Accounting Chapter 22: terms

Accounting changes are only permitted when ________.

adequate disclosures are made so, if feasible, financial statement users can restore comparability

change in principle

change from one accepted accounting principle to another -average cost to LIFO -completed contract to percentage of completion -old revenue recognition standards to new standards -adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is NOT an accounting change **a retrospective accounting change approach

Retrospective changes require all of the following EXCEPT?

detailed numerical comparisons of all prior periods to restated statements

When a self-correcting error is discovered after closing the books for the second year ________.

no journal entry is necessary because all permanent accounts are correctly stated

Changes in principle application

only appropriate when a company "demonstrates" that the newly adopted generally accepted accounting principle is preferable to the existing one -whether the new principle constitutes an improvement in financial reporting

Counterbalancing errors

will be offset or corrected over two periods

Some illegitimate reasons for a change in principle

-political costs -capital structure -bonus payments -smooth earnings

Change in Accounting Estimate

-reported prospectively -normal and recurring as part of any accounting system ex: -uncollectible receivables -inventory obsolescence -useful lives of fixed assets -depreciation methods -warranty estimates -contingent liabilities

(2 Points) Butler Products decided to change inventory methods on January 1, 2020. In the past, management has measured its ending inventories by the average-cost method and they now will use FIFO. Butler's tax rate is 35% for all years. Year Ended December 31, 2018 December 31, 2019 December 31, 2020 FIFO Inventory $264,000; 395,000; 240,000 Average-Cost Inventory 205,000; 345,000; 190,000 Which one of the following journal entries correctly records the change in the accounting principle?

Dr. Inventory 50,000 Cr. Tax 17,500 Cr. RE 32,500

(2 Points) Butler Products decided to change inventory methods on January 1, 2020. In the past, management has measured its ending inventories using the average-cost method and they now will use FIFO. Year Ended December 31, 2018 December 31, 2019 December 31, 2020 FIFO Inventory $250,000, 390,000, 240,000 Average-Cost Inventory $195,000, 329,000, 190,000 Ignoring income tax, which one of the following journal entries correctly records the change in the accounting principle at January 1, 2020?

Dr. Inventory 61,000 Cr. RE 61,000

(2 Points) Jett Company purchased an insurance policy in January, 2017 and paid a five-year premium of $400,000. The entire amount was recorded as Insurance Expense. The error was discovered at the end of 2017, and the books are still open. What is the proper entry to correct the error at December 31, 2017? (Ignore income taxes.)

Dr. Prepaid Insurance 240,000 Dr. Insurance Expense 80,000 Cr. RE 320,000

Correction of errors

all errors must be corrected! -restating prior financial statements -adjusting beginning RE -adjusting beginning balances of permanent accounts -adjusting temporary accounts if they have yet to be closed

Indirect effects

any change to current or future cash flows of a company that result from making a change in accounting principle -changes to profit sharing, commissions, royalties from a change in inventory principle -accounted for prospectively ex: if past earnings increases and triggers a bonus payout, that bonus would be a wage expense in the current year

For which one of the following changes is it appropriate to use the prospective method?

change in estimate

Impracticability

companies should not use retrospective application if one of the following conditions exist: -company cannot determine the effects of the retrospective application -retrospective application requires assumptions about management's intent in a prior period -retrospective application requires significant estimates that the company cannot develop

If a firm discovers a self-correcting error in the second year, and the books are still open, it ________.

should correct beginning retained earnings and any other accounts needed to correct the error

Direct effects

the direct effect of changes in accounting principle should be accounted for retrospectively -changes in tax expense -change in inventory -change in COGS

Which one of the following would NOT be a required disclosure for a change in accounting principle?

the estimated effect on future earnings per share

When a firm decides to change an accounting principle, but does not have sufficient information to use the retrospective approach, it may ________.

use the prospective approach

Non-counterbalancing errors

will be offset or corrected over three or more periods (maybe never)

(2 Points) Miller Manufacturing purchased a packaging machine for $300,000 on January 2, 2015. Miller assumed that the machine would be functional for five years with no salvage value. In 2018, Miller decided that the machine would last eight years total (the original five, plus three more) with a salvage value of $25,000. The company uses straight-line depreciation for all assets. What amount of depreciation should Miller record in 2018 and following years?

$19,000

(2 Points) Tarleton Company discovered ending inventory errors in 2017 and 2018. The 2017 ending inventory was overstated by $215,000 whereas the 2018 ending inventory was understated by $85,000. Ignoring income tax effects, by what amount should the beginning retained earnings be adjusted on January 1, 2019?

$85,000 credit

Retrospective change

-a company must adjust its financial statements for each prior period presented to the same basis as the new accounting principle -the company must adjust the carrying amounts of assets and liabilities as the beginning of the first year presented, plus the opening balance of retained earnings

Types of accounting changes:

-changes in accounting principle -changes in accounting estimate -changes in reporting entity **accounting errors require accounting changes, but are classified separately and are not formally considered an "accounting change" by US GAAP

Accounting errors

-expense recognition -revenue recognition -misclassification -equity -allowances/contingencies -long lived assets -taxes -other comprehensive income -inventory -stock options

The bookkeeper for Phillips, Inc. mistakenly classified a $300,000 one-year trade note receivable as a long-term note receivable in 2017. Interest revenue was correctly recorded. The error was discovered in 2019 by the company's auditors. Phillips, Inc. is a small company with $1,000,000 in total assets. What is the proper way to correct the error?

Correct the classification in 2019 retrospectively for comparative balance sheets.

(2 Points) JAT Corp. loaned $480,000 for three years to a major supplier on July 1, 2017. The note stipulated 24% interest to be paid annually each June 30. Since this was an unusual transaction, no one recorded the accrued interest at the year-end (December). After the 2017 books were closed, the CFO found the error. Which one of the following is the correct journal entry to correct the errors thru December 31, 2017? (Ignore income taxes.)

Dr. Interest receivable 57,600 Cr. Interest Revenue 57,600

If books are closed

-if error is counterbalanced, no entry is necessary -restatement of financial statements is required even if journal entry is not

If books are not closed

-make entry to correct the error in the current period -adjust the beginning balance of RE