ACC 221 Chapter 20B Smartbook LO 5-7

Match each situation with the correct accounting application. Change in accounting estimate Accounting error Prospective application Restatement of financial statements

Change in accounting estimate - Prospective application Accounting error - Restatement of financial statements

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.) Credit retained earnings $30,000. Credit income taxes payable $20,000. Debit revenues $50,000. Debit retained earnings $30,000.

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

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.) Credit retained earnings. Debit sales revenue. Debit retained earnings. Credit sales revenue.

Credit retained earnings. Debit sales revenue.

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 accounts payable; credit inventory. Debit equipment; credit inventory. Debit cash; credit equipment. Debit inventory; credit accounts payable.

Debit cash; credit equipment. Debit inventory; credit accounts payable.

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 inventory $10,000. Credit inventory $10,000. Debit cost of goods sold $10,000. Credit retained earnings $10,000.

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

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 $12,000 Debit retained earnings $28,000 Credit accumulated depreciation $38,000 Debit retained earnings $40,000 Debit accumulated depreciation $50,000

Debit retained earnings $28,000

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.) Debit retained earnings. Debit sales revenue. Credit sales revenue. Credit retained earnings.

Debit sales revenue. Credit retained earnings.

Rex Corp. purchased supplies on account and recorded it in the inventory account. What is the journal entry to correct this error? Debit inventory; credit supplies. Debit inventory; credit accounts payable. Debit supplies; credit inventory. Debit supplies; credit accounts payable.

Debit supplies; credit inventory.

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? IFRS only Both U.S. GAAP and IFRS U.S. GAAP only

IFRS only

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 receivable $12,000 Increase income tax receivable $20,000 Increase income tax payable $12,000 Increase income tax payable $20,000

Increase income tax receivable $12,000

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? No effect on income tax receivable or payable. Increase income tax payable $12,000. Increase income tax receivable $20,000. Increase income tax receivable $8,000

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

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

Land

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

Miscounting ending inventory at the end of the year.

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

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

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 assets $10,000. Understate net income $10,000. Overstate net income $10,000. Understate retained earnings $10,000.

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 net income $10,000. Understate retained earnings $10,000. Overstate assets $10,000. Understate net income $10,000. Understate assets $10,000.

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

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take? (Select all that apply.) Prepare the correct journal entry for the transaction. Allow the error to self-correct in the following year. Ignore the mistake if it is material. Reverse the incorrect entry.

Prepare the correct journal entry for the transaction. Reverse the incorrect entry.

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

Recording equipment purchased in the land account

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

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

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

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

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

A prior period adjustment is an addition or reduction in the beginning balance of retained earnings due to an error correction. the adjustment needed to retained earnings for a change in accounting estimate. an adjustment to any asset, liability, or equity account for a change in accounting principle.

an addition or reduction in the beginning balance of retained earnings due to an error correction.

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 cash. debit equipment; credit accounts payable. debit equipment; credit repair expense. debit repair expense; credit equipment.

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 repair expense; credit equipment. debit equipment; credit repair expense. debit equipment; credit accounts payable. debit equipment; credit cash.

debit equipment; credit repair expense.

Jill accrues salaries and records the transaction by debiting salary expense and crediting notes payable. The entry to correct this error is debit notes payable; credit salaries payable. debit salary expense; credit notes payable. debit salaries payable; credit notes payable. debit salaries payable; credit salary expense.

debit notes payable; credit salaries payable.

In year 1, Clark Corp. failed to record an entry to record a sale on account. In year 2, Clark recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would be debit retained earnings; credit accounts receivable. debit retained earnings; credit sales revenue. debit accounts receivable; credit retained earnings. debit sales revenue; credit retained earnings.

debit sales revenue; credit 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.) depreciation expense total liabilities total fixed assets retained earnings

depreciation expense total fixed assets retained earnings

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

either a single or a group of companies

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.) total liabilities net income total noncurrent assets cost of goods sold inventory

net income cost of goods sold inventory

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. permits; allows prohibits; permits permits; prefers permits; prohibits

permits; prohibits

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 estimate accounting method

reporting entity

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

restate the financial statements.

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

restatement of the financial statements of previous periods.

If an accountant discovers an error in the current year accounting records before the financial statements are prepared, the accountant should ignore the error if it counterbalances. prepare a prior period adjustment for the error. reverse the incorrect entry and prepare a correct entry. reissue the financial statements for previous years.

reverse the incorrect entry and prepare a correct entry.

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

statement of retained earnings

When an error causes the ending balance of retained earnings to be incorrect, a prior period adjustment is reported in the statement of comprehensive income balance sheet income statement statement of retained earnings

statement of retained earnings

The term "prior period adjustment" is used for a change in accounting principle. a change in accounting estimate. the correction of an error.

the correction of an error.

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

total fixed assets depreciation expense retained earnings

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.

True

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

effect of its correction on operations nature of the error

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

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. Debit revenues $50,000. Credit retained earnings $30,000. Credit income taxes payable $20,000.

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

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3? Debit retained earnings $100,000. Credit retained earnings $40,000. Credit retained earnings $60,000. Debit retained earnings $40,000.

Credit retained earnings $60,000. Reason: Repair expense is overstated in year 1 by $100,000. Depreciation expense is understated in years 1 and 2 by $40,000 ($20,000 each year). Therefore, the adjustment to retained earnings is to increase retained earnings by $60,000 ($100,000 - $40,000).

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%. What is the tax effect of the prior period adjustment in year 3? Increase income tax receivable $12,000 Increase income tax payable $12,000 Increase income tax payable $20,000 Increase income tax receivable $20,000

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.

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.) Understate net income. Understate retained earnings. Overstate net income. Understate assets. Overstate assets.

Understate net income. Understate retained earnings. Understate assets.

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

financial statements of prior periods to be revised retrospectively.

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3? Credit retained earnings $40,000. Credit retained earnings $60,000. Debit retained earnings $100,000. Debit retained earnings $40,000.

Credit retained earnings $60,000. Reason: Repair expense is overstated in year 1 by $100,000. Depreciation expense is understated in years 1 and 2 by $40,000 ($20,000 each year). Therefore, the adjustment to retained earnings is to increase retained earnings by $60,000 ($100,000 - $40,000).

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 income statement? No over or understatement Overstated by $10,000 Understated by $10,000

Overstated by $10,000 Reason: Year 1 the entire $100,000 was expensed. Year 2 should have had a depreciation deduction of $10,000.

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

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

In year 1, Regal Corp. 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 in year 1 and year 2. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3 assuming straight line depreciation? Debit retained earnings $20,000. Credit retained earnings $10,000. Credit retained earnings $20,000. Debit retained earnings $10,000.

Debit retained earnings $20,000.

A difference in accounting rules for accounting changes for U.S. GAAP and IFRS is IFRS requires changes in accounting principles and correction of errors to be reported prospectively. IFRS requires changes in accounting principles 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. IFRS requires changes in accounting estimates to be reported retrospectively.

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

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

Restatement of previous years' financial statements

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.) total noncurrent assets total liabilities inventory net income cost of goods sold

inventory net income cost of goods sold

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.

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.

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 balance sheet? (Select all that apply.) Assets are understated by $100,000 Retained earnings is understated by $80,000 Retained earnings is overstated by $80,000 Assets are understated by $80,000

Retained earnings is understated by $80,000 Assets are understated by $80,000

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 net assets other comprehensive income retained earnings

retained earnings

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

the nature of the error

Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following entries? Debit equipment $100,000. Debit accumulated depreciation $100,000. Debit inventory $100,000. Credit inventory $100,000.

Debit equipment $100,000. Credit inventory $100,000.

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 $12,000 Debit retained earnings $28,000 Debit retained earnings $40,000 Debit accumulated depreciation $50,000 Credit accumulated depreciation $38,000

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

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 balance sheet? (Select all that apply.) Assets are understated by $100,000 Retained earnings is understated by $80,000 Assets are understated by $80,000 Retained earnings is overstated by $80,000

Retained earnings is understated by $80,000 Assets are understated by $80,000 Reason: omitted equipment of $100,000 less accumulated depreciation Reason: excess expense in year 1 of $100,000 less two years of omitted depreciation expense

Jill accrues salaries and records the transaction by debiting salary expense and crediting notes payable. The entry to correct this error is debit salaries payable; credit notes payable. debit salary expense; credit notes payable. debit notes payable; credit salaries payable. debit salaries payable; credit salary expense.

debit notes payable; credit salaries payable.