ACCY 304 Ch. 22

6. 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

13. Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.

True

61. Bishop Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $198,000 overstated $219,000 understated Depreciation expense 126,000 overstated — Insurance expense 90,000 understated 90,000 overstated Prepaid insurance 90,000 overstated — In addition, on December 31, 2021 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2022. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Bishop's 2021 net income is

a. understated by $550,200

47. On January 1, 2019, 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 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

b. $0

72. On January 1, 2019, Hess Co. purchased a patent for $1,904,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2034. During 2022, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2022?

b. $1,305,600

74. On January 1, 2020, Janik Corp. acquired a machine at a cost of $900,000. It is to be depreciated on the straight-line method over a five-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

b. $180,000

62. Bishop Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $198,000 overstated $219,000 understated Depreciation expense 126,000 overstated — Insurance expense 90,000 understated 90,000 overstated Prepaid insurance 90,000 overstated — In addition, on December 31, 2021 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2022. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2021 is understated by

b. $388,200

41. On January 1, 2019, Neal Corporation acquired equipment at a cost of $840,000. 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 2022, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2022 would be

b. $70,000.

49. 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 $960,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/21, assuming a 20% tax rate, is

b. $768,000

52. Equipment was purchased at the beginning of 2019 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 2021. At the beginning of 2022, 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 2022, reflecting these changes in estimates, is

b. $82,500

*20. When changing from the equity method to the fair value method, a company must eliminate the balance in Unrealized Holding Gain or Loss.

False

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

False

11. Companies account for a change in depreciation methods as a change in accounting principle.

False

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

False

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

False

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

False

3. 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

5. 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

9. Companies report changes in accounting estimates retrospectively.

False

10. 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

15. Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

True

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

True

17. Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

True

19. For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

True

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

True

4. 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

7. An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.

True

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

True

Swift Company purchased a machine on January 1, 2019, 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, 2022, 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 2022 to reflect this additional information. 53. 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?

a. $0

71. On January 1, 2019, Lake Co. purchased a machine for $1,980,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2022, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $180,000. An accounting change was made in 2022 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2022 of

a. $1,095,000

66. Ernst Company purchased equipment that cost $3,000,000 on January 1, 2020. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. Ernst is subject to a 20% tax rate. Ernst's net income for the year ended December 31, 2020, was understated by

a. $2,144,000

76. Black, Inc. is a calendar-year corporation whose financial statements for 2020 and 2021 included errors as follows: Year Ending Inventory Depreciation Expense 2020 $324,000 overstated $270,000 overstated 2021 128,000 understated 90,000 understated Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2020, or at December 31, 2021. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2022?

a. $308,000 increase

44. 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 $450,000 $300,000 $150,000 Percentage-of-completion 750,000 375,000 270,000 What amount will be debited to Construction in Process account, to record the change at beginning of 2021?

a. $375,000

51. 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 $320,000 $360,000 LIFO 240,000 300,000 Net Income (computed under the FIFO method) 500,000 750,000 Based upon the above information, a change to the LIFO method in 2021 would result in net income for 2021 of

a. $690,000

55. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that the 2020 errors were not corrected and that no errors occurred in 2019. By what amount will 2020 income before income taxes be overstated or understated?

a. $70,000 overstatement

54. Swift Company purchased a machine on January 1, 2019, 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, 2022, 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 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?

a. $90,000

60. Accrued salaries payable of $102,000 were not recorded at December 31, 2020. Office supplies on hand of $58,000 at December 31, 2021 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause

a. 2021 net income to be understated $160,000 and December 31, 2021 retained earnings to be understated $58,000

31. 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

25. 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

a. credit to Accumulated Depreciation.

70. 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 $900,000 increase in the January 1, 2021 inventory. Assume that the income tax rate for all years is 20%. The cumulative effect of the accounting change should be reported by Frost in its 2021

a. retained earnings statement as a $720,000 addition to the beginning balance

42. On January 1, 2019, Knapp Corporation acquired machinery at a cost of $1,250,000. Knapp adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2022, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2022 would be

b. $91,429.

29. Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?

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

22. Which of the following is not accounted for as a change in accounting principle?

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

45. 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 $450,000 $300,000 $150,000 Percentage-of-completion 750,000 375,000 270,000 Which of the following will be included in the journal entry made by Dream Home to record the income effect?

b. A credit to Retained Earnings for $300,000

32. When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

b. change in accounting estimate.

68. Which of the following should be reported as a prior period adjustment?

b. change in estimated lives of depreciable assets - no change from unaccepted principle to accepted principle - yes

21. 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

b. consistency.

33. The estimated life of a building that has been depreciated for 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

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

50. 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 $640,000 $ 712,000 LIFO 560,000 636,000 Net Income (computed under the FIFO method) 980,000 1,330,000 Based on the above information, a change to the LIFO method in 2021 would result in net income for 2021 of

c. $1,254,000

67. Ernst Company purchased equipment that cost $3,000,000 on January 1, 2020. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. Ernst is subject to a 20% tax rate. Before the correction was made and before the books were closed on December 31, 2022, retained earnings was understated by

c. $1,888,000

56. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that no correcting entries were made at 12/31/20, or 12/31/21. Ignoring income taxes, by how much will retained earnings at 12/31/21 be overstated or understated?

c. $100,000 understatement

65. Link Co. purchased machinery that cost $3,000,000 on January 4, 2019. The entire cost was recorded as an expense. The machinery has a nine-year life and a $200,000 residual value. The error was discovered on December 20, 2021. Ignore income tax considerations. Before the correction was made, and before the books were closed on December 31, 2021, retained earnings was understated by

c. $2,377,778

69. 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 $3,500,000 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

c. $2,800,000

63. Bishop Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $198,000 overstated $219,000 understated Depreciation expense 126,000 overstated — Insurance expense 90,000 understated 90,000 overstated Prepaid insurance 90,000 overstated — In addition, on December 31, 2021 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2022. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the amount of Bishop's working capital at December 31, 2021 is understated by

c. $262,200

48. On January 1, 2019, 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 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

c. $320,000

43. On January 1, 2019, Piper Co., purchased a machine (its only depreciable asset) for $900,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2022, for financial statement reporting, Piper decided to change to the straight-line method for depreciation of the machine. Assume that Piper can justify the change. Piper's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2022, is $750,000. The income tax rate for 2022, as well as for the years 2019-2021, is 20%. What amount should Piper report as net income for the year ended December 31, 2022?

c. $528,000

34. Which of the following statements is correct?

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.

30. Which type of accounting change should always be accounted for in current and future periods?

c. Change in accounting estimate

26. Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?

c. Recomputation of current and future years' depreciation

59. Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2021, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2022. There were no other errors during 2021 or 2022 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2021?

c. Retained earnings understated by $12,500

23. Which of the following is not a retrospective-type accounting change?

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

58. Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2021, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2022. There were no other errors during 2021 or 2022 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2021?

c. Working capital understated by $22,500

75. On December 31, 2021, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2021 balance sheet?

c. accrued liabilities - understated retained earnings - no effect

36. Presenting consolidated financial statements this year when statements of individual companies were presented last year is

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

38. Counterbalancing errors do not include

c. an understatement of purchases.

27. 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

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

37. An example of a correction of an error in previously issued financial statements is a change

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

39. If, at the end of a period, a company using perpetual inventory erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause

c. no effect on net income, working capital, and retained earnings.

40. In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should:

c. remain as a part of the carrying amount of the investment.

64. Link Co. purchased machinery that cost $3,000,000 on January 4, 2019. The entire cost was recorded as an expense. The machinery has a nine-year life and a $200,000 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 a. $2,333,333.

d. $0.

46. 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 $ 475,000 $ 900,000 2020 625,000 950,000 2021 700,000 1,050,000 $1,800,000 $2,900,000 Assuming an income tax rate of 20% for all years, the effect of this accounting change on prior periods should be reported by a credit of

d. $600,000 on the 2021 retained earnings statement.

73. During 2020, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year. · Royalty income of $243,000 was accrued at 12/31/20 for the period July-December 2020. · Royalty income of $270,000 was received on 3/31/21, and $351,000 on 9/30/21. · Mercer learned from Roark that sales subject to royalty were estimated at $4,860,000 for the last half of 2021. In its income statement for 2021, Mercer should report royalty income at

d. $864,000

24. Which of the following is accounted for as a change in accounting principle?

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

28. Which of the following disclosures is required for a change from LIFO to FIFO?

d. All of these are required.

35. Which of the following describes a change in reporting entity?

d. Changing the companies included in combined financial statements.

57. Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2020 Dec. 31, 2021 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2021, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2022. There were no other errors during 2021 or 2022 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on Langley's 2021 net income?

d. Net income overstated by $75,000