Acct 302 Ch. 22

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. Under Over Under No effect B. No effect Over Over No effect C. Over Under No effect over D. No effect Over No effect under 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. Under Under Over No effect B. Over Over Under under C. no effect under under under D. under no effect over over A. A B. B C. C D. D

A

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 : A careful estimate that later proves to be incorrect should be considered a change in an estimate. B : 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. C : If a generally accepted accounting principle is involved, it's usually a correction of an error. D : If a generally accepted accounting principle is involved, it's usually a change in an estimate.

A : A careful estimate that later proves to be incorrect should be considered a change in an estimate.

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 : political costs B : bonus payments C : smooth earnings D : capital structure

A : political costs

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 : $221,333. B : $ -0-. C : $236,000. D : $224,000.

B : $ -0-

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 reporting entity. C : A change in segment reporting. D : A change in accounting estimate.

B : A change in reporting entity.

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. A : II, III, and IV. B : I, II, and III. C : I, II, and IV. D : I, III, and IV.

B : I, II, and III.

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 retained earnings statement after net income but before dividends. B : In the current retained earnings statement as an adjustment of the opening balance. C : In the current income statement after discontinued segment items. D : In the current income statement after income from continuing operations and before discontinued segment items.

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

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

B : the company has changed auditors.

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. show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented

Q 22.7: In 2025, Morton Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Morton since it began business in 2020. Net Income Year FIFO Avg 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, 2022 by showing an increase of $2,000. B : Change the beginning balance of retained earnings at January 1, 2021 by showing a decrease of $2,000. C : Change the beginning balance of retained earnings at January 1, 2023 by showing an increase of $3,000. D : 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, 2023 by showing an increase of $3,000.

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

Consistency

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 estimated recoverable mineral reserves B : a change in depreciation methods C : a change in accounting estimate D : a change in reporting entity

D : A change in reporting entity.

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 debit to Deferred Tax Liability of $68,000 D : A credit to Deferred Tax Liability of $56,000

D : A credit to Deferred Tax Liability of $56,000 ($100,000 + $40,000) x 40% = $56,000

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 : I, II, and III. B : II, III, and IV. C : I, II, and IV. D : I, III, and IV.

D : I, III, and IV.

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 over $8,000 under Depreciation Expense $2,000 under $4,000 over Assume that the 2018 errors were not corrected and that no errors occurred in 2017. The 2018 income before income taxes will be A : understated by $3,000. B : overstated by $3,000. C : understated by $7,000. D : overstated by $7,000.

D : overstated by $7,000.

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

D. an employee profit-sharing plan based on net income when a company uses the percentage-of-completion method.

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

changing the basis of inventory pricing from weighted-average cost to LIFO

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

prospectively

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 : current approach. D : retrospective approach.

retrospective approach.