Inter Acct Final

Counterbalancing errors are those errors that take longer than two periods to correct themselves.

False

When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year's income statement.

False

Correct answer. Your answer is correct. Heinz Company began operations on January 1, 2017, 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 2017 2018 FIFO 640,000 712,000 LIFO 560,000 636,000 Net Income 980,000 1,330,000 (FIFO) Based on the above information, a change to the LIFO method in 2018 would result in net income for 2018 of

$1,330,000 - ($712,000 - $636,000) = $1,254,000.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: 2017 2018 Inv 50,000Overstatement 80,000 Understated Dep 20,000Understatement 20,000 Overstated Assume that no correcting entries were made at 12/31/17, or 12/31/18. Ignoring income taxes, by how much will retained earnings at 12/31/18 be overstated or understated? Entry field with correct answer $80,000 overstatement $70,000 overstatement $100,000 understatement $30,000 understatement

$80,000 + $20,000 = $100,000 understatement.

Equipment was purchased at the beginning of 2016 for $850,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $100,000. The equipment was depreciated using the straight-line method of depreciation through 2018. At the beginning of 2019, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $62,500. The amount to be recorded for depreciation for 2019, reflecting these changes in estimates, is

$850,000 - {[($850,000 - $100,000) ÷ 6] × 3} = $475,000 ($475,000 - $62,500) ÷ (8 - 3) = $82,500.

Swift Company purchased a machine on January 1, 2016, for $900,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2019, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2019 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, 2019?

($900,000 ÷ 6) × 3 = $450,000; $450,000 ÷ 5 = $90,000

Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2018. In 2018, 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. Completed contract 2016 $450,000 2017 $300,000 2018 $150,000 Percentage-of-completion 2016 750,000 2017 375,000 2018 270,000 What amount will be debited to Construction in Process account, to record the change at beginning of 2018? A) $375,000 B) $150,000 C) $225,000 D) $75,000

A) $375,000

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

A) 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) A change from LIFO to FIFO for inventory valuation B)A change to a different method of depreciation for plant assets C)A change from full-cost to successful efforts in the extractive industry D)A change from the completed-contract to the percentage-of-completion method

B) A change to a different method of depreciation for plant assets

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a Entry field with correct answer A) correction of an error. B) change in accounting estimate. C) prior period adjustment. D) change in accounting principle.

B) change in accounting estimate.

Counterbalancing errors do not include Entry field with correct answer A) errors that correct themselves in two years. B) errors that correct themselves in three years. C) an overstatement of unearned revenue. D) an understatement of purchases.

B) errors that correct themselves in three years.

During 2018, a construction company that began operations in 2016 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 %-ofCompletion 2016 $ 475,000 $ 900,000 2017 625,000 950,000 2018 700,000 1,050,000 Total $1,800,000 $2,900,000 Assuming an income tax rate of 30% for all years, the effect of this accounting change on prior periods should be reported by a credit of Entry field with correct answer A $770,000 on the 2018 income statement. B $770,000 on the 2018 retained earnings statement. C $525,000 on the 2018 retained earnings statement. D $525,000 on the 2018 income statement.

C $525,000 on the 2018 retained earnings statement. (900,000+950,000)-(475,000+625,000)*(1-.3)=525,000

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method? Entry field with correct answer 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)Recomputation of current and future years' depreciation

Which type of accounting change should always be accounted for in current and future periods? Entry field with correct answer A)Correction of an error B)Change in reporting entity C) Change in accounting principle D) Change in accounting estimate

D) Change in accounting estimate

Which of the following statements is correct? Entry field with correct answer A)Changes in accounting principle are always handled in the current or prospective period. B)Correction of an error related to a prior period should be considered as an adjustment to current year net income. C)Prior statements should be restated for changes in accounting estimates. D)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)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 disclosures is required for a change from LIFO to FIFO? Entry field with correct answer A)The cumulative effect on prior years, net of tax, in the current retained earnings statement B)The justification for the change C)Restated prior year income statements D)All of these are required.

D)All of these are required.

Presenting consolidated financial statements this year when statements of individual companies were presented last year is Entry field with correct answer A)not an accounting change. B)a correction of an error. C)an accounting change that should be reported prospectively. D)an accounting change that should be reported by restating the financial statements of all prior periods presented.

D)an accounting change that should be reported by restating the financial statements of all prior periods presented.

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

False

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

False

Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.

False

When companies make changes that result in different reporting entities, the change is reported prospectively.

False

One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

True

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

True

If an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.

True

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

True

Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements—as if the new principle had always been used.

True

When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

True

On January 1, 2016, Nobel Corporation acquired machinery at a cost of $1,600,000. 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 2019, 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 2019 is

{($1,600,000 - [($1,600,000 ÷ 10) × 3]} ÷ 7 × 2 = $320,000