Ch 20. Accounting Changes and Error Corrections

The prospective approach usually is required for: A) A change in estimate. B) A change in reporting entity. C) A change in accounting principle. D) A correction of an error.

A) A change in estimate. With a change in estimate, the current amounts are used to apply the new estimate this year and future years. The new estimate is not applied to previous periods.

Fickle Company purchased a machine at a total cost of $220,000 (no residual value) at the beginning of 2013. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2016, it was decided to change to straight-line. Ignoring taxes, the 2016 adjusting entry will include a debit to depreciation expense of: A) $11,000 B) $16,000 C) $22,000 D) $38,000

B) $16,000 Sum-of the years' digits depreciation was $108,000 {$220,000 x [(10 + 9+ 8) / 55]}. Thus, the undepreciated value at the beginning of 2013 is $112,000 ($220,000 - $108,000), which will be depreciated over seven years.

Retrospective restatement usually is appropriate for a change in: A) Acct Principle - Yes; Acct Estimate - Yes B) Acct Principle - Yes; Acct Estimate - No C) Acct Principle - No; Acct Estimate - Yes D) Acct Principle - No; Acct Estimate - No

B) Acct Principle - Yes; Acct Estimate - No A change in accounting principle is usually reported using a retrospective approach and a change in accounting estimate is reported using a prospective approach.

Retrospective restatement usually is not applied for a: A) Change in accounting principle. B) Change in accounting estimate. C) Change in entity. D) Correction of error.

B) Change in accounting estimate. Change is accounting estimate is reported using a prospective approach.

Which of the following is not true regarding the correction of an error? A) A journal entry is made to correct any account balances that are incorrect as a result of the error. B) The correction is reported prospectively; previous financial statements are not revised. C) Prior years' financial statements are restated to reflect the correction of the error (if the error affected those statements). D) A disclosure note should describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and earnings per share.

B) The correction is reported prospectively; previous financial statements are not revised. The effect of the error is reported as an adjustment to beginning-of-period retained earnings and prior years' financial statements are restated.

A change in the residual value of a building depreciated on a straight-line basis is: A) A change that should be reported in earnings of the period of change. B) A change reported by restating prior years' financial statements. C) An error correction. D) A change reported in the current and future periods when the change affects both.

D) A change reported in the current and future periods when the change affects both. A change in residual value is a change in estimate which is reported using a prospective approach.

Early in 2016, Brandon Transport discovered that a five-year insurance premium payment of $250,000 at the beginning of 2013 was debited to insurance expense. The correcting entry would include: A) A debit to prepaid insurance of $250,000. B) A debit to insurance expense of $100,000. C) A debit to prepaid insurance of $150,000. D) A credit to retained earnings of $100,000.

D) A credit to retained earnings of $100,000. The correcting entry would debit prepaid insurance for $100,000 and a credit to retained earnings for $100,000 since there are two years remaining on the insurance policy.

Lamont Communications has amortized a patent on a straight-line basis since it was acquired in 2013 at a cost of $50 million. During 2016 management decided that the benefits from the patent would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. Lamont's 2016 financial statements should include: A) A patent balance of $50 million. B) Patent amortization expense of $2.5 million. C) Patent amortization expense of $5 million. D) A patent balance of $34 million.

D) A patent balance of $34 million. Accumulated amortization at the end of 2013 is $16 million, comprised of 3 year's amortization at $2.5 million per year ($50 / 20 years) plus one year's amortization at $8.5 million [($50 - $7.5) / (8 - 3) years].

Which of the following is not usually accounted for retrospectively? A) Change in the composition of firms reporting on a consolidated basis. B) Change from LIFO to FIFO. C) Change from expensing extraordinary repairs to capitalizing the expenditures. D) Change from FIFO to LIFO.

D) Change from FIFO to LIFO. With a change to LIFO, companies may not have the necessary information related to the cost of inventory to retrospectively adjust retained earnings.

Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards? A) Change in depreciation method. B) Change in reporting entity. C) Change in estimated useful life of depreciable assets. D) Change from the FIFO method of costing inventories to the LIFO method.

D) Change from the FIFO method of costing inventories to the LIFO method. LIFO is not a permissible method for accounting for inventory under IFRS.

Which of the following is accounted for prospectively? A) Changes from Average to FIFO. B) Change in reporting entity. C) Correction of an error. D) Change in the percentage used to determine warranty expense.

D) Change in the percentage used to determine warranty expense. The new warranty percentage is applied to the current year reported amount and future years. The new percentage is not applied to previous years.

In 2016, it was discovered that Trilogy Company had debited expense for the full cost of an asset purchased on January 1, 2013. The cost was $12 million with no expected residual value. Its useful life was 5 years and straight-line depreciation is used by the company. The correcting entry assuming the error was discovered in 2016 before the adjusting and closing entries includes: A) A credit to accumulated depreciation of $7.2 million. B) A debit to accumulated depreciation of $4.8 million C) A credit to an asset of $12 million. D) A debit to retained earnings of $4.8 million.

A) A credit to accumulated depreciation of $7.2 million. Accumulated depreciation would be credited for three year's depreciation (2010 to 2012) at $2.4 million per year. Depreciation for 2013 will be accounted for normally. In addition, an asset account would be debited for $12 million and retained earnings would be credited for $4.8 million.

Which of the following is not a change in accounting principle usually accounted for by restrospectively revising prior financial statements? A) Change from SYD to DDB. B) Change from FIFO to the average method. C) Change from the average method to FIFO. D) Change from LIFO to FIFO.

A) Change from SYD to DDB. Changes in depreciation methods are treated as changes in estimates and accounted for prospectively.

Fickle Company purchased a machine at a total cost of $220,000 (no residual value) at the beginning of 2013. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2016, it was decided to change to straight-line. An accompanying disclosure note would include each of the following except: A) The cumulative effect of the change. B) Justification that the change is preferable. C) The effect of a change on any financial statement line items affected for all periods reported. D) The effect of a change on per share amounts affected for all periods reported.

A) The cumulative effect of the change. A change in depreciation methods is considered a change in estimate, and as such is accounted for prospectively. However, the disclosure note should disclose the justification that the change is preferable, the effect of a change on any financial statement line items affected for all periods reported, and the effect of the change on per share amounts affected for all periods reported.

A change in accounting principle that usually should not be reported by revising the financial statements of prior periods is a change from the: A) The weighted-average method to the LIFO method. B) The weighted-average method to the FIFO method. C) FIFO method to the weighted-average method. D) LIFO method to the weighted-average method.

A) The weighted-average method to the LIFO method. Changes to LIFO are handled prospectively.

State Materials, Inc. changed from the FIFO method of costing inventories to the weighted average method during 2016. When reported in the 2016 comparative financial statements, the 2015 inventory amount will be: A) Decreased. B) Increased. C) Increased or decreased, depending on how prices changed during 2016. D) Unaffected.

C) Increased or decreased, depending on how prices changed during 2016. It will be restated to the balance it would have if the average method had been used all along.

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards? A) The error can be reported prospectively if it's not considered practicable to report it retrospectively. B) The error can be reported in the current period if it's not considered practicable to report it prospectively. C) The error can be reported in the current period if it's not considered practicable to report it retrospectively. D) Retrospective application is required with no exception.

C) The error can be reported in the current period if it's not considered practicable to report it retrospectively. IFRS allows the error to be reported in the current period, GAAP requires a retrospective approach.

The discovery of the error described in the previous question in 2018, before adjusting or closing entries, would require: A) A credit to inventory of $10 million. B) A decrease in retained earnings. C) An increase in retained earnings. D) None of the above.

D) None of the above. By then, this counterbalancing error would have "corrected itself."

Blair Pen Company overstated its inventory by $10 million at the end of 2016. The discovery of this error during 2017, before adjusting or closing entries, would require: A) A debit to inventory of $10 million. B) A prospective adjustment in the 2017 income statement. C) An increase in retained earnings. D) None of the above.

D) None of the above. Retained earnings would be debited for $10 million, and inventory would be credited for $10 million.