Chapter 22- Accounting Changes and Error Corrections

On January 1, 2019, Nobel Corporation acquired machinery at a cost of $1600000. 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 2022, a decision was made to change to the double-declining balance method of depreciation for this machine.Assuming a 20% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is $0. $240640. $179200. $300800.

$0, No cumulative effect; handle prospectively.

Swift Company purchased a machine on January 1, 2019, for $900000. At the date of acquisition, the machine had an estimated useful life of 6 years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2022, Swift determined, as a result of additional information, that the machine had an estimated useful life of 8 years from the date of acquisition with no salvage. An accounting change was made in 2022 to reflect this additional information.Assume that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate was 30% in 2019, 2020, 2021, and 2022. What should be reported in Swift's income statement for the year ended December 31, 2022, as the cumulative effect on prior years of changing the estimated useful life of the machine? $60000 $0 $315000 $90000

$0, no cumulative effect, handle prospectively (change in estimate).

Heinz Company began operations on January 1, 2020, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Final Inventory 2020 2021 FIFO $640000 $712000 LIFO 560000 636000 Net Income (computed under the FIFO method) 980000 1330000 Based on the above information, a change to the LIFO method in 2021 would result in net income for 2021 of $1254000. $980000. $1250000. $1330000.

$1330000 - ($712000 - $636000) = $1254000.

On December 31, 2021, 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 $3500000 increase in the beginning inventory at January 1, 2021. Assume a 20% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is $3500000. $2800000. $0. $700000.

$3500000 × (1 - 0.20) = $2800000.

Lanier Company began operations on January 1, 2020, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Final Inventory 2020 2021 FIFO $320000 $360000 LIFO 240000 300000 Net Income (computed under the FIFO method) 500000 750000 Based upon the above information, a change to the LIFO method in 2021 would result in net income for 2021 of $690000. $810000. $750000. $770000.

$750000 - ($360000 - $300000) = $690000.

On January 1, 2020, Janik Corp. acquired a machine at a cost of $900000. It is to be depreciated on the straight-line method over a 5-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Janik's 2020 financial statements. The oversight was discovered during the preparation of Janik's 2021 financial statements. Depreciation expense on this machine for 2021 should be $0. $180000. $225000. $360000.

$900000 ÷ 5 = $180000.

On December 31, 2021 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2021 beginning inventory to increase by $960000. What the cumulative effect of this accounting change to be reported for the year ended 12/31/21, assuming a 20% tax rate? $768000. $192000. $0. $960000.

$960000 × (1 - 0.20) = $768000.

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2021. In 2021, it changed to the percentage-of-completion method.The company decided to use the same for income tax purposes. The tax rate enacted is 20%. Income before taxes under both the methods for the past three years appears below. 2019 2020 2021 Completed contract $450000 $300000 $150000 Percentage-of-completion 750000 375000 270000 What amount will be debited to Construction in Process account, to record the change at beginning of 2021? $375000 $150000 $225000 $75000

($750000 - $450000) + ($375000 - $300000) = $375000.

Swift Company purchased a machine on January 1, 2019, for $900000. At the date of acquisition, the machine had an estimated useful life of 6 years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2022, Swift determined, as a result of additional information, that the machine had an estimated useful life of 8 years from the date of acquisition with no salvage. An accounting change was made in 2022 to reflect this additional information.What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2022? $112500 $225000 $90000 $180000

($900000 ÷ 6) × 3 = $450000; $450000 ÷ 5 = $90000.

Which of the following statements is correct? Changes in accounting principle are always handled in the current or prospective period. Correction of an error related to a prior period should be considered as an adjustment to current year net income. Prior statements should be restated for changes in accounting estimates. 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.

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.

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

A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

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

A change in inventory valuation from average cost to FIFO.

Which of the following is not accounted for as a change in accounting principle? A change from the completed-contract to the percentage-of-completion method. A change to a different method of depreciation for plant assets. A change from full-cost to successful efforts in the extractive industry. A change from LIFO to FIFO for inventory valuation.

A change to a different method of depreciation for plant assets.

Which of the following disclosures is required for a change from LIFO to FIFO? The cumulative effect on prior years, net of tax, in the current retained earnings statement. The justification for the change. Restated prior year income statements. All of these are required.

All of these are required.

Link Co. purchased machinery that cost $3000000 on January 4, 2019. The entire cost was recorded as an expense. The machinery has a 9-year life and a $200000 residual value. The error was discovered on December 20, 2021. Ignore income tax considerations.Link's income statement for the year ended December 31, 2021, should show the cumulative effect of this error in the amount of $0. $2066667. $2333333. $2377778.

CE = $0, correction of error.

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

Changing the companies included in combined financial statements.

Which of the following should be reported as a prior period adjustment? Change in Estimated Lives of Depreciable Assets Change from Unaccepted Principle to Accepted Principle Yes No No Yes No No Yes Yes

No Yes

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

Recomputation of current and future years' depreciation.

Which of the following is not a retrospective-type accounting change? "Full cost" method to another method in the extractive industry. Sum-of-the-years'-digits method to the straight-line method. LIFO method to the FIFO method for inventory valuation. Completed-contract method to the percentage-of-completion method for long-term construction contracts.

Sum-of-the-years'-digits method to the straight-line method.

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2021. In 2021, it changed to the percentage-of-completion method.The company decided to use the same for income tax purposes. The tax rate enacted is 20%. Income before taxes under both the methods for the past three years appears below. 2019 2020 2021 Completed contract $450000 $300000 $150000 Percentage-of-completion 750000 375000 270000 Which of the following will be included in the journal entry made by Dream Home to record the income effect? A credit to Retained Earnings for $300000 A credit to Retained Earnings for $225000 A debit to Retained Earnings for $225000 A debit to Retained Earnings for $300000

[($300000 - ($300000 × 0.20)) + ($75000 - ($75000 × 0.20))] = $300000 credit.

During 2021, a construction company that began operations in 2019 changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below: Completed-Contract Percentage-of-Completion 2019 $475000 $ 900000 2020 625000 950000 2021 700000 1050000 $1800000 $2900000 Assuming an income tax rate of 20% for all years and that comparative statements are not issued, the effect of this accounting change on prior periods should be reported by a increase of $775000 on the 2021 income statement. $775000 on the 2021 retained earnings statement. $600000 on the 2021 retained earnings statement. $600000 on the 2021 income statement.

[($900000 + $950000) - ($475000 + $625000)] × (1 - 0.20) = $600000 retained earnings statement

On January 1, 2019, Neal Corporation acquired equipment at a cost of $840000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of 8 years, with no residual value. At the beginning of 2022, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2022 would be $70000. $168000. $43750. $105000.

[(8 + 7 + 6) ÷ 36] × $840000 = $490000 (AD)($840000 - $490000) ÷ 5 = $70000.

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

change in accounting estimate.

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of materiality. objectivity. consistency. conservatism.

consistency.

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

credit to Accumulated Depreciation.

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a credit to Deferred Tax Liability. debit to Retained Earnings in the amount of the difference on prior years, net of tax. debit to Construction in Process. debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.

debit to Retained Earnings in the amount of the difference on prior years, net of tax.

An example of a correction of an error in previously issued financial statements is a change from the cash basis of accounting to the accrual basis of accounting. in the tax assessment related to a prior period. from the FIFO method of inventory valuation to the LIFO method. in the service life of plant assets, based on changes in the economic environment.

from the cash basis of accounting to the accrual basis of accounting

On January 1, 2021, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $900000 increase in the January 1, 2021 inventory. Assume that the income tax rate for all years is 20%. Assuming that comparative statements are not issued, the cumulative effect of the accounting change should be reported by Frost in its 2021 retained earnings statement as a $720000 addition to the beginning balance. income statement as a $720000 cumulative effect of accounting change. retained earnings statement as a $900000 addition to the beginning balance. income statement as a $900000 cumulative effect of accounting change.

retained earnings statement as a $720000 addition to the beginning balance. $900000 × (1 - 0.2) = $720000.

On January 1, 2019, Nobel Corporation acquired machinery at a cost of $1600000. 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 2022, 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 2022 is $160000. $224000. $320000. $480000.

{($1600000 - [($1600000 ÷ 10) × 3]} ÷ 7 × 2 = $320000.