Chapter 22 Intermediate Accounting: Review - Accounting Changes and Error Analysis

18. Which of the following is not a counterbalancing error? (LO 4) (a)Failure to record accrued wages. (b)Failure to record depreciation. (c)Failure to record prepaid expenses. (d)Understatement of unearned revenue.

(b) Failure to record depreciation. Errors that are not offset in the next accounting period are noncounterbalancing errors.

1. (L.O. 1) Accounting alternatives diminish the comparability of financial information between periods and between companies. They also obscure useful historical trend data. true (T) or false (F)

1. (T)

10. (L.O. 1) The FASB takes the position that companies should retrospectively apply the indirect effects of a change in accounting principle. true (T) or false (F)

10. (F) The FASB takes the position that companies should not change priorperiod amounts for indirect effects of a change in accounting principle.

11. (L.O. 1) Companies should use retrospective application if the company cannot determine the effects of the retrospective application. true (T) or false (F)

11. (F) Companies should not use retrospective application if the company cannot determine the effects of the retrospective application.

12. (L.O. 1) If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new accounting principle. true (T) or false (F)

12. (T)

20. (L.O. 3) Counterbalancing errors are two separate errors that offset one another in the same accounting period. true (T) or false (F)

20. (F) Counterbalancing errors are errors that will offset or correct themselves over two periods. For example, the failure to record accrued wages in period one will cause (1) net income to be overstated, (2) accrued wages payable to be understated, and (3) wages expense to be understated. If no attempt is made to correct this error, then in period two net income will be understated, accrued wages payable will be correct, and wages expense will be overstated. The net effect of this error for the two years (at the end of the second year) is that net income, accrued wages payable, and wages expense will be correct.

23. (L.O. 4) If a counterbalancing error is discovered after the books are closed in the second year, no correcting entry is needed. true (T) or false (F)

23. (T)

5. (L.O. 1) If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a change in principle. true (T) or false (F)

5. (F) If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a correction of an error.

Q 22.45: Counterbalancing errors include inventory errors. A : True B : False

A

Q 22.4: Turloon Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change handles the change in which of the following ways? A currently B retrospectively C prospectively D haphazardly

C

A change from reporting as one type of entity to another type of entity.

Change in reporting entity.

Q 22.48: Teagan Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/18 and 12/31/19 contained the following errors: 2018/2019 Ending inventory - $25,000 overstatement/$40,000 understatement Depreciation expense - 10,000/20,000 oveerstatement Assume that no correcting entries were made at 12/31/18, or 12/31/19. Ignoring income taxes, the retained earnings at 12/31/19 will be A : overstated by $35,000. B : understated by $15,000. C : overstated by $40,000. D : understated by $50,000.

D To determine this answer, add the ending inventory understatement for 2019 and the depreciation expense overstatement for 2019 and deduct the depreciation expense understatement for 2018: $40,000 + $20,000 - $10,000 = $50,000.

3. In 2017, Elite Company discovered that equipment purchased on January 1, 2016, for $60,000 was expensed at that time. The equipment should have been depreciated over 6 years using the straight-line method, with a $6,000 value. The effective tax rate is 40%. Prepare Elite's 2017 journal entry to correct the error.

Equipment...60,000 .....Accumulated Depreciation—Equipment...9,000 .....Deferred Tax Liability...20,400 .....Retained Earnings...30,600 ($60,000 − $6,000 = $54,000; $54,000 / 6 = $9,000) ($60,000 − $9,000 = $51,000; $51,000 × 40% = $20,400)

Errors occur as a result of mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time financial statements were prepared.

Errors in financial statements.

Errors that are not offset in the next accounting period.

Noncounterbalancing errors.

Supplementary statements that are shown on an "as if" basis.

Pro Forma statements.

Previously reported results remain; no change is made. Opening balances are not adjusted, and no attempt is made to allocate charges or credits for prior events.

Prospective adjustment.

The cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed and the prior years' financial statements are recast on a basis consistent with the newly adopted principle.

Retrospective adjustment.

Q 22.24: The type of error that is involved and the entries are needed to correct the error are both questions that companies need to address during error __.

correction

No entry will be required for an error if the books have already closed and the error is already __.

counterbalanced

Q 22.32: Generally, errors that affect both the income statement and the balance sheet and correct themselves within two years are classified as __ errors.

counterbalancing

Q 22.39: The classification of plant assets as inventory and the classification of a short-term receivable as part of the investment section are both examples of __ errors.

income statement

15. The Chalet 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 Ending inventory: $11,000 understatement/$14,000 overstatement Advertising expense: 9,500 overstatement/11,500 understatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? (LO 4) (a)$20,500 understatement (b)$5,000 understatement (c)$9,500 overstatement (d)$2,000 overstatement

(a) $20,500 understatement $11,000 + $9,500 = $20,500 understatement.

14. Koppernaes 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 Ending inventory: $23,000 overstatement/$52,000 understatement Depreciation expense: 19,000 understatement/42,000 overstatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? (LO 4) (a)$42,000 overstatement (b)$3,000 overstatement (c)$32,000 understatement (d)$19,000 understatement

(a) $42,000 overstatement $23,000 + $19,000 = $42,000 overstatement.

17. Which of the following is a reason why companies prefer certain accounting methods? (LO 3) (a)Bonus payments. (b)Asset structure. (c)Comparability. (d)Asset allocation.

(a) Bonus payments. Companies prefer certain accounting methods for bonus payments among other issues not listed here.

16. On July 1, 2016, Elberta Corp. acquired equipment at a cost of $1,020,000. It is to be depreciated on the straight-line method over a four-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Elberta's 2016 financial statements. The oversight was discovered during the preparation of Elberta-s 2017 financial statements. Which of the following accounts will not be affected by correcting the error that occurred in 2016, assuming comparative financial statements are not prepared? (LO 3) (a)Depreciation Expense. (b)Accumulated Depreciation. (c)Retained Earnings. (d)All of these accounts will be affected.

(a) Depreciation Expense. Only depreciation expense will be unaffected by the correction.

5. On January 1, 2017, Columbia Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $2,320,000 increase in the January 1, 2017 inventory. Assume that the income tax rate for all years is 25%. The cumulative effect of the accounting change should be reported by Columbia in its 2017 (LO 1) (a)retained earnings statement as a $1,740,000 addition to the beginning balance. (b)income statement as a $2,320,000 cumulative effect of accounting change. (c)retained earnings statement as a $638,000 addition to the beginning balance. (d)income statement as a $1,740,000 cumulative effect of accounting change.

(a) retained earnings statement as a $1,740,000 addition to the beginning balance. $2,320,000 × (100% − 25%) = $1,740,000.

3. What approach does the FASB require when accounting for changes in accounting principle? (LO 1) (a)Cumulative. (b)Retrospective. (c)Prospective. (d)Allowance.

(b) Retrospective. The FASB requires the use of the retrospective approach.

10. When a company changes from an accelerated method to the straight-line method of depreciation, this change should be handled as a (LO 2) (a)change in accounting principle. (b)change in accounting estimate. (c)prior period adjustment. (d)correction of an error.

(b) change in accounting estimate. When a company changes from an accelerated balance method to the straight-line method of depreciation, this change should be handled as a change in accounting estimate.

1. 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 (LO 1) (a)materiality. (b)consistency. (c)faithful representation. (d)objectivity.

(b) consistency. In theory, this may be a violation of the accounting concept of consistency.

8. A change to LIFO inventory valuation from any other acceptable inventory valuation method: (LO 4) (a)requires restatement of all prior years' income. (b)does not require restatement of prior years' income. (c)is not allowed by FASB. (d)is accounted for as an adjustment to beginning retained earnings.

(b) does not require restatement of prior years' income. No restatement is required because it would be too difficult and therefore impractical.

19. All of the following involve counterbalancing errors except the (LO 4) (a)failure to record prepaid expenses. (b)failure to adjust for bad debts. (c)understatement of inventory. (d)overstatement of purchases.

(b) failure to adjust for bad debts. Failure to adjust for bad debts is a noncounterbalancing error.

20. All of the following involve counterbalancing errors except the: (LO 4) (a)failure to record prepaid expenses. (b)failure to record depreciation. (c)overstatement of ending inventory. (d)understatement of purchases.

(b) failure to record depreciation. All of the options involve counterbalancing errors except the failure to record depreciation.

7. On December 31, 2017, Dodd, 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 $2,300,000 increase in the beginning inventory at January 1, 2017. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. (b)$690,000. (c)$1,610,000. (d)$2,300,000.

(c) $1,610,000. $2,300,000 × (100% − 30%) = $1,610,000.

6. On December 31, 2017, Paiva, Inc. appropriately changed its inventory valuation method to weighted-average cost from FIFO cost for financial statement and income tax purposes. The change will result in a $1,480,000 increase in the beginning inventory at January 1, 2017. Assume a 35% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. (b)$518,000. (c)$962,000. (d)$1,480,000.

(c) $962,000. $1,480,000 × (100% − 35%) = $962,000.

9. Which type of accounting change should always be accounted for in current and future periods? (LO 2) (a)Change in accounting principle (b)Change in reporting entity (c)Change in accounting estimate (d)Correction of an error

(c) Change in accounting estimate. A change in an accounting estimate should always be accounted for in current and future periods.

13. In 2016, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2017, it will be accounted for: (LO 3) (a)using pro forma data. (b)prospectively. (c)as a prior period adjustment. (d)All of these answer choices are correct.

(c) as a prior period adjustment. Error correction is recorded as a prior period adjustment.

11. Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a: (LO 2) (a)change in principle. (b)correction of an error. (c)change in estimate. (d)counterbalancing error.

(c) change in estimate. Whenever it is impossible to determine the type of change that has occurred, it is to be considered a change in estimate.

12. Which of the following describes a change in reporting entity? (LO 2) (a)A company acquires a subsidiary that is to be accounted for as a purchase. (b)A manufacturing company expands its market from regional to nationwide. (c)A company divests itself of a European branch sales office. (d)Changing the companies included in combined financial statements.

(d) Changing the companies included in combined financial statements. Changing the companies included in combined financial statements describes a change in reporting entity.

2. Which of the following is not one of the three types of accounting changes? (LO 1) (a)Change from LIFO to FIFO. (b)Change in reporting entity. (c)Change in the estimated useful life of an asset. (d)Correction of understated depreciation expense in a prior period.

(d) Correction of understated depreciation expense in a prior period. Errors in financial statements are not considered an accounting change.

4. All of the following are examples of a change in accounting principle except a change from: (LO 2) (a)average cost to LIFO inventory pricing. (b)FIFO to average cost. (c)the completed-contract to percentage-of-completion method of accounting for construction contracts. (d)the double-declining balance method to the straight-line method of depreciation.

(d) the double-declining balance method to the straight-line method of depreciation. All of the options are examples of a change in accounting principle except a change from the double-declining balance method to the straight-line method of depreciation.

*25. (L.O. 5) If an investor's level of influence has changed requiring the investor to change from the equity method to the fair value method, a retrospective adjustment is necessary. true (T) or false (F)

*25. (F) If an investor's level of influence has changed requiring the investor to change from the equity method to the fair value method, the earnings or losses that were previously recognized by the investor under the equity method should remain as part of the carrying amount of the investment with no retrospective adjustment to the new method.

1. (L.O. 1) Which of the following financial statement characteristics is adversely affected by accounting changes? A. Usefulness. B. Consistency. C. Timeliness. D. Relevance.

1. (B) While the characteristics of usefulness and relevance may be enhanced by changes in accounting, the characteristic of consistency is adversely affected. Consistent financial statements and historical 5 and 10 year summaries particularly can be distorted by changes in accounting. When changes in accounting occur, proper treatment and full disclosure should enable readers of financial statements to comprehend and assess the effects of such changes. The timeliness of financial statements should be unaffected by accounting changes.

E2210. (Accounting for Accounting Changes and Errors) (L0 1, 2, 3) Listed below are various types of accounting changes and errors. ________ 1. Change in a plant asset's salvage value. ________ 2. Change due to overstatement of inventory. ________ 3. Change from sum-of--the-years' digits to straight-line method of depreciation. ________ 4. Change from presenting unconsolidated to consolidated financial statements. ________ 5. Change from LIFO to FIFO inventory method. ________ 6. Change in the rate used to compute warranty costs. ________ 7. Change from an unacceptable accounting principle to an acceptable accounting principle. ________ 8. Change in a patent's amortization period. ________ 9. Change from completed-contract to percentage-of-completion method on construction contracts. ________ 10.Change from FIFO to average-cost inventory method. Instructions: For each change or error, indicate how it would be accounted for using the following code letters: (a) Accounted for prospectively. (b) Accounted for retrospectively. (c) Neither of the above.

1. a. 6. a. 2. b. 7. b. 3. a. 8. a. 4. b. 9. b. 5. b. 10. b.

10. (L.O. 1) Which of the following is not considered a direct effect of a change in accounting principle? A. An employee profitsharing plan based on net income when a company uses the percentageofcompletion method. B. The inventory balance as a result of a change in the inventory valuation method. C. An impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance. D. Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-ormarket-test to the adjusted inventory balance.

10. (A) An employee profit sharing plan based on net income when a company uses the percentage-of-completion method is considered an indirect effect of a change in accounting principle. All the other answers are considered direct effects.

11. (L.O. 1) Weaver Company changes from the LIFO method to the FIFO method in 2018. The increase in pretax income as a result of the difference in the two methods prior to 2016 is $ 100,000 and for the year 2016 is $40,000 and for the year 2017 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2017 should include. A. A debit to Deferred Tax Liability of $68,000. B. A credit to Deferred Tax Liability of $68,000. C. A debit to Deferred Tax Liability of $56,000. D. A credit to Deferred Tax Liability of $56,000.

11. (D) The change in accounting principle from LIFO to FIFO would result in a direct effect adjustment to deferred taxes. Because income increased, there would be a 40% increase in Deferred Tax Liability which is done with a credit entry. The amount is calculated based on the sum of the prior years of $100,000 and $40,000 multiplied by 40%.

12. (L.O. 1) In 2017 the Flynn Company has changed from the percentage-of-completion method to the completed-contract method for long-term construction contracts. The difference in pretax income prior to 2017 is a decrease of $60,000 and for 2017 is a decrease of $20,000. The estimated tax effect is 40%. The journal entry made by Flynn Company should include a: A. Debit to Deferred Tax Liability of $24,000. B. Credit to Deferred Tax Liability of $32,000. C. Debit to Deferred Tax Liability of $32,000. D. Credit to Deferred Tax Liability of $24,000.

12. (A) The change in accounting principles from percentage-of-completion method to completed-contract method for long-term construction contracts would result in a direct effect adjustment to deferred taxes. Because income decreased, there would be a 40% decrease in Deferred Tax Liability which is done with a debit entry. The amount is calculated by multiplying the difference in pretax income prior to 2017 by 40%.

13. (L.O. 1) Which of the following is a condition in which retrospective application is not impracticable? A. The company cannot determine the effects of retrospective application. B. Retrospective application requires assumptions about management's intent in a prior period. C. The company has changed auditors. D. Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.

13. (C) Retrospective application is still practicable even though a company has changed auditors. All the other answers would make retrospective application impracticable.

13. (L.O. 2) Changes in estimates must be handled prospectively. true (T) or false (F)

13. (T)

14. (L.O. 2) Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate? A. Report current and future financial statements on a new basis. B. Restate prior period financial statements. C. Disclose in the year of change the effect on net income and earnings per share data for that period only. D. Make no adjustments to current period opening balances for purposes of catchup.

14. (B) Restating prior period financial statements is a part of the application of the retrospective approach. That approach is not appropriate for changes in accounting estimates. Alternatives A, C, and D represent the appropriate treatment for the current and prospective approach as applied to accounting for a change in an estimate.

14. (L.O. 2) If a change in an accounting estimate affects current net income by an amount equal to or greater than 1% of net income, the change should be handled retrospectively. true (T) or false (F)

14. (F) Changes in accounting estimates must be handled prospectively, that is, no changes should be made in previously reported results. Opening balances are not adjusted and no attempt is made to catchup for prior periods.

15. (L.O. 2) Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of a: A. change in accounting estimate. B. change in accounting principle. C. change in segment reporting. D. change in reporting entity.

15. (D) This is an example of a change in the reporting entity. This occurs when a company makes a change from reporting as one type of entity to another type of entity. This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods.

15. (L.O. 2) Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate. true (T) or false (F)

15. (T)

16. (L.O. 2) Tang Corporation has a change in accounting that requires Tang to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. This change is most likely the result of a: A. change in depreciation methods. B. change in accounting estimate. C. change in reporting entity. D. change in estimated recoverable mineral reserves.

16. (C) The question describes most closely the accounting and disclosure requirements necessary for a change in reporting entity. Alternatives A, B and D are all changes in according estimates and do not require the disclosures indicated in the question.

16. (L.O. 2) When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a correction of an error. true (T) or false (F)

16. (F) When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a change in estimate.

17. (L.O. 3) Julie Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year they changed to the FIFO inventory method at the insistence of their public accountant. The effect of this change should be reported, net of applicable income taxes, in the current: A. income statement after income from continuing operations and before discontinued operations. B. retained earnings statement after net income but before dividends. C. income statement after discontinued operations. D. retained earnings statement as an adjustment of the opening balance.

17. (D) When a company changes from an accounting principle that is not generally accepted (NIFO) to one that is generally accepted (FIFO), the change should be handled as a correction of an error. In considering this change as a correction of an error, it should be handled as a prior period adjustment. Thus, the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings.

17. (L.O. 2) When a company makes changes that result in different reporting entities, the company should report the change by changing the financial statements of all prior periods presented and the revised statements should show the financial information for the new reporting entity for all periods. true (T) or false (F)

17. (T)

18. (L.O. 3) The general rule for differentiating between a change in an estimate and a correction of an error is: A. based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate. B. if a generally accepted accounting principle is involved, it's usually a change in an estimate. C. if a generally accepted accounting principle is involved, it's usually a correction of an error. D. a careful estimate that later proves to be incorrect should be considered a change in an estimate.

18. (D) Distinguishing between a change in an estimate and a correction of an error is not necessarily determined by a GAAP being involved. Also, materiality is not one of the criteria to be used in differentiating between a change in an estimate and a correction of an error. The best basis for differentiating between a change in one estimate and a correction of an error is to follow the general rule that "careful estimates that later prove to be incorrect should be considered a change in an estimate."

18. (L.O. 3) A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable should be treated as an accounting error. true (T) or false (F)

18. (T)

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 19. (L.O. 3) Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? A. $3,000 overstatement. B. $7,000 overstatement. C. $3,000 understatement. D. $7,000 understatement.

19. (B) Effect on 2017 Income: Ending inventory $5,000 overstatement ................... $5,000 over Depreciation expense $2,000 understatement ........ 2,000 over Net effect .............................................................. $7,000 over

19. (L.O. 3) GAAP requires that corrections of errors be handled prospectively and shown in the current operating section of the income statement in the year the correction is made. true (T) or false (F)

19. (F) The profession requires that corrections of errors be treated as prior period adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error.

2. (L.O. 1) A change in accounting principle is evidenced by: A. a change from the historical cost principle to current value accounting. B. adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted. C. changing the basis of inventory pricing from weightedaverage cost to LIFO. D. a change from current value accounting to the historical cost principle.

2. (C) Because current value accounting is not GAAP, alternatives A and D cannot be correct. A change in accounting principle is defined as a change from one GAAP to another GAAP. Alternative B is incorrect because adopting a principle for a new transaction does not constitute a change in accounting principle.

2. (L.O. 1) A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial. true (T) or false (F)

2. (F) Adoption of a new principle in recognition of events that were previously immaterial is not an accounting change.

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 20. (L.O. 3) 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? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

20. (D) Effect on 2018 Retained Earnings 2017 Ending inventory ...................................... $5,000 overstatement ................................. 0* 2018 Ending inventory ...................................... $8,000 understatement ............................... 8,000 under 2017 Depreciation expense .............................. $2,000 understatement ............................... 2,000 over 2018 Depreciation expense .............................. $4,000 overstatement ................................. 4,000 under Net effect ................................................ $10,000 under *This is an example of a counterbalancing error. This error overstates income by $5,000 in 2017 and understates income by $5,000 in 2018. Thus, at the end of 2018, there is no effect on retained earnings. If the $8,000 inventory error is not corrected, it will correct itself at the end of 2019. The depreciation errors are noncounterbalancing and will cause retained earnings to be in error until specifically corrected.

4. When the records of Padron Corporation were reviewed at the close of 2018, it was discovered that the company failed to record accrued salary expense for the last week in 2017; that amount was recorded when paid in 2018. Indicate whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.

2017: overstatement 2018: understatement

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 21. (L.O. 3) Assume that no correcting entries were made at 12/31/17 or 12/31/18 and that no additional errors occurred in 2019. By how much will 2019 income before income taxes be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

21. (B) Net Income: 2018 Ending inventory .............................................. $8,000 understatement .................................... $8,000 over Net effect ....................................................... $8,000 over The 2017 and 2018 depreciation expense errors do not affect 2019 net income.

21. (L.O. 3) Recording the purchase of land as an expense is an example of a noncounterbalancing error. true (T) or false (F)

21. (T)

22. (L.O. 4) On December 31, 2017, accrued wages in the amount of $6,500 were not recognized by Shwenk Company. What effect would this error have on the following account balances at 12/31/17? Expenses...Retained Earnings...Liabilities...Assets A. No Effect Overstate Overstate No Effect B. Overstate Understate No Effect Overstate C. Understate Overstate Understate No Effect D. No Effect Overstate No Effect Understate

22. (C) A failure to record accrued wages is a failure to make the following journal entry: Wages Expense 6,500 Wages Payable 6,500 Thus, the expenses would be understated and the liabilities would be understated. The retained earnings would be overstated because the expense was not recorded. Assets would be unaffected by the failure to record this entry.

22. (L.O. 4) If accrued wages are overlooked at the end of the accounting period, expenses and liabilities will be understated and net income will be overstated. true (T) or false (F)

22. (T)

23. (L.O. 4) The December 31, 2017, physical inventory of Dunn Company appropriately included $4,500 of merchandise inventory that was not recorded as a purchase until January, 2018. What effect will this error have on the following account balances at 12/31/17? COGS...Liabilities...Retained Earnings...Assets A. Overstate Overstate Understate Understate B. No Effect Understate Understate Understate C. Understate No Effect Overstate Overstate D. Understate Understate Overstate No Effect

23. (D) The merchandise was correctly counted in the physical inventory and thus ending inventory and total assets are properly stated. The fact that the purchase was not recorded understates liabilities because accounts payable was not credited. Also, with the purchase not being recorded, the amount of merchandise available for sale is understated and results in an understatement of cost of goods sold. The understatement of cost of goods sold causes both net income and retained earnings to be overstated.

Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost was recorded as an expense. The machinery has a nineyear life and a $12,000 residual value. Kielty uses the straightline method to account for depreciation expense. The error was discovered on December 10, 2017. Ignore income tax considerations. 24. (L.O. 4) Kielty's income statement for the year ended December 31, 2017, should show that cumulative effect of this error in the amount of: A. $236,000. B. $224,000. C. $221,333. D. $ 0.

24. (D) The profession requires that corrections of errors be treated as prior period of adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. Therefore, Kielty's income statement for the year ended December 31, 2017 will not be affected.

24. (L.O. 4) An understatement in ending inventory will result in a corresponding understatement of net income. true (T) or false (F)

24. (T)

Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost was recorded as an expense. The machinery has a nineyear life and a $12,000 residual value. Kielty uses the straightline method to account for depreciation expense. The error was discovered on December 10, 2017. Ignore income tax considerations. 25. (L.O. 4) Before the correction was made and before the books were closed on December 31, 2017, retained earnings was understated by: A. $300,000. B. $236,000. C. $224,000. D. $221,333.

25. (B) Corrections of errors are treated as prior period adjustments and are reported in the financial statements as an adjustment to the beginning balance of retained earnings. The company should have taken $32,000 for each year [($300,000 $12,000)/9 = $32,000]. Therefore, $64,000 ($32,000 × 2) should have been taken as depreciation expense and $300,000 should not have been recorded as an expense; therefore, the net effect is that retained earnings was understated by $236,000 ($300,000 $64,000).

3. (L.O. 1) Which of the following is not a change in accounting principle? A. A change from completedcontract to percentage-ofcompletion. B. A change from FIFO to average cost. C. Using a different method of depreciation for new plant assets. D. A change from LIFO to FIFO for inventory valuation.

3. (C) When a company uses a different method of depreciation for new plant assets, this is not considered a change in accounting principle. A, B, and D are all considered changes in accounting principle.

3. (L.O. 1) A change in accounting principle results when a company changes from one GAAP to another GAAP. true (T) or false (F)

3. (T)

4. (L.O. 1) Schoen Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change is known as handling the change: A. prospectively. B. currently. C. retrospectively. D. haphazardly.

4. (A) The company has handled its accounting change prospectively. This method is required to be used for changes in accounting estimates. When a change is handled currently, the cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed. This adjustment is then reported in the current year's income statement as an irregular item. A retrospective adjustment of the financial statements is made by recasting the financial statements of prior years on a basis consistent with the newly adopted principle and any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. There is no haphazard treatment advocated for accounting changes.

4. (L.O. 1) Instituting a policy whereby customers can now purchase merchandise on account, when in the past only cash sales were accepted, is evidence that a change in accounting principle has occurred. true (T) or false (F)

4. (F) This is not a change in an accounting principle but rather a new transaction that results in the use of a principle not previously required.

5. (L.O. 1) A company that reports changes retrospectively would: A. report the cumulative effect in the current year's income statement as an irregular item. B. not change any prioryear financial statements. C. make changes prospectively. D. show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

5. (D) A company that reports changes retrospectively would adjust prior years' statements on a basis consistent with the newly adopted principle. In addition the company should show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

6. (L.O. 1) According to the FASB, which approach is required for reporting changes in an accounting principle? A. Currently B. Retrospectively C. Prospectively D. Futuristically

6. (B) The FASB requires that companies use the retrospective approach for reporting changes in accounting principles.

6. (L.O. 1) The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principle. true (T) or false (F)

6. (F) The FASB requires companies to use the retrospective approach for reporting changes in accounting principle.

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 7. (L.O. 1) What journal entry should Skaggs report at the beginning of 2015? A. No entry is necessary B. Inventory 2,000 .....Retained Earnings 2,000 C. Retained Earnings 2,000 .....Inventory 2,000 D. Retained Earnings 4,000 .....Inventory 4,000

7. (A) A journal entry is necessary only for the current year to update the accounts to their corrected status. No journal entries are made in the books for previous years.

7. (L.O. 1) When a company changes an accounting principle under the retrospective approach it adjusts its financial statements for each prior period presented. true (T) or false (F)

7. (T)

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 8. (L.O. 1) What journal entry should Skaggs report at the beginning of 2018? A. Retained Earnings 3,000 .....Inventory 3,000 B. Retained Earnings 4,500 .....Inventory 4,500 C. Inventory 3,000 .....Retained Earnings 3,000 D. Inventory 4,500 .....Retained Earnings 4,500

8. (C) To adjust the financial records for the change from FIFO to average cost, previous year differences are accumulated as follows: Net Income Year...FIFO...Average Cost...Difference in Income 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 2016 79,000 78,000 (1,000) 2017 93,000 94,000 1,000 Total at beginning of 2018 $ 3,000 Therefore the journal entry for Skaggs should be as follows: Inventory 3,000 .....Retained Earnings 3,000

8. (L.O. 1) When a company changes an accounting principle it should not adjust any assets or liabilities. true (T) or false (F)

8. (F) When a company changes an accounting principle it adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented.

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 9. (L.O. 1) If Skaggs presents comparative statements for 2016, 2017 and 2018, then it should: A. Change the beginning balance of retained earnings at January 1, 2013 by showing a decrease of $2,000. B. Change the beginning balance of retained earnings at January 1, 2014 by showing a decrease of $2,000. C. Change the beginning balance of retained earnings at January 1, 2015 by showing an increase of $2,000. D. Change the beginning balance of retained earnings at January 1, 2016 by showing an increase of $3,000.

9. (D) If a company changes accounting principles it must change the beginning balance of retained earnings of the earliest year presented. Since Skaggs is presenting comparative statements for 2016, 2017 and 2018, it must change the beginning balance of retained earnings at January 1, 2016. The cumulative effect of the prior years is calculated as follows: Net Income Year FIFO Average Cost Difference in Cost 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 Total at beginning of 2016 $3,000

9. (L.O. 1) When a company changes an accounting principle, one of the disclosure requirements is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented. true (T) or false (F)

9. (T)

Q 22.11: The parts of applying the current and prospective approach in accounting for a change in an estimate include: I. reporting current and future financial statements on a new basis. II. disclosing the effect on net income and earnings per share data in the year of change only. III. making no adjustment to current period opening balances for purposes of catchup. IV. restating prior period financial statements. This is correct answer : A I, II, and III. B II, III, and IV. C I, II, and IV. D I, III, and IV.

A

Q 22.13: Marg Corporation has a change in accounting that requires Marg to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. What is this change most likely the result of? A a change in reporting entity B a change in depreciation methods C a change in estimated recoverable mineral reserves D a change in accounting estimate

A

Q 22.16: Corston Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/18 and 12/31/19 contained the following errors: 2018.....2019 Ending inventory-$5,000 overstatement.....$8,000 understatement Depreciation expense-$2,000 understatement.....$4,000 overstatement Assume that the 2018 errors were not corrected and that no errors occurred in 2017. The 2018 income before income taxes will be A overstated by $7,000. B understated by $7,000. C understated by $3,000. D overstated by $3,000.

A

Q 22.18: On December 31, 2019, accrued wages in the amount of $6,500 were not recognized by Morris Company. The effect this error would have on the following account balances at 12/31/19 is represented by Expenses.....Retained Earnings.....Liabilities.....Assets A. Understate.....Overstate.....Understate.....No Effect B. No Effect.....Overstate.....Overstate.....No Effect C. Overstate.....Understate.....No Effect.....Overstate D. No Effect.....Overstate.....No Effect.....Understate A a. B b. C c. D d.

A

Q 22.19: The December 31, 2018, physical inventory of Velt Company appropriately included $4,500 of merchandise inventory purchased on account that was not recorded as a purchase until January, 2019. The effect this error will have on the following account balances at 12/31/18 is represented by COGS.....Liabilities.....Retained.....Assets A. Understate.....Understate.....Overstate.....No Effect B. Overstate.....Overstate.....Understate.....Understate C. No Effect.....Understate.....Understate.....Understate D. Understate.....No Effect.....Overstate.....Overstate A a. B c. C d. D b.

A

Q 22.1: The financial statement characteristics that is adversely affected by accounting changes is A Consistency. B Usefulness. C Relevance. D Timeliness.

A

Q 22.26: Which of the following is not an accounting error? A changes in acceptable accounting principles B misuse of facts C mathematical mistakes D incorrect classification of costs

A

Q 22.38: Restatement of comparative financial statements is necessary even if a correcting entry is not required, when working with counterbalancing errors. A True B False

A

Q 22.40: When comparative statements are presented, restatement is necessary even if a correcting journal entry for an error is not required. A True B False

A

Q 22.8: Which of the following would incorrectly be considered a direct effect of a change in accounting principles? A an employee profit-sharing plan based on net income when a company uses the percentage-of-completion method. B the inventory balance as a result of a change in the inventory valuation method. C an impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance. D deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance.

A

Q 22.29: Reston Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 contained the following errors: Dec. 31, 2017.....Dec. 31, 2018 Ending inventory-$132,000 too high.....$146,000 too low Depreciation expense-84,000 too high.....- Insurance expense-60,000 too low.....60,000 too high Prepaid insurance-60,000 too high.....- In addition, on December 31, 2018 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the amount of Reston's working capital at December 31, 2018 is understated by which of the following amounts? A $174,800. B $306,800. C $390,800. D $114,800.

A Assets - Liabilities = Working Capital; Understated = $146,000 + $28,800 = $174,800.

Q 22.35: What is the difference between companies who prefer accounting methods because of political costs and those who prefer certain methods due to capital structure? A Those motivated by political costs will look for methods that decrease their income, while those motivated by capital structure will look for methods that increase their net income. B Those motivated by political costs will look for methods that decrease their income, while those motivated by capital structure will look for methods that increase their bonus payments. C Those motivated by political costs will look for methods that increase their income, while those motivated by capital structure will look for methods that decrease their net income. D Those motivated by political costs will look for methods that increase their bonus payments, while those motivated by capital structure will look for methods that increase their net income.

A Companies motivated by political costs often look for accounting methods that will decrease their income. Companies motivated by capital structure will look for accounting methods that can increase their net income.

Q 22.47: Sylva's company made some changes by using the current and prospective approach. The changes will involve ensuring that the prior period financial statements are presented as previously reported. Which of the following changes is this an example of? A : changes in accounting estimate B : changes in reporting entity C : changes in accounting principle D : changes due to error

A Changes in accounting estimate employ the current and prospective approach by reporting the current and future financial positions on the new basis and presenting prior period financial statements as previously reported.

Q 22.34: When reviewing their accounts, the Yanos Company discovered that in the previous year there had been improper treatment of tax liabilities. They will now need to make accounting changes. What is this an example of? A changes due to error B changes in accounting estimate C changes in accounting principle D changes in reporting entity

A Improper treatment of tax liabilities is an accounting error, so changes made to fix it would be considered changes due to error.

Q 22.10: Which of the following would incorrectly be classified as an impracticable condition for retrospective application? A retrospective application that requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates. B the company has changed auditors. C the company cannot determine the effects of retrospective application. D retrospective application that requires assumptions about management's intent in a prior period.

B

Q 22.31: Which of the following errors would be incorrectly classified as a counterbalancing error? A A failure to record accrued wages. B A failure to record depreciation. C An understatement of unearned revenue. D A failure to record prepaid expenses.

B

Q 22.49: Which of the following would influence investors the most? A : decreases in capital structure B : a favorable profit picture C : a strong liquidity position D : bonus payments

B

Q 22.5: A company that reports changes retrospectively would do which of the following? A make changes prospectively B show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented C report the cumulative effect in the current year's income statement as an irregular item D not change any prior-year financial statements

B

Q 22.23: Rose Corp. acquired a machine at a cost of $700,000 on January 1, 2018. 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 Rose's 2018 financial statements. The oversight was discovered during the preparation of Rose's 2019 financial statements. Depreciation expense on this machine for 2019 should be which of the following? A $0. B $140,000. C $280,000. D $175,000.

B To determine this answer, divide the cost of the machine by the estimated years useful. In this case: $700,000 / 5 =$140,000

Q 22.42: On January 1, 2015, Janus Corporation acquired machinery at a cost of $1,200,000. Janus 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 2018, a decision was made to change to the double-declining balance method of depreciation for this machine. The amount that Janus should record as depreciation expense for 2018 is which of the following? A : $120,000 B : $240,000 C : $168,000 D : none of these are correct

B To determine this answer, first start out with how much depreciation has accumulated in three years. To find this, divide the cost by the estimated life, then multiply that number by 3: $1,200,000 /10 = $120,000 X 3 = $360,000. Then subtract the accumulated depreciation from the cost to find the current book value in 2018: $1,200,000 - $360,000 = $840,000. Then using the double-declining balance method with 7 years left, the declining balance rate will be 2/7 (1/7 x 2). Multiply the book value by the declining balance rate to find the depreciation expense: $840,000 X 2/7 = $240,000 (rounded).

Q 22.14: Franco Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year they changed to the FIFO inventory method at the insistence of their public accountant. How should the effect of this change be reported, net of applicable income taxes? A In the current income statement after income from continuing operations and before discontinued segment items. B In the current retained earnings statement after net income but before dividends. C In the current retained earnings statement as an adjustment of the opening balance. D In the current income statement after discontinued segment items.

C

Q 22.17: Which of the following would be the reason a company chooses an accounting method that would have an income-decreasing approach? A smooth earnings B bonus payments C political costs D capital structure

C

Q 22.20: Sulton Company purchased machinery that cost $300,000 on January 1, 2017. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Sulton uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ignore income tax considerations. Sulton's income statement for the year ended December 31, 2019, should show that the cumulative effect of this error is which of the following? A $236,000. B $224,000. C $ -0-. D $221,333.

C

Q 22.21: Which of the following has no impact on net income? A noncounterbalancing errors B counterbalancing errors C income statement errors D balance sheet and income statement errors

C

Q 22.22: Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered to be which of the following? A a counterbalancing error B a correction of an error C a change in estimate D a change in principle

C

Q 22.2: A change in accounting principle is evidenced by which of the following? A a change from the historical cost principle to replacement cost accounting B adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted C changing the basis of inventory pricing from weighted-average cost to LIFO D a change from replacement cost accounting to the historical cost principle

C

Q 22.37: Which of the following would be misclassified as an income statement error? A recording depreciation expense as interest expense B recording interest revenue as part of sales C recording a note payable as an account payable D recording purchases as bad debt expense

C

Q 22.44: Triton Co. purchased machinery that cost $1,800,000 on January 4, 2017. The entire cost was recorded as an expense. The machinery has a nine-year life and a $120,000 residual value. The error was discovered on December 20, 2019. Ignore income tax considerations. Triton's income statement for the year ended December 31, 2019, should show the cumulative effect of this error as wich of the following amounts? A : $1,240,000. B : $1,613,333. C : $0. D : $1,426,667.

C

Q 22.6: According to the FASB, reporting changes in an accounting principle must be done using the A prospective approach. B futuristic approach. C retrospective approach. D current approach.

C

Q 22.30: Equipment was purchased at the beginning of 2018 for $680,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $80,000. The equipment was depreciated using the straight-line method of depreciation through 2020. At the beginning of 2021, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $50,000. The amount to be recorded for depreciation for 2021, reflecting these changes in estimates, is which of the following? A $78,750. B $76,000. C $66,000. D $41,250.

C To determine this answer, first start by subtracting the original price from the original salvage value: $680,000 - $80,000 = $600,000. Then divide this number by the estimated useful life: $600,000/6 = $100,000. Now multiply the yearly depreciation by the number of years depreciation before the change in estimate in 2021: $100,000 X 3 = $300,000. Next, subtract the three year depreciation from the original cost of the equipment: $680,000 - $300,000 = $380,000, which is the book value of the equipment in 2021. The new book value should now be subtracted from the new estimated salvage value: $380,000 - $50,000 = $330,000, which can then be divided by 5 (the years of useful life left 8-3=5): $330,000 /5 = $66,000.

Q 22.9: Roven Company changes from the LIFO method to the FIFO method in 2020. The increase in pre-tax income as a result of the difference in the two methods prior to 2018 is $ 100,000 and for the year 2018 is $40,000 and for the year 2019 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2019 should include which of the following? A A credit to Deferred Tax Liability of $68,000 B A debit to Deferred Tax Liability of $56,000 C A credit to Deferred Tax Liability of $56,000 D A debit to Deferred Tax Liability of $68,000

C ($100,000 + $40,000) x 40% = $56,000

Q 22.36: Cora's company purchased a new building for $400,000. The accumulated depreciation on a straight-line basis is determined to be $160,000 after two years. Which of the following equations demonstrates how Cora can determine the current book value of the asset? A $400,000 + ($160,000 X 2) B $400,000 + $160,000 C $400,000 - $160,000 D $400,000 - ($160,000 X 2)

C Book value in this case can be determined by subtracting the accumulated depreciation from the purchase price.

A change that occurs as the result of new information or as additional experience is acquired.

Change in accounting estimate.

A change from one generally accepted accounting principle to another generally accepted accounting principle.

Change in accounting principle.

Errors that will be offset or corrected over two periods.

Counterbalancing errors.

The cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed and is reported in the current year's income statement as an irregular item.

Current adjustment.

Q 22.12: Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of which of the following? A A change in accounting principle. B A change in segment reporting. C A change in accounting estimate. D A change in reporting entity.

D

Q 22.15: The general rule for differentiating between a change in an estimate and a correction of an error can be understood in which of the following ways? A If a generally accepted accounting principle is involved, it's usually a correction of an error. B If a generally accepted accounting principle is involved, it's usually a change in an estimate. C It is based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate. D A careful estimate that later proves to be incorrect should be considered a change in an estimate.

D

Q 22.27: In cases where it is impossible to determine if the change that has occurred is a change in estimate or a change in principle, which of the following will a company do? A They will consider it both a change in estimate and a change in principle. B They will consider it neither a change in estimate nor a change in principle. C They will consider it a change in principle. D They will consider it a change in estimate.

D

Q 22.28: Which of the following accounting principles is violated when expenses are recorded in the wrong period and at the wrong amount? A revenue recognition B contingencies C misclassification D expense recognition

D

Q 22.3: Which of the following are changes in accounting principles? I. a change from FIFO to average cost. II. using a different method of depreciation for new plant assets. III. a change from completed-contracts to percentage-of-completion. IV. a change from LIFO to FIFO for inventory valuation. A II, III, and IV. B I, II, and III. C I, II, and IV. D I, III, and IV.

D

Q 22.7: Net Income Year/FIFO/Average Cost 2020/35,000/33,000 2021/63,000/67,000 2022/74,000/75,000 2023/79,000/78,000 2024/93,000/94,000 2025/87,500/89,000 Which of the following should Morton do if it presents comparative statements for 2023, 2024 and 2025? A Change the beginning balance of retained earnings at January 1, 2021 by showing a decrease of $2,000. B Change the beginning balance of retained earnings at January 1, 2020 by showing a decrease of $2,000. C Change the beginning balance of retained earnings at January 1, 2022 by showing an increase of $2,000. D Change the beginning balance of retained earnings at January 1, 2023 by showing an increase of $3,000.

D

Q 22.33: On January 1, 2018, Marx Co., purchased a machine (its only depreciable asset) for $600,000. 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, 2021, for financial statement reporting, Marx decided to change to the straight-line method for depreciation of the machine. Assume that Marx can justify the change. Marx's income before depreciation, before income taxes, and before the effect of the accounting change (if any), for the year ended December 31, 2021, is $500,000. The income tax rate for 2021, as well as for the years 2018-2021, is 30%. What amount should Piper report as net income for the year ended December 31, 2021? A $182,000. B $120,000. C $350,000. D $308,000.

D $600,000 - ($600,000 x 5/15) + ($600,000 x 4/15) + ($600,000 x 3/15)= $120,000 book value at Jan. 1, 2021. Straight-line after 3 years depreciation would be $120,000 / 2 = $60,000 for 2021 and 2022. Net Income = $500,000 - $60,000 - ($440,000 x 0.30) = $308,000

Q 22.41: What is a difference in motivations for accounting methods between a favorable profit picture and a strong liquidity position? A : Politicians are primarily influenced by a favorable profit picture, while creditors are mostly influenced by a strong liquidity position. B : Investors are primarily influenced by a favorable profit picture, while politicians are mostly influenced by a strong liquidity position. C : Creditors are primarily influenced by a favorable profit picture, while investors are mostly influenced by a strong liquidity position. D : Investors are primarily influenced by a favorable profit picture, while creditors are mostly influenced by a strong liquidity position.

D A favorable profit picture can influence investors, and a strong liquidity position can influence creditors. Too favorable of a profit picture, however, can provide union negotiators and government regulators with ammunition during bargaining talks.

Q 22.46: Lisa and Terry work for a company that has recently decided to use consolidated statements rather than statements of individual companies. Lisa does not believe that this change will need to be noted, but Terry disagrees. Who is correct? A : Terry, the company will need to disclose the nature of that change, as well as the reasons the change occurred, on their financial statements for the next three years. B : Lisa, the change will not need to be noted on any financial statements, but they will have to notify the FASB of the change. C : Lisa, the change will not need to be noted on any financial statements, but they will have to notify all shareholders of the change. D : Terry, the company will need to disclose the nature of that change, as well as the reasons the change occurred, on their financial statements.

D In the year in which a company changes a reporting entity, it should disclose in the financial statements the nature of the change and the reason for it.

Q 22.43: Davinda Corporation acquired equipment at a cost of $720,000 on January 1, 2018. The corporation 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 2021, a decision was made to change to the straight-line method of depreciation for this equipment. What will be the depreciation expense for 2021? A : $37,500 B : $90,000 C : $144,000 D : $60,000

D Using the sum-of-the-years'-digits method, you would have 8+7+6+5+4+3+2+1 = 36, so $720,000/36 = $20,000. For year 1, you would have depreciation of 8 * $20,000 = $160,000. In year 2, you would have depreciation of 7 * $20,000 = $140,000. In year 3, you would have depreciation of 6 * $20,000 = $120,000. Therefore, at the end of year 3, you would have total depreciation of $160,000 + $140,000 + $120,000 = $420,000 for a remaining balance of $720,000 - $420,000 = $300,000. Divided over the remaining five years, this gives a new annual depreciation of $300,000/5 = $60,000.

1. At the beginning of 2017, Day IT Consulting changed from the recognition over time (percentage-of-completion) to the completed-contract method for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $240,000, and completed-contract $190,000. The tax rate is 30%. Prepare Day IT's 2017 journal entry to record the change in accounting principle.

Deferred Tax Liability [($240,000 − $190,000) × 30%]...15,000 Retained Earnings...35,000 .....Construction in Process ($240,000 − $190,000)...50,000

2. Trivino, Inc. changed depreciation methods in 2017 from straight-line to double-declining-balance. Depreciation prior to 2017 under straight-line was $120,000, whereas double-declining-balance depreciation prior to 2017 would have been $180,000. Trivino's depreciable assets had a cost of $450,000 with a $30,000 salvage value, and a 5-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Trivino's depreciable assets.

This is a change in estimate effected by a change in accounting principle. Cost of depreciable assets...$450,000 Accumulated depreciation...(120,000) = Carrying value at January 1, 2017...330,000 * Double-declining depreciation rate (1 / 5 × 200% = 40%)...40% = Depreciation in 2017...$132,000 Depreciation Expense...132,000 .....Accumulated Depreciation...132,000