ch. 21
On August 31 of the current year, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted-average periodic inventory system. Harvey uses U.S. GAAP, is on a calendar year basis, and does not present comparative financial statements. The cumulative effect of the change is determined:
As of January 1 of the current year
A firm may choose to apply indirect effects of an accounting principle change either prospectively or retrospectively.
FAlse
Mandatory accounting changes require retrospective application of the new accounting standard.
False
Prior years' financial statements are restated for changes in material accounting estimates.
False
Many errors are due to misapplication of accounting policies.
True
John Pickens writes mystery novels. His publisher pays him royalties for the number of books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $53,000. On March 31, 2019, he received $57,500. Assuming that he recorded $53,000 in royalties at December 31, 2018, how would you account for this change?
as a change in estimate
Energy, Inc began operations in 2018 using LIFO inventory methods. In 2019, management decided they should have chosen FIFO. The beginning inventory for 2019 using LIFO was $128,000. Under the FIFO method, the beginning inventory would have been $157,000. The adjustment to inventory for the change in accounting principle for 2019 would be ________.
$29,000 debit
Balance sheet errors are typically the result of misclassification of accounts in the process of recording a transaction and require correction upon discovery.
True
Tarleton Company discovered ending inventory errors in 2017 and 2018. The 2017 ending inventory was overstated by $260,000 whereas the 2018 ending inventory was understated by $115,000. Ignoring income tax effects, by what amount should the beginning retained earnings be adjusted on January 1, 2019?
$115,000 credit
Johnston Controls began operation in 2017 using FIFO inventory methods. In 2018, management decided they should have chosen LIFO to more accurately portray financial position and performance. The beginning 2018 inventory using FIFO was $ 180 comma 000$180,000. Under the LIFO method the beginning inventory would have been $ 195 comma 000$195,000. The adjustment to inventory for the accounting principle change for 2017 would be ________.
0
Humphrey Contractors purchased customized equipment in January, 2017 for $620,000. The manufacturer warranted the equipment for six years. Humphrey used double−declining balance depreciation with a useful life of eight years and no salvage value. After two full years, he now believes that the equipment will only last a total of five years. Compute his depreciation expense for 2019 if he switches to straight−line depreciation.
116,250
Peoples Corporation purchased a building on December 29, 2014 that cost $1,400,000 and occupied it on January 2, 2015. The owner estimated that the building would last 40 years with a salvage value of $150,000 using straight−line depreciation. In early 2018, Mr. Peoples learned that due to a permanent highway closure, the company needs to relocate at the end of 2020. He believes that the salvage value of the building at that time will be $800,000. Compute the amount of depreciation to record during 2018, and each of the two years thereafter
168,750
Miller Manufacturing purchased a packaging machine for $300,000 on January 2, 2015. The seller assumed that the machine would be functional for at least five years with no salvage value. In 2018, Miller decided that the machine would last an additional five years with a salvage value of $25,000. The company uses straight−line depreciation for all assets. What amount of depreciation should Miller record in 2018 and following years?
19,000
Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in uncollectible accounts. In 2018, her sales were $3,380,000 and in 2019, sales were $3,960,000. Before 2019, she estimated that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. What should be the bad debt expense for 2018 and 2019 in the comparative income statements for 2018 and 2019?
2018, $67,600; 2019, $118,800
On December 31, Year 10, Brown Company changed its inventory valuation method from the weighted-average method to FIFO for financial statement purposes. The change will result in an $800,000 decrease in the beginning inventory at January 1, Year 10. The tax rate is 30%. The cumulative effect of this accounting change for the year ended December 31, Year 10, in the statement of retained earnings is:
560000
Jenkins, Inc. builds custom machines for manufacturers using robotic equipment. In 2018, the company decided to change from straight−line to double−declining balance depreciation for its robotic equipment. It changed the life expectancy as follows: Determine the correct amount of depreciation to expense for 2018.
590,000
Hampton's Construction, Inc. decided to change from the completed−contract method of accounting to the percentage−of−completion method. The following information is available for net income. Ignore income tax effects:
Construction in Progress 106,000 Retained Earnings 106,000
The bookkeeper for Phillips, Inc. mistakenly recorded a $300,000 one−year trade note receivable as a long−term note receivable in 2017. Interest revenue was correctly recorded. The error was discovered in 2019 by the company's auditors. What is the proper way to correct the error?
Correct the classification in 2019 retrospectively for comparative balance sheets.
Austin Motor Works declared and distributed a 6% stock dividend in 2018 when the stock was selling for $18 per share. There were 6,000,000 shares outstanding at the time of the dividend declaration. The controller recorded the distribution at par value ($1 per share) resulting in a debit to Dividends and a credit to Common Stock for $360,000. Upon review in early 2019 when the 2018 books were still open, the CFO made which of the following correcting entries?
Dividends 6,120,000 APIC in Excess of Par−Common 6,120,000
Changes in depreciation methods are changes in accounting principle that are accounted for retrospectively.
False
Fraud is a type of accounting error.
False
JAT Corp. loaned $400,000 for three years to a major supplier on July 1, 2017. The note stipulated 12% interest to be paid annually each June 30. Since this was an unusual transaction, no one billed the supplier for the interest in 2018 or recorded the accrued interest at the year−end (December). The supplier did not send in any interest in 2018. On March 1, 2019, after the 2018 books were closed, the CFO found the error. Which one of the following is the correct journal entry to correct the errors thru March 1, 2019
Interest Receivable 80,000 Interest Revenue 8,000 Retained Earnings Prior−Period Adjustment 72,000
Butler Products decided to change inventory methods on January 1, 2020 to more effectively report its results of operations. In the past, management has measured its ending inventories by the average−cost method and they now believe that FIFO is a better representation of its financial position and profitability. Butler's tax rate is 35% for all years.
Inventory 125,000 Deferred Tax Liability 43,750 Retained Earnings 81,250
Butler Products decided in 2020 to change inventory methods to more effectively report its results of operations. In the past, management has measured its ending inventories by the average−cost method and they now believe that FIFO is a better representation of its profitability. Ignoring income tax, which one of the following journal entries correctly records the change in the accounting principle at January 1, 2020?
Inventory 54,000 Retained Earnings 54,000
At the end of 2017, the payroll supervisor for Claro, Inc. failed to accrue $30,100 in commissions for their outside salespersons. The cost was recorded in 2018 when the commissions were paid and Commission Expense was debited and Cash credited for the full amount. The error was not discovered until late in 2018 while reconciling years−end expense for 2018. The tax rate for both years was 40%. What is the proper journal entry to correct the error for 2018?
Retained Earnings 18,060 Taxes Receivable 12,040 Commission Expense 30,100
Woods, Inc. purchased a new engine for a long−distance truck in January, 2017. The engine cost $380,000 and should give the truck an additional 400,000 miles of life. Inadvertently, the engine was charged to truck repairs expense. The error was found in December, 2018. The company records depreciation based on miles driven with no salvage value. Miles driven in 2017 were 85,000 and 70,000 in 2018. Which one of the following entries properly corrects all the errors through December 31, 2018?
Truck 380,000 Depreciation Expense−Truck (2018) 66,500 Accumulated Depreciation−Truck 147,250 Retained Earnings 299,250
A change in the specific subsidiaries that make up the group of entities for which consolidated financial statements are presented is a change in a reporting entity.
True
Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.
True
Presenting consolidated statements instead of individual financial statements is a change in a reporting entity.
True
Georgio, Inc. decided to move its business from its current location to another larger plant. Management should examine the salvage value of the building in the future and the change in the useful life to see if a change in the depreciation of the current building is warranted.
True
Langley Corporation replaced an HVAC system in one of its warehouses in July, 2017, at a cost of $410,000. The accountant recording the purchase charged it to repairs and maintenance expense. The error was discovered late in 2018 while reconciling depreciation expense for 2018. The system should last about 7 years with no salvage value. What entry should be made before the 2018 books are closed if the company uses straight−line depreciation?
Warehouse 410,000 Depreciation Expense (2018)long dash—Warehouse 58,571 Accumulated Depreciation minus−Warehouse 87,857 Retained Earnings long dash—Prior Period Adjustment 380,714
Gonzales Company purchased a machine on January 1, Year 1, for $600,000. On the date of acquisition, the machine had an estimated useful life of 6 years with no salvage value. The machine was being depreciated on a straight-line basis. On January 1, Year 4, Gonzales determined that the machine had an estimated life of 8 years from the date of acquisition. An accounting change was made in Year 4. What is the amount of the depreciation expense that should be recorded for the year ended Year 4?
60,000
In completing the adjusting entries for 2017 in early 2018, the internal auditor discovered that a patent, with an estimated eight year life that was registered in January, 2017 had not been amortized. The patent cost $440,000. The income tax rate is 40%. The books are still open in 2017. What is the journal entry to correct the error?
Amortization Expense−Patent 55,000 Patent 55,000
John Pickens writes mystery novels. His publisher pays him royalties for books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $55,000. On March 31, 2019, he received $58,000. Assuming that he recorded $55,000 at December 31, 2018, which one of the following is the correct journal entry on March 31, 2019? His tax rate is 35%.
Cash 58,000 Royalties Receivable 55,000 Royalty Revenue 3,000
A change in reporting entity must be treated retrospectively for a maximum of two prior years.
False
On August 31 of the current year, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted-average periodic inventory system. Harvey uses IFRS and is on a calendar-year basis. The cumulative effect of the change is shown as an adjustment to beginning retained earnings on the balance sheet for:
January 1 of the prior year
During 2017, a $50,000 loss on the sale of machinery was incorrectly recorded as a factory equipment repair. The error was not discovered until the books were closed and the financial statements were issued for 2018. What adjustment is necessary?
Make no entry, but if $50,000 is a material amount, retrospectively adjust the 2017 comparative income statement.
Jett Company purchased an umbrella liability policy in January, 2017 and paid a five−year premium for $400,000. It was recorded as Insurance Expense. The error was discovered late in 2017 when the accountants were reconciling 2017 for adjusting entries. What is the proper entry to correct the error at December 31, 2017?
Prepaid Insurance 320,000 Insurance Expense 320,000
A material error is one that, if not corrected, would impact a user's decisions.
True
The auditor for Universal Tools, Inc. discovered in 2019 that the warranty liability account showed a $25,000 debit balance. She investigated and discovered that the 3% estimate based on sales for warranty expense was recorded and understated, and it was more likely 3.5%. Sales for 2019 were $7,000,000. What is the appropriate journal entry as a result of this discovery?
Warranty Expense 35,000 Warranty Liability 35,000
Accounting changes detract from which one of the following enhancing qualitative characteristics of accounting information?
comparability
Retrospective changes require all but which of the following?
detailed numerical comparisons of all prior periods to restated statements
Which one of the following might be affected by a change in revenue recognition requiring a prospective change?
management compensation
When a self−correcting error is discovered after closing the books for the second year
no entry is necessary because all permanent accounts are correctly stated
Which of the following is not an estimate that might be revised as a natural part of the accounting process?
salary expense
When a firm has a change in reporting entity, it must disclose
the effect of the change on net income and EPS for each year presented
When a company makes a change in an accounting principle, IFRS additionally requires a company to report ________.
three years of balance sheets and two years of other financial statements
There are four types of accounting changes long dash— principles, estimates, entities and errors.
FAlse
Accounting entity changes are handled prospectively.
False
The proper accounting treatment to account for a change in inventory valuation from FIFO to LIFO under U.S. GAAP is:
Prospective application
