ACC-220 CH 20B Accounting Changes and Error Corrections

net income cost of goods sold inventory

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? (Select all that apply.) - net income - total liabilities - cost of goods sold - inventory - total noncurrent assets

restate the financial statements.

If a company discovers an error in previously issued financial statements, it must - correct the error in the current year. - prospectively apply the new correct method of accounting. - restate the financial statements.

the nature of the error

If a company records an error correction, it must disclose __________ in its notes to the financial statements. - the nature of the error - procedures put into place to prevent further errors - who is responsible for the error

Debit inventory $10,000. Credit retained earnings $10,000.

In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? (Select all that apply.) - Debit cost of goods sold $10,000. - Debit inventory $10,000. - Credit retained earnings $10,000. - Credit inventory $10,000.

Credit retained earnings $30,000. Credit income taxes payable $20,000.

In year 1, Durham Corp. failed to record a sale for $50,000. Durham also failed to record this revenue on the tax return. In year 2, the error was discovered. Durham's tax rate is 40%. Which of the following entries would be required to record the correction of the error including tax effects? (Select all that apply.) - Debit retained earnings $30,000. - Credit retained earnings $30,000. - Credit income taxes payable $20,000. - Debit revenues $50,000.

Increase income tax receivable $12,000 Reason: $120,000 / 6 yrs = $20,000 year x 2 years = $40,000 depreciation expense was not deducted x .30 = $12,000 receivable because reported tax income was higher than it would have been had depreciation been deducted.

In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. What is the tax effect of the prior period adjustment in year 3? - Increase income tax payable $12,000 - Increase income tax payable $20,000 - Increase income tax receivable $20,000 - Increase income tax receivable $12,000

Debit retained earnings $28,000 Reason: $120,000/6 years = $20,000 per year x 2 years = $40,000 less tax savings of $12,000 = $28,000

In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. Which of the following entries would be required to record the correction of the error including tax effects? - Debit retained earnings $28,000 - Debit accumulated depreciation $50,000 - Debit retained earnings $12,000 - Debit retained earnings $40,000 - Credit accumulated depreciation $38,000

Increase income tax receivable $8,000 Reason: $100,000/10 years = $10,000 per year depreciation x 2 years = $20,000 x 40% tax = $8,000

In year 1, Regal Corporation purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation is used. Regal's tax rate is 40%. What is the tax effect of the prior period adjustment in year 3? - Increase income tax receivable $20,000. - No effect on income tax receivable or payable. - Increase income tax payable $12,000. - Increase income tax receivable $8,000

debit equipment; credit repair expense.

Iris Company purchased equipment for cash and incorrectly recorded the entry as a debit to repair expense and a credit to cash. The entry required to correct the error is to - debit equipment; credit accounts payable. - debit equipment; credit cash. - debit equipment; credit repair expense. - debit repair expense; credit equipment.

Understate assets. Understate net income. Understate retained earnings.

Mirage Corp. miscounts and understates its ending inventory in year 1 by $5,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.) - Overstate assets. - Understate assets. - Understate net income. - Understate retained earnings. - Overstate net income.

prior period adjustment.

The correction of a material error in the prior year's financial statements is considered a - change in reporting entity. - change in accounting principle. - change in accounting estimate. - prior period adjustment.

retained earnings

The prior period adjustment is applied to _________ for the year following the error or for the earliest period being reported in the comparative financial statements. - net income - other comprehensive income - net assets - retained earnings

True

True or false: A prior period adjustment requires an adjustment to the beginning balance of retained earnings for the year following the error or for the earliest year being reported in the comparative financial statements if the error occurred prior to the earliest year presented.

True Reason: The two standards (IAS No. 8 and SFAS 154 [ASC 250]) converged standards on accounting changes and error correction.

True or false: Because of the convergence efforts by FASB and IASB, few differences remain between U.S. GAAP and IFRS with respect to accounting changes and error correction.

Restatement of previous years' financial statements

What is the approach used for an error correction? - Prospective application of the correct method - Restatement of previous years' financial statements - Retrospective application of the new method without restatement of previous financial statements

permits; prohibits

When correcting errors in previously issued financial statements, IFRS ________ the effect of the error to be reported in the current period if it is not considered practicable to report it retrospectively; U.S. GAAP _________ such treatment. prohibits; permits permits; allows permits; prohibits permits; prefers

Changing specific companies that are included in the consolidated statements. Presenting consolidated financial statements in place of individual statements.

Which of the following are considered a change in reporting entity? (Select all that apply.) - Changing specific companies that are included in the consolidated statements. - Changing the name of the company. - Changing the size of the company by purchasing additional assets. - Presenting consolidated financial statements in place of individual statements.

Prepare a journal entry to correct the error. Disclose the nature of the error and the impact of the error on net income. Restate previous years' financial statements that are incorrect.

Which of the following are requirements for the correction of an accounting error? (Select all that apply.) - Correct the financial statements in the current year only. - Prepare a journal entry to correct the error. - Disclose the nature of the error and the impact of the error on net income. - Restate previous years' financial statements that are incorrect.

Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected. Prepare a journal entry to correct the error.

Which of the following are requirements for the correction of an accounting error? (Select all that apply.) - Treat the error on a prospective basis in the current year and future years. - Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected. - Prepare a journal entry to correct the error.

Recording equipment purchased in the land account

Which of the following errors typically do not self-correct? - Failing to accrue salaries in the current period - Recording a building improvement as maintenance expense - Recording equipment purchased in the land account - Miscounting ending inventory

Miscounting ending inventory at the end of the year.

Which of the following errors will self-correct? - Long-term notes receivable classified as accounts receivable. - Miscounting ending inventory at the end of the year. - Recording a loss as an expense on the income statement. - Misclassification of an item as an operating activity on the statement of cash flows.

Miscounting ending inventory. Failure to accrue salaries in the current year.

Which of the following errors would self-correct in the following year? (Select all that apply.) - Recording the purchase of inventory as equipment. - Miscounting ending inventory. - Recording an equipment purchase in the land account. - Failure to accrue salaries in the current year.

The nature of the change. The reason for the change. The effect of the change on net income.

Which of the following should be included in the disclosure for a change in reporting entity? (Select all that apply.) - Expected future changes in reporting entity. - The estimated net income amounts for future periods. - The nature of the change. - The reason for the change. - The effect of the change on net income.

The nature of the change. The effect of the change on net income. The reason for the change.

Which of the following should be included in the disclosure for a change in reporting entity? (Select all that apply.) - The nature of the change. - The effect of the change on net income. - Expected future changes in reporting entity. - The estimated net income amounts for future periods. - The reason for the change.

financial statements of prior periods to be revised retrospectively.

A change in reporting entity requires - prospective application with the new entity reporting results for the current year only. - financial statements of prior periods to be revised retrospectively. - a prior period adjustment to correct the financial statements.

IFRS permits the effect of an error to be reported in the current period if it is not considered practicable to report it retrospectively.

A difference in accounting rules for accounting changes for U.S. GAAP and IFRS is - IFRS requires changes in accounting estimates to be reported retrospectively. - IFRS requires changes in accounting principles to be reported prospectively. - IFRS requires changes in accounting principles and correction of errors to be reported prospectively. - IFRS permits the effect of an error to be reported in the current period if it is not considered practicable to report it retrospectively.

the beginning balance of retained earnings.

A prior period adjustment requires an adjustment to - the income statement in the current year. - net income in the current year and future years. - the beginning balance of retained earnings. - the ending balance of other comprehensive income.

either a single company or group of companies that reports a single set of financial statements

A reporting entity can be - only a single company - only a group of companies that reports a single set of financial statements - either a single company or group of companies that reports a single set of financial statements

either a single company or a group of companies

A reporting entity can consist of - either a single company or a group of companies - only a single company - only a group of companies

IFRS only

Adam needs to correct an error that affected prior year income. Adam correctly judges that retrospective reporting is impracticable for this error. Under which accounting standards may Adam report the effect of the error in the current period? - U.S. GAAP only - Both U.S. GAAP and IFRS - IFRS only

reporting entity

After a recent acquisition, Joann Inc. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in _____________. - reporting entity - accounting method - estimate

restatement of the financial statements of previous periods.

An accounting change requires retrospective application of the new method to previous periods, whereas an accounting error requires - restatement of the financial statements of previous periods. - prospective application of the correct method. - correction in the current year.

Land

An error in which of the following accounts typically does not self-correct? - Building - Equipment - Land - Inventory

Overstate assets $10,000. Overstate net income $10,000.

Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.) - Overstate assets $10,000. - Understate net income $10,000. - Understate assets $10,000. - Overstate net income $10,000. - Understate retained earnings $10,000.

Reverse: Debit cash; credit equipment. Correct entry: Debit inventory; credit accounts payable.

Gris Corp. purchases inventory on account and incorrectly records a debit to equipment and a credit to cash. Which entries would be used to reverse and correct this error? (Select all that apply.) Debit cash; credit equipment. Debit inventory; credit accounts payable. Debit accounts payable; credit inventory. Debit equipment; credit inventory.

total fixed assets depreciation expense retained earnings

Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? (Select all that apply.) - total fixed assets - total liabilities - depreciation expense - retained earnings

effect of its correction on operations nature of the error

Error correction requires disclosure of the: (Select all that apply.) - effect of its correction on operations - preventative procedures used in the future - nature of the error - reasons why the error occurred

statement of retained earnings

Events that cause changes in retained earnings are reported in the - balance sheet - comprehensive income statement - statement of retained earnings