Chapter 20: Accounting Changes and Error Corrections

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 balance sheet? (Select all that apply.)

Assets are understated by $80,000 Retained earnings is understated by $80,000 Reason: excess expense in year 1 of $100,000 less two years of omitted depreciation expense

Accounting changes include changes in accounting _ , in accounting _ , and in reporting entity.

Blank 1: principle Blank 2: estimate or estimates

A change in accounting estimate is accounted for using the _ approach

Blank 1: prospective

When it is impracticable to measure the period-specific effects of a change in accounting principle, the _ approach should be used.

Blank 1: prospective

Which of the following are considered a change in reporting entity? (Select all that apply.)

Changing specific companies that are included in the consolidated statements. Presenting consolidated financial statements in place of individual statements.

Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following entries?

Credit inventory $100,000. Debit equipment $100,000.

In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? (Select all that apply.)

Credit retained earnings $10,000. Debit inventory $10,000.

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3?

Credit retained earnings $60,000. Reason: Repair expense is overstated in year 1 by $100,000. Depreciation expense is understated in years 1 and 2 by $40,000 ($20,000 each year). Therefore, the adjustment to retained earnings is to increase retained earnings by $60,000 ($100,000 - $40,000).

In year 1, Regal Corp. purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense in year 1 and year 2. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3 assuming straight line depreciation?

Debit retained earnings $20,000.

Which of the following are requirements for the correction of an accounting error? (Select all that apply.)

Disclose the nature of the error and the impact of the error on net income. Prepare a journal entry to correct the error. Restate previous years' financial statements that are incorrect.

Which of the following errors would self-correct in the following year? (Select all that apply.)

Failure to accrue salaries in the current year. Miscounting ending inventory.

Which of the following are acceptable reasons for an accounting change? (Select all that apply.)

To be consistent with others in the industry. To apply a new method that is more appropriate.

Mirage Corp. miscounts and understates its ending inventory in year 1 by $5,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

Understate assets. Understate retained earnings. Understate net income.

In year 2, Rogers Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

Year 1 net income will decrease. Year 1 ending inventory will decrease. Reason: If year 2 beginning inventory is $5,000 lower, then ending inventory in year 1 is $5,000 lower. Year 1 cost of goods sold is higher, resulting in lower net income for year 1 and lower retained earnings for year 1.

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

Year 1 retained earnings will increase. Year 1 net income will increase Reason: If year 2 beginning inventory is higher, then year 1 ending inventory is higher, and year 1 cost of goods sold is lower. Therefore, year 1 net income will increase, and year 1 retained earnings will increase.

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and

an adjustment is made to retained earnings at the beginning of the adoption period.

In year 1, Clark Corp. failed to record an entry to record a sale on account. In year 2, Clark recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would be

debit sales revenue; credit retained earnings.

Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement? (Select all that apply.)

earnings per share cost of goods sold net income

If an accountant discovers an error in the current year accounting records before the financial statements are prepared, the accountant should

reverse the incorrect entry and prepare a correct entry.

Which of the following are considered a change in accounting principle? (Select all that apply.)

Adopt a new FASB standard. Change from the cost to equity method.

Which of the following is a change in accounting estimate?

Change in actuarial calculations pertaining to pension plan.

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.)

Debit sales revenue. Credit retained earnings

Rex Corp. purchased supplies on account and recorded it in the inventory account. What is the journal entry to correct this error?

Debit supplies; credit inventory.

Which of the following errors will self-correct?

Miscounting ending inventory at the end of the year.

If it is impracticable to measure the period-specific effects of a change in accounting principle, what approach is used?

Prospective

What is the approach used for an error correction?

Restatement of previous years' financial statements

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? (Select all that apply.)

The adjusted net income for each year is shown on the retained earnings statement for that year. Retained earnings is adjusted for the earliest period presented.

A prior period adjustment is

an addition or reduction in the beginning balance of retained earnings due to an error correction.

A change in depreciation method is treated as a(n)

change in accounting estimate.

If a company changes its inventory method, what financial statement accounts are affected? (Select all that apply.)

cost of goods sold inventory

Jill accrues salaries and records the transaction by debiting salary expense and crediting notes payable. The entry to correct this error is

debit notes payable; credit salaries payable.

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? (Select all that apply.)

net income inventory cost of goods sold

Accounting changes include changes in

principles, estimates, or entities.

The term "prior period adjustment" is used for

the correction of an error.

Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? (Select all that apply.)

total fixed assets depreciation expense retained earnings

In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted-average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change?

Earnings per share for year 1 decreased.

Which of the following are requirements for the correction of an accounting error? (Select all that apply.) [2]

Prepare a journal entry to correct the error. Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected.

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?

Cost of goods sold Inventory Income tax payable Retained earnings

When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ______ approach is used.

modified retrospective

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

in the beginning balance of retained earnings for the earliest year presented for the years prior to that date.

After a recent acquisition, Joann Inc. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in _____.

reporting

If a company discovers an error in previously issued financial statements, it must

restate the financial statements.

Which of the following are changes in accounting estimates? (Select all that apply.)

Change in useful life of a depreciable asset. Change in estimate of periods benefited by intangible asset.

Which of the following is a change in accounting principle?

Change the method of inventory.

Which of the following situations would be an appropriate reason for an accounting principle change?

Changes in related economic conditions

Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

Overstate net income $10,000. Overstate assets $10,000.

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 income statement?

Overstated by $10,000 Reason: Year 1 the entire $100,000 was expensed. Year 2 should have had a depreciation deduction of $10,000.

What method is used to account for a change in accounting estimate?

Prospective application

What approach is used to account for a change in depreciation method?

Prospective approach

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take? (Select all that apply.)

Reverse the incorrect entry. Prepare the correct journal entry for the transaction.