Chapter 20

Which of the following are considered a change in accounting principle?

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

Which of the following is a change in accounting estimate?

Change in actuarial calculations pertaining to pension plan.

Which of the following is a change in accounting estimate achieved by a change in accounting principle?

Change in depreciation methods.

Which of the following are changes in accounting estimates?

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

Which of the following is a change in accounting principle?

Change the method of inventory.

Which of the following situations would be an appropriate reason for an accounting principle change?

Changes in related economic conditions

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?

Cost of goods sold Income tax payable Retained earnings Inventory

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 $60,000.

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?

Debit depreciation expense $16,000. Credit accumulated depreciation $16,000.

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.

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?

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

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.

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?

Debit sales revenue. Credit retained earnings.

Which of the following are requirements for the correction of an accounting error?

Disclose the nature of the error and the impact of the error on net income. Prepare a journal entry to correct the error. Restate previous years' financial statements that are incorrect. Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected.

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 decreased.

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

Increase income tax receivable $8,000

An error in which of the following accounts typically does not self-correct?

Land

Which of the following errors will self-correct?

Miscounting ending inventory at the end of the year.

Which of the following errors would self-correct in the following year?

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

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

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

Prospective

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

Prospective

What method is used to account for a change in accounting estimate?

Prospective application

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs?

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.

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take?

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

Which of the following are acceptable reasons for an accounting change?

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

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?

Understate retained earnings. Understate assets. Understate net income.

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?

Year 1 ending inventory will decrease. Year 1 net income will decrease. Reason: 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.

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and

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

For U.S. GAAP, which of the following are considered accounting changes?

change in accounting estimate change in reporting entity change in accounting principle

A change in depreciation method is treated as a(n)

change in accounting estimate.

For U.S. GAAP, which of the following are considered accounting changes?

change in accounting principle change in accounting estimate change in reporting entity

A change in depreciation method is treated as a

change in estimate achieved by a change in accounting principle.

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 retained earnings for $7,000. Reason: If beginning inventory is increased, ending 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.

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.

Which items are considered a correction of an error when the financial statements are adjusted?

failing to record a transaction mathematical mistakes change from the cash basis of accounting to accrual basis

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

in the beginning balance of retained earnings for the earliest year presented for the years prior to that date.

If a company changes its inventory method, what financial statement accounts are affected?

inventory cost of goods sold

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

A voluntary accounting principle change:

must be justified as being preferable

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements?

net income cost of goods sold inventory

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

preferable

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

principle, estimate

Accounting changes include changes in

principles, estimates, or entities.

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

prospective

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

If a company discovers an error in previously issued financial statements, it must

restate the financial statements.

If it is impracticable to adjust each year reported for the effect of a voluntary accounting principle change, the change is applied

retrospectively to the earliest year practicable.

If an accountant discovers an error in the current year accounting records before the financial statements are prepared, the accountant should

reverse the incorrect entry and prepare a correct entry.

If a lack of information makes it impracticable to report a voluntary accounting change retrospectively, then

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.

Which of the following are considered a change in reporting entity?

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

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; accounting estimate

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 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?

depreciation expense total fixed assets retained earnings

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?

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

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 inventory.

Which of the following errors typically do not self-correct?

Recording equipment purchased in the land account

What is the approach used for an error correction?

Restatement of previous years' financial statements

A prior period adjustment is

addition to or reduction in the beginning retained earnings balance in a statement of shareholders' equity due to a correction of an error.

An example of a change in accounting estimate that is effected by a change in accounting principle is a change in

depreciation methods.

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.

When is the prospective approach used in accounting changes?

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.

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?

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

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?

Overstated by $10,000

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?

Year 1 retained earnings will increase. Year 1 net income will increase.

The term "prior period adjustment" is used for

correction of an error

Failure to record an adjusting entry is a change that requires a:

correction of error

Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement?

earnings per share net income cost of goods sold

What approach is used to account for a change in depreciation method?

Prospective approach

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

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

credit to retained earnings for $12,000 debit to inventory for $20,000