Ch. 22

False

A change in accounting principle is a change that occurs as the result of new information or additional experience.

a. $154,000 increase

Black, Inc. is a calendar-year corporation whose financial statements for 2014 and 2015 included errors as follows: Year Ending Inventory Depreciation Expense 2014 $162,000 overstated $135,000 overstated 2015 64,000 understated 45,000 understated Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2014, or at December 31, 2015. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2016? a. $154,000 increase b. $46,000 increase c. $19,000 decrease d. $8,000 increase

False

Companies report changes in accounting estimates retrospectively.

True

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements

b. change in accounting estimate.

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a a. change in accounting principle. b. change in accounting estimate. c. prior period adjustment. d. correction of an error

a. Current period and prospectively

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? a. Current period and prospectively b. Current period and retrospectively c. Retrospectively only d. Current period only

d. A change in inventory valuation from average cost to FIFO

Which of the following is accounted for as a change in accounting principle? a. A change in the estimated useful life of plant assets. b. A change from the cash basis of accounting to the accrual basis of accounting. c. A change from expensing immaterial expenditures to deferring and amortizing them as they become material. d. A change in inventory valuation from average cost to FIFO

b. No Yes

Which of the following should be reported as a prior period adjustment? Change in Estimated Lives / Unaccepted Principle to Accepted Principle a. Yes Yes b. No Yes c. Yes No d. No No

c. Change in accounting estimate

Which type of accounting change should always be accounted for in current and future periods? a. Change in accounting principle b. Change in reporting entity c. Change in accounting estimate d. Correction of an error

a. credit to Accumulated Depreciation.

A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a a. credit to Accumulated Depreciation. b. debit to Retained Earnings in the amount of the difference on prior years. c. debit to Deferred Tax Asset. d. credit to Deferred Tax Liability

a. $250,000

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method. The company decided to use the same for income tax purposes. The tax rate enacted is 40%. Income before taxes under both the methods for the past three years appears below. 2013 2014 2015 Completed contract $300,000 $200,000 $100,000 Percentage-of-completion 500,000 250,000 180,000 What amount will be debited to Construction in Process account, to record the change at beginning of 2015? a. $250,000 b. $100,000 c. $150,000 d. $50,000

b. A credit to Retained Earnings for $150,000

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method. The company decided to use the same for income tax purposes. The tax rate enacted is 40%. Income before taxes under both the methods for the past three years appears below. 2013 2014 2015 Completed contract $300,000 $200,000 $100,000 Percentage-of-completion 500,000 250,000 180,000 Which of the following will be included in the journal entry made by Dream Home to record the income effect? a. A debit to Retained Earnings for $150,000 b. A credit to Retained Earnings for $150,000 c. A credit to Retained Earnings for $100,000 d. A debit to Retained Earnings for $100,000

c. 1,750,000

On December 31, 2015, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,500,000 increase in the beginning inventory at January 1, 2015. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is a. 0 b. 750,000 c. 1,750,000 d. 2,500,000

a. $730,000.

On January 1, 2012, Lake Co. purchased a machine for $1,320,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2015, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $120,000. An accounting change was made in 2015 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2015 of a. $730,000. b. $770,000. c. $800,000. d. $880,000

b. 60,000

On January 1, 2012, Neal Corporation acquired equipment at a cost of $720,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2015, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2015 would be a. 37,500 b. 60,000 c. 90,000 d. 144,000

b. $0.

On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a decision was made to change to the double-declining balance method of depreciation for this machine. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is a. $134,400. b. $0. c. $157,920. d. $225,600.

c. $240,000.

On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a decision was made to change to the double-declining balance method of depreciation for this machine. The amount that Nobel should record as depreciation expense for 2015 is a. $120,000. b. $168,000. c. $240,000. d. none of these are correct.

a. retained earnings statement as a $490,000 addition to the beginning balance.

On January 1, 2015, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $700,000 increase in the January 1, 2015 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its 2015 a. retained earnings statement as a $490,000 addition to the beginning balance. b. income statement as a $490,000 cumulative effect of accounting change. c. retained earnings statement as a $700,000 addition to the beginning balance. d. income statement as a $700,000 cumulative effect of accounting change.

b. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent? a. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported. b. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported. c. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated. d. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

b. depreciate the remaining book value over the remaining life of the asset.

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should a. continue to depreciate the building over the original 50-year life. b. depreciate the remaining book value over the remaining life of the asset. c. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years. d. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

d. Changing the companies included in combined financial statements.

Which of the following describes a change in reporting entity? a. A company acquires a subsidiary that is to be accounted for as a purchase. b. A manufacturing company expands its market from regional to nationwide. c. A company divests itself of a European branch sales office. d. Changing the companies included in combined financial statements.

d. Changing the companies included in combined financial statements

Which of the following describes a change in reporting entity? a. A company acquires a subsidiary that is to be accounted for as a purchase. b. A manufacturing company expands its market from regional to nationwide. c. A company divests itself of a European branch sales office. d. Changing the companies included in combined financial statements

c. Recomputation of current and future years' depreciation

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line? a. The cumulative effect on prior years, net of tax, in the current retained earnings statement b. Restatement of prior years' income statements c. Recomputation of current and future years' depreciation d. All of these are required.

c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.

Which of the following statements is correct? a. Changes in accounting principle are always handled in the current or prospective period. b. Prior statements should be restated for changes in accounting estimates. c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate. d. Correction of an error related to a prior period should be considered as an adjustment to current year net income