A : |
B |
|
Q 22.50: A : |
… |
Share This
Flashcard
