ACCN-4110 Int Accn 2 Chp 20

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

(D) 50K ? (C) 20K income taxes payable (C) 30K retained earnings 50K * 0.4 = 20K No included in slide 53 ?! round there additional consideration in book

During 2017, Trey Corporation accrued warranty expense based on 3.5% of net sales revenue. During 2018, Trey Corporation revised its estimate to 4%. Sales revenue was $2 million for each year. For the year ended December 31, 2018, the warranty-related entry would include a debit to: > warranty expense for $80,000 > warranty expense for 90,000 > retained earnings for $80,000 > retained earnings for $10,000

0.04* 2M = 0.08M Debit: warranty expense for 0.08M (D) 0.08M warranty expense (C) 0.08M warranty liability see slide 26

In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted-average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change? > Earnings per share for year 1 increased. > Earnings per share for year 1 decreased. > Cost of goods sold in year 1 decreased. > Net income in year 2 increased.

> Earnings per share for year 1 decreased. Beginning inventory of year 2 (closing inventory of year 1) has decreased, resulting in increase of COGS decrease of Net income of year 1. Thus EPS decreased. ?!

What factors strongly contribute to the need for changes in estimates? (Select all that apply.) > Experience relating to the estimates > Incorrect estimates were made during prior periods > New information becomes available

> Experience relating to the estimates > New information becomes available see slide 24 notes

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

> Failure to accrue salaries in the current year. > Miscounting ending inventory. ---------------------------------------- > Recording the purchase of inventory as equipment. This entry would take more than 1 year to self-correct; it would not self-correct until the equipment was fully depreciated.

What hidden motivations should investors and creditors be wary of when a company makes an accounting method change? > Increase executive compensation > Improve comparability with other companies > Report inflated earnings that are not associated with increased economic performance > Increase current or future cash flow > Avoid irregular earnings patterns

> Increase executive compensation > Report inflated earnings that are not associated with increased economic performance > Avoid irregular earnings patterns see slide 6

Investors should be alert to accounting method changes that may be based on these hidden motivations: (Select all that apply.) > Changes that enhance current or future cash flows > Increases in earnings not based on changes in effectiveness or efficiency > A desire to hide potential debt covenant violations > Effect on executive compensation

> Increases in earnings not based on changes in effectiveness or efficiency > A desire to hide potential debt covenant violations > Effect on executive compensation

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

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

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 specific companies that are included in the consolidated statements. > Changing the size of the company by purchasing additional assets. > Changing the name of the company.

> Presenting consolidated financial statements in place of individual statements. > Changing specific companies that are included in the consolidated statements. ---------------------- -Changes in accounting rules, or -One company acquiring another see slide 34

Accounting changes include changes in accounting ______, in accounting ______, and in reporting entity.

> Principals > Estimates See Slide 2 notes

Which of the following are acceptable reasons for an accounting change? (Select all that apply.) > To be consistent with others in the industry. > To apply a new method that is more appropriate. > To establish reserves to be used in future periods that can offset expenses. > To manage earnings in the current period.

> To be consistent with others in the industry. > To apply a new method that is more appropriate.

Which of the following is an exception to retrospective application of voluntary changes in accounting principle? (select all that apply) > When authoritative literature requires prospective application > When there is insufficient information to determine the cumulative effect of prior years > If the company perceives the cost of retrospective application to be higher than prospective application

> When authoritative literature requires prospective application > When there is insufficient information to determine the cumulative effect of prior years see slided 20 notes

In year 2, Rogers Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.) > Year 1 retained earnings will increase. > Year 1 ending inventory will decrease. > Year 1 ending inventory does not change. > Year 1 net income will decrease.

> Year 1 ending inventory will decrease. > Year 1 net income will decrease. If year 2 beginning inventory is $5,000 lower, then ending inventory in year 1 is $5,000 lower. Year 1 cost of goods sold is higher, resulting in lower net income for year 1 and lower retained earnings for year 1.

A company's choice of accounting method is important because > it cannot be changed once selected > affects comparability with peer firms > it impacts reported net income

> affects comparability with peer firms > it impacts reported net income

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and > no adjustment is made to retained earnings. > an adjustment is made to retained earnings at the beginning of the adoption period. > an adjustment is made to retained earnings for the earliest period presented.

> an adjustment is made to retained earnings at the beginning of the adoption period. see slide 4 and slide 16

Modified retrospective application for a change in accounting principle requires that > an adjustment is made to retained earnings at the beginning of the adoption period. > an adjustment is made to retained earnings for the earliest period presented. > no adjustment is made to retained earnings.

> an adjustment is made to retained earnings at the beginning of the adoption period. slide 4

Retrospective application for a change in accounting principle requires that > an adjustment is made to retained earnings for the earliest period presented. > an adjustment is made to ending retained earnings in the current period. > no adjustment is made to retained earnings.

> an adjustment is made to retained earnings for the earliest period presented. see slide 4

A change in depreciation method is treated as a > correction of an error. > retrospective change in all periods presented. > change in estimate achieved by a change in accounting principle. > change in accounting method.

> change in estimate achieved by a change in accounting principle. See slide 21

The rationale for a change of depreciation method to be treated as a change in accounting estimate is that > changing depreciation method is done to reflect changes in estimated future benefits. > depreciation methods are not considered accounting principles. > the cost of the asset is estimated and the life of the asset is uncertain.

> changing depreciation method is done to reflect changes in estimated future benefits.

Which of the following are estimates used in asset depreciation? (Select all that apply.) > pattern of receiving benefits > future benefits from the asset > acquisition date of the asset > cost of the asset

> future benefits from the asset > pattern of receiving benefits ---------------------------------- > the company's knowledge about those benefits. See slide 29 notes

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected > as a cumulative adjustment for a change in accounting principle on the income statement. > as a cumulative expense in calculating the current year retained earnings. > in the beginning balance of retained earnings for the earliest year presented for the years prior to that date.

> in the beginning balance of retained earnings for the earliest year presented for the years prior to that date. see slide 12 notes

Which items are considered a correction of an error when the financial statements are adjusted? (Select all that apply.) > mathematical mistakes > change in percentage of bad debts > change from the cash basis of accounting to accrual basis > failing to record an adjusting entry. > change in depreciation method

> mathematical mistakes > change from the cash basis of accounting to accrual basis > failing to record an adjusting entry. See slide 3

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. see slide 38 chart

Change in accounting principle

Change from one generally accepted method to another generally accepted method of accounting

Which of the following is a change in accounting estimate? > Change from completed contract method to percentage-of-completion method. > Change in subsidiaries included in consolidated financial statements. > Change in inventory method. > Change in actuarial calculations pertaining to pension plan.

Change in actuarial calculations pertaining to pension plan. see slide 24 Estimate changes occur when the carrying values of assets or liabilities are changed. These changes are accounted for in the period of change. Changes in accounting estimates don't require the restatement of previous financial statements. If the change leads to an immaterial difference, no disclosure of the change is required.

Which of the following is a change in accounting principle? > Change the subsidiaries included in financial statements. > Change the actuarial estimate of a pension plan. > Change the method of inventory. > Change the useful life of an asset.

Change the method of inventory.

Change in reporting entity

Consolidate a subsidiary not previously included in consolidated financial statements

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?

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

In year 2, Reynolds changes its inventory method from FIFO to the weighted-average method. If the weighted-average method would have been used in year 1, cost of goods sold would be $10,000 higher. Reynolds has an effective tax rate of 40%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method? > Increase retained earnings $6,000. > Decrease retained earnings $6,000. > Increase retained earnings $10,000. > Increase retained earnings $4,000.

Decrease retained earnings $6,000. 10K * (1-0.4) = 6K see slide 11 Cost of good is higher therefore retain earnings will decrease you keep less

If it is impracticable to measure the period-specific effects of a change in accounting principle, what approach is used? > Retrospective > Restatement > Prospective

Prospective

Change in accounting estimate

Prospective application see slide 38

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

Restatement of previous years' financial statements see slide 37 More specifically, previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. And, of course, any account balances that are incorrect as a result of the error are corrected by a journal entry. If retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance in a statement of shareholders' equity (or statement of retained earnings if that's presented instead).

Change in accounting estimate

Revision of an amount due to new information or new experience

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

cost of goods sold net income inventory No included in slide 53 ?! round there additional consideration in book

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

debit equipment; credit repair expense.

When it is impossible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in ______.

estimate See slide 32 notes When the distinction is not possible, the change should be treated as a change in estimate.

New information that becomes available about an event or transaction frequently results in a change in > estimate. > accounting principle. > reporting entity.

estimate.

The prospective approach for reporting a change in accounting principle requires that > financial statements are restated to reflect the new method in all years presented. > previous financial statements are revised to reflect the new method. > no change is made to previous years' financial statements.

no change is made to previous years' financial statements.

A change in accounting estimate is accounted for using the ______ approach.

prospectively see slide 24 notes

The selection of an accounting method is important because it can (Select all that apply.) > reduce comparability. > complicate comparisons. > not be changed once selected. > influence financial ratios.

reduce comparability. complicate comparisons. influence financial ratios. > reduce comparability. > complicate comparisons. > influence financial ratios.

When financial statements are revised to reflect the impact of a change in accounting principle, the ______ approach is used. > restatement > retrospective > prospective

retrospective

Candy changes inventory methods in year 2, resulting in a $20,000 increase to beginning inventory in year 2. The tax rate is 40%. The journal entry required to record the change in accounting principles will require (Select all that apply.) > credit to taxes payable of $20,000 > debit to inventory for $20,000 > credit to retained earnings for $12,000 > debit to retained earnings of $8,000.

(D) Inventory $20K (C) retained earnings $12K. (C) Income Tax Pay $8K see slide 13 but slides 11-13 also If beg. inventory is increased, end. inventory in the previous year is also increased. Cost of goods sold in previous years decreased, resulting in higher income. $20,000 x (1 - 40% tax rate) = $12,000 total increase to retained earnings, and a credit is made to retained earnings to adjust the beginning retained earnings.

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 sales revenue. > Debit sales revenue. > Credit retained earnings. > Debit retained earnings.

> Debit sales revenue. > Credit retained earnings. see slide 58-60

Which of the following occur with the prospective approach for reporting a change in accounting principle? (Select all that apply.) > It does not restate financial statements. > It reflects the changes in the current and future years only. > It restates all previous financial statements to reflect the effects of the change. > It revises only the previous year and the current year financial statements.

> It does not restate financial statements. > It reflects the changes in the current and future years only.

What method is used to account for a change in accounting estimate? > Prior period adjustment > Correction of an error > Retrospective application > Prospective application

> Prospective application

Which of the following are considered a change in accounting principle? (Select all that apply.) > Adopt a new FASB standard. > Change the residual value of a depreciable asset. > Change from the cost to equity method. > Report consolidated statements in place of individual statements.

> Adopt a new FASB standard. > Change from the cost to equity method.

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

Failure to record an adjusting entry is a change that requires a: > change in accounting estimate > change in accounting principle > change in reporting entity > correction of error

> correction of error

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.

understate ending inventory 10K > Debit inventory $10,000. > Credit retained earnings $10,000. see slide 54

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

> Debit supplies; credit inventory. see slide 45-46

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

> either a single or a group of companies

Accounting error

Restatement of financial statements see slide 38

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

statement of retained earnings When it's discovered that the ending balance of retained earnings in the period prior to the discovery of an error was incorrect as a result of that error, the balance must be corrected when it appears as the beginning balance the following year. However, simply reporting a corrected amount might cause misunderstanding for someone familiar with the previously reported amount. Explicitly reporting a prior period adjustment on the statement itself avoids this confusion. see slide 40

Kroft changes inventory methods in year 2, resulting in a $10,000 increase to beginning inventory in year 2. The tax rate is 30%. The journal entry required to record the change in accounting principles will require a > credit to inventory for $10,000. > credit to retained earnings for $3,000. > credit to retained earnings for $7,000. > debit to retained earnings for $10,000.

(D) Inventory $10K (C) retained earnings $7K. (C) Income Tax Pay $3K see slide 13 but slides 11-13 also If beg. inventory is increased, end. inventory in the previous year is also increased. Cost of goods sold in previous years decreased, resulting in higher income. $10,000 x (1 - 30% tax rate) = $7,000 total increase to retained earnings, and a credit is made to retained earnings to adjust the beginning 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 The two standards (IAS No. 8 and SFAS 154 [ASC 250]) converged standards on accounting changes and error correction.

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

reverse the incorrect entry and prepare a correct entry. see slide 43 If an accounting error is made and discovered in the same accounting period, the original erroneous entry should simply be reversed and the appropriate entry recorded. The possibilities are limitless. Let's look at the one in the illustration.

When a company makes accounting choices that cause earnings to follow a steady trend from year to year, this manipulation is called income ______

smoothing

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 > income statement > statement of retained earnings > balance sheet

statement of retained earnings see slide 40 When it's discovered that the ending balance of retained earnings in the period prior to the discovery of an error was incorrect as a result of that error, the balance must be corrected when it appears as the beginning balance the following year. However, simply reporting a corrected amount might cause misunderstanding for someone familiar with the previously reported amount. Explicitly reporting a prior period adjustment on the statement itself avoids this confusion

If a change in accounting principle requires prior tax savings to be repaid, the tax effects are recorded in a ________ account; however, if the tax law does not require a recapture of prior tax savings, then the tax effects are recorded in a _________ account. > deferred tax liability; taxes payable > taxes payable; deferred tax asset > taxes payable; deferred tax liability > deferred tax liability; deferred tax asset

taxes payable; deferred tax liability see page 1178 NOT TESTABLE

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

the correction of an error. see slide 39 Before we see these steps applied to the correction of an error, one of the steps requires elaboration. As discussed in Chapter 4, the correction of errors is the situation that creates prior period adjustments. A prior period adjustment refers to an addition to or reduction in the beginning retained earnings balance in a statement of shareholders' equity (or statement of retained earnings if that's presented instead).

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

> IFRS only

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? > Credit retained earnings $10,000. > Debit retained earnings $20,000. > Debit retained earnings $10,000. > Credit retained earnings $20,000.

> (D) retained earnings $20,000. ----------- https://www.chegg.com/homework-help/questions-and-answers/year-1-regal-corp-purchased-equipment-100-000-regal-appropriately-debited-equipment-accoun-q86408517 see slide 47-48

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

> Understate net income. > Understate assets. > Understate retained earnings.

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 see slide 34 A reporting entity can be a single company, or it can be a group of companies that reports a single set of financial statements.

When it is not possible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in > reporting entity. > principle. > estimate.

> estimate. see slide 32 notes

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

> financial statements of prior periods to be revised retrospectively. NOT TESTABLE

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

> Increase income tax receivable $8,000 $100K /10 years = $10K per year depreciation 10K x 2 years = $20K 20K x 40% tax = $8,000 No included in slide 53 ?! round there additional consideration

Which of the following represents a situation when it may be difficult to distinguish between a change in estimate and a change in principle? > The cost of tools are capitalized instead of expensed > The useful life of a machine is determined to be shorter than expected > Warranty expense is updated for new information about actual claims experience > A switch from FIFO to LIFO for inventory costing results in tax savings

> The cost of tools are capitalized instead of expensed see slide 32 Sometimes, it's not easy to distinguish between a change in principle and a change in estimate. For example, if a company begins to capitalize rather than expense the cost of tools because their benefits beyond one year become apparent, the change could be construed as either a change in principle or a change in the estimated life of the asset

Which of the following may be objectives of companies that manage earnings? (Select all that apply.) > Increasing income > Smoothing income > Decreasing income > Reporting income conservatively

Increasing income Smoothing income Decreasing income

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

Land

If a company changes its inventory method, what financial statement accounts are affected? (Select all that apply.) > accounts payable > sales > inventory > interest expense > cost of goods sold

inventory cost of goods sold see 1177

Which of the following situations would be an appropriate reason for an accounting principle change? > Management's desire to increase bonuses > An expected increase in earnings per share > Changes in related economic conditions > Management's desire to increase reported income

> Changes in related economic conditions see slide 5 notes

An exception to the retrospective application of voluntary changes in accounting principles is when > management calculates the period-specific effects of the change. > authoritative literature requires prospective application for a change in accounting methods. > a company elects the prospective method for handling a change in accounting method.

> authoritative literature requires prospective application for a change in accounting methods. see slide 20

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

> reporting entity

Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement? (Select all that apply.) > sales > earnings per share > accounts payable > cost of goods sold > net income

> earnings per share > cost of goods sold > net income see slide 10

A voluntary accounting principle change: > can be made for any reason, if properly disclosed > is permitted only once for each item > must be justified as being preferable

> must be justified as being preferable

Emile Company utilized the LIFO inventory costing method for the past ten years and saved $350,500 in taxes. If Emile switches away from LIFO, the company > will record a gain due to tax savings. > must repay the prior years' tax savings to the IRS. > does not have to consider past tax savings.

> must repay the prior years' tax savings to the IRS. Slide 13 notes

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? > Understated by $10,000 > No over or understatement > Overstated 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. see slide 48

Which of the following is a change in accounting estimate achieved by a change in accounting principle? > Change in accounting for treasury stock from cost to par value method. > Change in depreciation methods. > Change in inventory methods. > Change in accounting for construction contracts.

> Change in depreciation methods. see slide 21

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.

> restate the financial statements. see slide 37 More specifically, previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. And, of course, any account balances that are incorrect as a result of the error are corrected by a journal entry. If retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance in a statement of shareholders' equity (or statement of retained earnings if that's presented instead).

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 reason for 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 nature of the change. > The reason for the change. > The effect of the change on net income see slide 34 A change in reporting entity is reported by recasting all previous periods' financial statements as if the new reporting entity existed in those periods. In the first set of financial statements after the change, a disclosure note should describe the nature of the change and the reason it occurred. Also, the effect of the change on net income, income from continuing operations, and related per share amounts should be indicated for all periods presented.

If a change in accounting principle does not require additional taxes to be paid or taxes to be refunded, which account is used to record the tax effects of a change in accounting principle? > Goodwill > Deferred tax asset or liability accounts > Other comprehensive income for the period > Income tax expense for the period

Deferred tax asset or liability accounts see slide 1178

When it is impracticable to measure the period-specific effects of a change in accounting principle, the ______ approach should be used.

prospective

A change in depreciation method is treated as a(n) > change in accounting estimate. > change in accounting principle. > prior period adjustment. > error correction.

change in accounting estimate. but by a change in accounting principle. see slide 29 notes As a result, we report a change in depreciation method as a change in estimate, rather than as a change in accounting principle.

Which of the following are changes in accounting estimates? (Select all that apply.) > Adoption of a new FASB standard. > Change in estimate of periods benefited by intangible asset. > Change in useful life of a depreciable asset. > Change in inventory costing method.

> Change in estimate of periods benefited by intangible asset. > Change in useful life of a depreciable asset.

When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ______ approach is used. > modified retrospective > restatement > prospective > retrospective

> modified retrospective

When an adjustment is made to the balance of retained earnings at the beginning of the adoption period to reflect the impact of a change in accounting principle, the ______ approach is used. > restatement > retrospective > modified retrospective > prospective

> modified retrospective see slide 4 and 16

Accounting changes include changes in > accounts due to business transactions during the year. > principles, estimates, or entities. > current and noncurrent classifications. > operating, investing, or financing activities.

> principles, estimates, or entities. See slide 1 and 35

If a lack of information makes it impracticable to report a voluntary accounting change retrospectively, then (select all that apply) > the company is not allowed to change accounting methods. > the company should disclose the reason why retrospective application was impracticable. > the new method is applied prospectively as of the beginning of the year of change.

> the company should disclose the reason why retrospective application was impracticable. > the new method is applied prospectively as of the beginning of the year of change.

When is the prospective approach used in accounting changes? (Select all that apply.) > For a correction of an error that affected previous years' net income. > For a change in accounting principle if the effect of the change can be calculated. > For a change in accounting principle if it is impracticable to determine the effect of the change on previous years. > For a change in accounting estimate.

> For a change in accounting principle if it is impracticable to determine the effect of the change on previous years. > For a change in accounting estimate.

If it is impracticable to adjust each year reported for the effect of a voluntary accounting principle change, the change is applied > prospectively to future years with no retrospective application. > evenly over the next five years. > retrospectively to the earliest year practicable.

retrospectively to the earliest year practicable. see slide 19

Which of the following represents a situation for which it may be difficult to distinguish between an estimate and a principle change? > Switching from FIFO to LIFO results in tax savings > The costs of tools are capitalized instead of expensed > The useful life of a machine is shorter than expected

> The costs of tools are capitalized instead of expensed see slide 32 notes Sometimes, it's not easy to distinguish between a change in principle and a change in estimate. For example, if a company begins to capitalize rather than expense the cost of tools because their benefits beyond one year become apparent, the change could be construed as either a change in principle or a change in the estimated life of the asset.

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? > A cumulative effect adjustment for the change is made in the current year income statement. > Retained earnings is adjusted for the earliest period presented. > A total cumulative adjustment is made to retained earnings of the most recent year. > The adjusted net income for each year is shown on the retained earnings statement for that year.

> Retained earnings is adjusted for the earliest period presented. > The adjusted net income for each year is shown on the retained earnings statement for that year.

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

> effect of its correction on operations > nature of the error see slide 51

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 1 income statement? > Net income understated by $90,000 > Net income understated by $100,000 > Net income overstated by $100,000 > Net income overstated by $90,000

> Net income understated by $90,000 > expense overstated by $100,000 less the omitted depreciation expense of $10,000 see slide 48

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

> the nature of the error see slide 37 And, as for accounting changes, a disclosure note is needed to describe the nature of the error and the impact of its correction on operations.

A change in ______ relates to a change in method of accounting for an item, whereas a change in ______ arises from a new calculation due to new information or new experience. > accounting principle; reporting entity > reporting entity; accounting principle > accounting principle; accounting estimate > accounting estimate; accounting principle

accounting principle; accounting estimate

An example of a change in accounting estimate that is effected by a change in accounting principle is a change in > actuarial estimates for pensions. > percentage of bad debts. > depreciation methods. > inventory method.

depreciation methods. see slide 1

What approach is used to account for a change in depreciation method? > Restatement approach > Prospective approach > Retrospective approach > Modified retrospective approach

> Prospective approach See slide 29 notes Even though the company is changing its depreciation method, it is doing so to reflect changes in its estimates of future benefits. As a result, we report a change in depreciation method as a change in estimate, rather than as a change in accounting principle. For this reason, a company reports a change in depreciation method (say to straight-line) prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life. The illustration provides an example.

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.

Modified retrospective application for a change in accounting principle requires that > an adjustment is made to retained earnings for the earliest period presented. > no adjustment is made to retained earnings. > an adjustment is made to retained earnings at the beginning of the adoption period.

an adjustment is made to retained earnings at the beginning of the adoption period.

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; prohibits > permits; prefers > permits; allows

permits; prohibits

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

Recording equipment purchased in the land account slide 53 Most errors, in fact, eventually self-correct. An example of an uncommon instance in which an error never self-corrects would be an expense account debited for the cost of land. Because land doesn't depreciate, the error would continue until the land is sold.

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. > Disclose the nature of the error and the impact of the error on net income. > Prepare a journal entry to correct the error. > Correct the financial statements in the current year only.

Step 1 > Prepare a journal entry to correct the error. Step 2 > Restate previous years' financial statements that are incorrect. Step 3 If retained earnings is one of the accounts incorrect as a result of the error, the correction is reported as a prior period adjustment to the beginning balance in a statement of shareholders' equity (or statement of retained earnings if that's presented instead). Step 4 > Disclose the nature of the error and the impact of the error on net income.

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

> Debit cash; credit equipment. > Debit inventory; credit accounts payable. If an accounting error is made and discovered in the same accounting period, the original erroneous entry should simply be reversed and the appropriate entry recorded. see slide 43

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

> debit notes payable; credit salaries payable. see slide 45 and add more

On January 1, year 1, Yuri Corp. purchases equipment for $120,000. The equipment has a 6-year useful life with no residual value. Yuri uses the double-declining-balance method of depreciation, and depreciates the equipment $40,000 in year 1. In year 2, Yuri changes its depreciation method to straight-line depreciation. The journal entry in year 2 to record the depreciation expense will include which of the following journal entries? (Select all that apply.) > Debit depreciation expense $16,000. > Credit depreciation expense $8,000. > Debit accumulated depreciation $20,000. > Credit accumulated depreciation $16,000.

(D) depreciation expense 16K (C) accumulated depreciation 16K The prospective basis is used. The book value at the beginning of year 2 is $120,000 less $40,000 = $80,000. $80,000 divided by 5 remaining years is $16,000 depreciation expense for year 2. see slide 32 ?! Change in Depreciation Method for Newly Acquired Assets—Rohm and Haas Company Y1 120K 6 year life 40K Y1 120 - 40 = 80 80/5 = 16

In year 2, Rocco changes its inventory method from the weighted-average to the FIFO method. If FIFO would have been used in year 1, cost of goods sold would be $20,000 lower. Rocco has an effective tax rate of 21%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method? > Increase retained earnings $20,000 > Decrease retained earnings $12,000 > Decrease retained earnings $4,200 > Increase retained earnings $15,800

Increase retained earnings $15,800 Year 1 cost of goods sold is lower, resulting in higher net income for year 1 and higher retained earnings for year 1 (1 - 0.21) * 20K

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

Miscounting ending inventory at the end of the year. see slide 53

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.) > Year 1 retained earnings will increase. > Year 1 net income will increase. > Year 1 ending inventory will decrease.

Year 1 retained earnings will increase. Year 1 net income will increase If year 2 beginning inventory is higher, then year 1 ending inventory is higher, and year 1 cost of goods sold is lower. Therefore, year 1 net income will increase, and year 1 retained earnings will increase.

Relay Corp. estimates bad debt expense as 3% of credit sales. During year 1 Relay sold $100,000 of goods on account. During year 2, Relay determines that a more accurate estimate of bad debts is 4% of credit sales. Year 2 sales on account was $300,000. The entry in year 2 to record the change in accounting estimate would include a debit to > bad debt expense for $13,000. > allowance for uncollectible accounts for $12,000. > bad debt expense for $12,000. > uncollectible accounts for $13,000.

300K sales on account 0.04 * 300K = 12K (D) 12K bad debt expense (C) 12K Allowance for uncollectible accounts see slide 26 No account balances are adjusted. The cumulative effect of the estimate change is not reported in current income. Rather, in 2021 and later years, the adjusting entry to record warranty expense simply will reflect the new percentage.

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

> Debit retained earnings $28,000 $120K/6 years = $20K per year $20K per year x 2 years = $40K 20K * 0.3 * 2 = 12K 40K less tax savings of $12K= $28K No included in slide 53 ?! round there additional consideration

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

> Increase income tax receivable $12,000 $120K/ 6 yrs = $20K 20K x 2 years = $40K 40K x .30 = $12K receivable because reported tax income was higher than it would have been had depreciation been deducted.

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements? > Inventory > Revenue > Accounts payable > Income tax payable > Cost of goods sold > Retained earnings

> Inventory > Income tax payable > Cost of goods sold > Retained earnings see slide 13 notes Besides reporting revised amounts in the comparative financial statements, They must also adjust the book balances of affected accounts. It does so by creating a journal entry to change those balances from their current amounts (from using LIFO) to what those balances would have been using the newly adopted method (FIFO). As discussed in the previous section, differences in cost of goods sold and income are reflected in retained earnings, as are the income tax effects of changes in income. So, the journal entry updates inventory, retained earnings, and the income tax liability for the cumulative differences up to the year of the decision to change from the LIFO method to the FIFO method.

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. > 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. > Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected. see slide 39

Schumacher Company used the LIFO inventory costing method for its first 5 years of operations, generating tax savings of $75,000. In year 6, Schumacher switches from LIFO to FIFO. The company > records a current and noncurrent liability to show that it must repay the $75,000 over time. > is allowed to continue using LIFO for tax purposes and therefore keeps the tax savings. > will record a gain due to the tax savings. > records a current liability to show that it must repay the $75,000 immediately.

> records a current and noncurrent liability to show that it must repay the $75,000 over time. see slide 13 notes the income tax effect is reflected in the income tax payable account. unlike for other accounting method changes, IRS code requires inventory costing method used for tax purposes must be the same as that used for financial reporting. Therefore tax code allows a retrospective change in an inventory method, but requires that taxes saved previously ($75M in this case) from having used another inventory method must now be repaid. However, taxpayers are given up to six years to pay the tax due. As a result, this liability has both a current portion (payable within one year) and a noncurrent portion (payable after one year), but is not a deferred tax liability.

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 $60,000. > Credit retained earnings $40,000. > Debit retained earnings $40,000.

> Credit retained earnings $60,000. 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). see slide 47 - 48

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

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

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 assets > net income > retained earnings > other comprehensive income

> retained earnings see slide 41 At least two years' (as in our example) and often three years' statements are reported in comparative financial statements. The prior period adjustment is applied to beginning retained earnings for the year following the error, or for the earliest year being reported in the comparative financial statements when the error occurs prior to the earliest year presented.

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 sales revenue. > debit retained earnings; credit accounts receivable. > debit accounts receivable; credit retained earnings. > debit sales revenue; credit retained earnings.

debit sales revenue; credit retained earnings. see slide 58-60

A voluntary accounting change can be made only if it is justified as being ______ to the previous method.

preferable see slide 32 Is a change in depreciation method is both a change in accounting principle and change in estimate Even though it's considered to reflect a change in estimate and is accounted for as such, a change to a new depreciation method requires the company to justify the new method as being preferable to the previous method, just as for any other change in principle. A disclosure note should justify that the change is preferable and describe the effect of a change on any financial statement line items and per share amounts affected for all periods reported.

In year 2, Rocco changes its inventory method from the weighted-average to the FIFO method. If FIFO would have been used in year 1, cost of goods sold would be $20,000 lower. Rocco has an effective tax rate of 21%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method? > Increase retained earnings $15,800 > Decrease retained earnings $12,000 > Increase retained earnings $20,000 > Decrease retained earnings $4,200

> Increase retained earnings $15,800 20K * (1-0.21) = 15.8K see slide 11 Cost of good is lower therefore retain earnings will increase you keep more

On January 1, year 1, Weston Corp. purchases equipment for $100,000. The equipment has a 10-year useful life with no residual value. Weston uses the double-declining-balance method of depreciation, and depreciates the equipment $20,000 in year 1 and $16,000 in year 2. In year 3, Weston changes its depreciation method to straight-line depreciation. The journal entry in year 3 to record the depreciation expense will include which of the following journal entries? > Debit depreciation expense $8,000. > Credit depreciation expense $12,000. > Credit accumulated depreciation $12,000. > Debit depreciation expense $10,000.

(D) depreciation expense $8,000. (C) accumulated depreciation $8,000. see slide 32 100K - (20K + 16K) = 64K 64K/8K = 8K The prospective basis is used. The book value at the beginning of year 3 is $100,000 less $36,000 = $64,000. $64,000 divided by 8 remaining years is $8,000 depreciation expense for year 3.

When it is impracticable to determine the cumulative effect of prior years of a voluntary change in accounting principle, then the new method is applied ______ beginning in the earliest year practicable.

prospectively

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

> retained earnings > total fixed assets > depreciation expense No included in slide 53 ?! round there additional consideration

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 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. At least two years' (as in our example) and often three years' statements are reported in comparative financial statements. The prior period adjustment is applied to beginning retained earnings for the year following the error, or for the earliest year being reported in the comparative financial statements when the error occurs prior to the earliest year presented. see slide 41 ?!