Intermediate CH 22 Conceptual

For Year 2, Suwanee Co. estimated its 2-year equipment warranty costs based on $100 per unit sold in Year 2. Experience during Year 3 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported A) In Year 3 income from continuing operations. B) As an accounting change, net of tax, below Year 3 income from continuing operations. C) As an accounting change requiring Year 2 financial statements to be retrospectively adjusted. D) As a correction of an error requiring Year 2 financial statements to be restated.

A. In year 3 income from continuing operations

The item that should be reported as an error correction related to a prior period is A) A change from an accounting principle that is not generally accepted to one that is generally accepted. B) A change in the depletion rate for oil reserves. C) A change from the straight-line to the declining-balance method of depreciation. D) The payment of taxes as the result of an IRS audit of a prior year's tax return.

A. a change from an accounting principle that is not generally accepted to one that is generally accepted

For which of the following justified changes should previously issued financial statements be adjusted to report the effects of a newly adopted accounting principle as if the new principle had always been used? A. A change from an accelerated method of depreciation of productive assets to the straight-line method B. A change from the weighted-average method of inventory measurement to the FIFO measurement C. A change int eh percentages used to determine warranty expense D. Adoption of an accounting principle to account for a transaction clearly different in substance from previously occurring transactions

B. A change from the weighted-average method of inventory measurement to the FIFO measurement

Miller Co. discovered that, in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 40%. What was the impact of the error on Miller's financial statements for the prior year? A) Understatement of accumulated depreciation of $24,000. B) Understatement of accumulated depreciation of $40,000. C) Understatement of depreciation expense of $24,000. D) Understatement of net income of $24,000.

B. Understatement of accumulated depreciation of $40,000

An entity reports the cumulative effect on earnings of prior years as an adjustment of the beginning balance of retained earnings for the first period presented. For which of the following accounting changes was this adjustment made? A) A change in an estimate effected by a change in accounting principle. B) A change from LIFO to FIFO. C) A change in the estimated salvage value of a depreciable asset. D) A change in the method of depreciation from sum-of-the-years'-digits to straight-line.

B. a change from LIFO to FIFO

The correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current A) Retained earnings statement after net income but before dividends. B) Retained earnings statement as an adjustment of the opening balance. C) Income statement after income from continuing operations and before extraordinary items. D) Income statement after income from continuing operations and after extraordinary items.

B. retained earnings statement as an adjustment of the opening balance

Which of the following transactions should be classified as an accounting change? I. Change from a previously generally accepted accounting principle to a new accounting principle. II. Change from an accounting principle not generally accepted to a generally accepted accounting principle. III. Change in the percentage used to determine an allowance for uncollectible accounts. A) I, II, and III. B) I and II only. C) I and III only. D) II and III only.

C. I and III only

When financial statements for prior periods are to be restated because of the correction of errors, A) The cumulative effect of the errors is recognized in current income. B) All adjustments are made as of the end of the latest period reported. C) The beginning balance of retained earnings of the current period is adjusted for the error effects on all prior periods, and the corrections are made directly to the prior-period financial statements. D) The restatement must be in pro forma presentations presented in the notes to the financial statements.

C. The beginning balance of retained earnings of the current period is adjusted for the error effects on all prior periods, and the corrections are made directly to the prior-period financial statements

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported A) By restating the financial statements of all prior periods presented. B) As a correction of an error. C) In the period of change and future periods if the change affects both. D) As a separate disclosure after income from continuing operations, in the period of change and future periods if the change affects both.

C. in the period of change and future periods if the change affects both

Volga Co. included a foreign subsidiary in its Year 6 consolidated financial statements. The subsidiary was acquired in Year 4 and was excluded from previous consolidations. The change was caused by the elimination of foreign currency controls. Including the subsidiary in the Year 6 consolidated financial statements results in an accounting change that should be reported A) By note disclosure only. B) Currently and prospectively. C) Currently with note disclosure of pro forma effects of retrospective application. D) By retrospective application to the financial statements of all prior periods presented.

D. By retrospective application to the financial statements of all prior periods presented

JKC Corporation, a calendar year-end firm, changed its method for measuring inventory from FIFO to LIFO, effective January 1, Year 6. Records of inventory purchases and sales were not available for certain earlier years of its existence. Accordingly, it was impracticable for JKC to determine the cumulative effect of applying the change in accounting principle retrospectively. If records of inventory purchases and sales are available for recent years, JKC must apply LIFO at the A) End of the latest accounting period presented for which retrospective application is impracticable. B) Beginning of the earliest accounting period presented for which full retrospective application is practicable. C) Beginning of the current accounting period. D) Earliest date practicable.

D. Earliest date practicable

Which of the following statements is correct as it relates to changes in accounting estimates? A) Most changes in accounting estimates are accounted for retrospectively. B) Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle. C) Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate. D) It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error.

D. It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error

At the end of Year 2, Dnieper Co. failed to accrue sales commissions earned during Year 2 but paid in Year 3. The error was not repeated in Year 3. What was the effect of this error on Year 2 ending working capital and on the Year 3 ending retained earnings balance? Year 2 Ending Year 3 Ending Working Capital Retained Earnings A) Overstated Overstated B) No effect Overstated C) No effect No effect D) Overstated No effect

D. Overstated; no effect

Cuthbert Industrials, Inc., prepares 3-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company report the error? A) The financial statements for Years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the Year 3 financial statements. B) The financial statements for Years 1 and 2 should not be restated; financial statements for Year 3 should disclose the fact that the error was made in prior years. C) The financial statements for Years 1 and 2 should not be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3. D) The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.

D. The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3

How should the effect of a change in accounting estimate be accounted for? A) By retrospectively applying the change to amounts reported in financial statements of prior periods. B) By reporting pro forma amounts for prior periods. C) As a prior-period adjustment to beginning retained earnings. D) By prospectively applying the change to current and future periods.

D. by prospectively applying the change to current and future periods

Which of the following describes the appropriate reporting treatment for a change in accounting estimate? A) In the period of change with no future consideration. B) By reporting pro forma amounts for prior periods. C) By restating amounts reported in financial statements of prior periods. D) In the period of change and future periods, if the change affects both.

D. in the period of change and future periods, if the change affects both