Chpt 21 Practice - Adoptive

What will a company do if a careful estimate is later proven to be incorrect? They will consider it neither a change in estimate nor an error. They will consider it an error. They will consider it a change in estimate. They will consider it an error and a change in estimate.

They will consider it a change in estimate. Changes in estimates are a normal and expected part of the ongoing process of reviewing the current status and future benefits and obligations related to assets and liabilities. A change in estimate arises from the appearance of new information that alters the existing situation. Since the estimate was later proven to be incorrect, it's a change in estimate. It is not an error due to the fact they most likely got more information that is helping the estimate better for the future.

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? They will consider it a change in estimate. They will consider it a change in principle. They will consider it both a change in estimate and a change in principle. They will consider it neither a change in estimate nor a change in principle.

They will consider it a change in estimate. If it is impossible to determine whether a change in principle or a change in estimate has occurred, the rule is to consider the change as a change in estimate. This is often referred to as a change in estimate effected by a change in accounting principle.

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

A careful estimate that later proves to be incorrect should be considered a change in an estimate. Companies should consider careful estimates that later prove to be incorrect as changes in the estimate. Only when a company obviously computed the estimate incorrectly because of lack of expertise or in bad faith should it consider the adjustment an error.

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

A failure to record depreciation. Counterbalancing errors are those that will be offset or corrected over two periods. An example of this is the failure to record accrued wages, a counterbalancing error because over a two-year period the error will no longer be present. Noncounterbalancing errors are those that are not offset in the next accounting period. An example would be the failure to capitalize equipment that has a useful life of five years. Depreciation would be incorrectly classified as a counterbalancing error as it is a non-counterbalancing error.

At the end of the current year, 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 the end of the year is represented by

Accrued wages are not considered a significant error. This error is an income statement and balance sheet error. Since accrued wages payable were not recognized expenses and liabilities would be understated, while retained earnings would be overstated. But there is no effect on assets.

A characteristic that is inconsistent with a counterbalancing error is: An understatement of purchases An error that corrects itself within two years An error that corrects itself within three years An overstatement of unearned revenue

An error that corrects itself within three years Counterbalancing errors correct themselves over two periods. Non-counterbalancing errors are those that do not offset in the next accounting period and take longer than two periods.

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.

Balance sheet Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account. Balance sheet errors can be the classification of a short-term receivable as part of the investment section, the classification of a note payable as an account payable, and the classification of plant assets as inventory.

_______ errors are those that will be offset or corrected over two periods.

Counterbalancing Counterbalancing errors are those that will be offset or corrected over two periods. Noncounterbalancing errors are those that are not offset in the next accounting period.

Generally, errors that affect both the income statement and the balance sheet and correct themselves within two years are classified as ______ your answer here errors.

Counterbalancing Counterbalancing errors are those that will be offset or corrected over two periods, and they will affect both the income statement and balance sheet.

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

Counterbalancing errors Counterbalancing errors are those that will be offset or corrected over two periods.

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 _______

Entries Entries are needed to correct the error are both questions that companies need to address during error analysis. With error analysis companies must answer three questions. What type of error is involved? What entries are needed to correct for error? After the discovery of the error, how are financial statements to be restated?

Which of the following statements is incorrect regarding changes in estimates? These changes are viewed as normal recurring corrections and adjustments. Pro forma amounts for prior periods are reported. Financial statements of prior periods are not restated. Opening balances are not adjusted for the change.

Pro forma amounts for prior periods are reported. The circumstances related to a change in estimate differ from those for a change in accounting principle. In this case, this is a change in accounting principle. Here, if impracticable to determine the prior period effect, companies should disclose the effect of the change on the current year, and the reasons for omitting the computation of the cumulative effect and pro forma amounts for prior years.

The end of the current year, physical inventory of Velt Company appropriately included $4,500 of merchandise inventory that was not recorded as a purchase until January, of the next year. The effect this error will have on the following account balances at the end of the current year is represented by

The effect this error has is that COGS and Liabilities would be affected by being understated. Then, Retained earnings would be overstated. While assets are not affected. COGS is affected since it is the beginning inventory plus inventory purchases minus ending inventory. Retained earnings would be overstated because it would seem the company has more income than they really do because inventory purchases were not taking into consideration. Liabilities are understated because the payable of inventory was never reported.

In the current year, Daisy Inc. found a counterbalancing error that was made last year. As a result, they had to make an entry to adjust the beginning balance of retained earnings. Which situation would result in this entry? The error is already counterbalanced but the books for the current year are not yet closed. The error has not yet counterbalanced but the books for the current year are already closed. The error has not yet counterbalanced and the books for the current year have not yet been closed. The error has already counterbalanced, and the books are closed for the current year.

The error has not yet counterbalanced and the books for the current year have not yet been closed. If a counterbalancing error is discovered in the first or second year, and the error has not yet counterbalanced but the current books are close they would need to make an entry to adjust the present balance of retained earnings. If the books were not closed, they would make an entry to adjust the beginning balance of retained earnings. If a counterbalancing error is discovered in the first or second year, and the error has already counterbalanced there would be no entry required if the books for the current year are closed. If the books were not closed, they would need to make an entry to adjust the error in the current period and adjust the beginning balance of retained earnings.

Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account. True False

True Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account. Income statement errors involve the improper classification of revenues or expenses.

Restatement of comparative financial statements is necessary even if a correcting entry is not required when working with counterbalancing errors. True False

True If a company presents comparative statements, it must restate the amounts for comparative purposes.

Cooper Company overlooked posting accrued wages at the end of the accounting period. It will result in which of the following counterbalancing errors at the end of the accounting period? Wages expense is understated Accrued wages payable is overstated Wages expense is overstated There would be no errors to the balance sheet or income statement

Wages expense is understated Failure to record accrued wages is a counterbalancing error because over a two-year period the error will no longer be present. In the period the error was made net income would be overstated, accrued wages payable would be understated, and wages expense would be understated.

Which of the following questions would be unnecessary for companies to ask during an error analysis? What type of error is involved? What is the prospective amount? After discovery of the error, how are financial statements to be restated? What entries are needed to correct the error?

What is the prospective amount? Error analysis companies must answer three questions: What type of error is involved? What entries are needed to correct the error? After discovery of the error, how are financial statements to be restated?

Which of the following is an example of a correction of an error in previously issued financial statements? a change in the service life of plant assets, based on changes in the economic environment a change from the FIFO method of inventory valuation to the LIFO method a change in the tax assessment related to a prior period a change from the cash basis of accounting to the accrual basis of accounting

a change from the cash basis of accounting to the accrual basis of accounting A correction of an error in a previously issued financial statement would involve a change from the cash basis of accounting to the accrual basis of accounting. A change from the FIFO method to the LIFO method is a change in accounting principles. A change in service life would be a change in estimate.

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 change in accounting estimate a change in depreciation methods a change in reporting entity a change in estimated recoverable mineral reserves

a change in reporting entity The change is most likely because of a change in reporting entity. A change in reporting entity is a change that occurs as the result of new information or additional experiences. A change in accounting principle occurs when you change from one generally accepted accounting principle to another one.

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. Which of the following should the entry to record this change include? a debit to Retained Earnings in the amount of the difference on prior years, net of tax a debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax a credit to Deferred Tax Liability a debit to Construction in Process

a debit to Retained Earnings in the amount of the difference on prior years, net of tax Retained earnings would get debited for the cumulative income effects in the prior years. Construction in process would get credited. The dDeferred tTax liability gets debited for the amount of the tax effect.

Presenting consolidated financial statements this year when statements of individual companies were presented last year is which of the following? an accounting change that should be reported prospectively an accounting change that should be reported by restating the financial statements of all prior periods presented not an accounting change a correction of an error

an accounting change that should be reported by restating the financial statements of all prior periods presented When a company presents consolidated financial statements in the current year and has presented statements of individual companies in the prior year, it should be reported by restating the financial statements of prior periods presented. Going forward, the company should stick with consolidated statements and not go back to individual statements for companies to keep continuity.

An estimate was calculated incorrectly by a new employee. When the incorrect estimate is discovered, what will the company consider this to be? an error both an error and a change in estimate neither an error nor a change in estimate a change in estimate

an error This would be considered an error. An error occurs when information was overlooked earlier in the period like an incorrect calculation. A change in estimate happens because of new information coming out.

If at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause which of the following? the ending inventory and retained earnings to be understated an error that corrects itself within three years the ending inventory, cost of goods sold, and retained earnings to be understated cost of goods sold and net income to be understated

an error that corrects itself within three years When a company erroneously excluded goods from its ending inventory and did not record the purchase of goods in its accounting records, both of these errors would correct themselves within three years. This is an example of non-counterbalancing errors.

Which types of errors typically only affect the presentation of an asset, liability, or stockholders' equity account? income statement errors balance sheet and income statement errors balance sheet errors counterbalancing errors

balance sheet errors Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account. Balance sheet errors can be the classification of a short-term receivable as part of the investment section, the classification of a note payable as an account payable, and the classification of plant assets as inventory.

Counterbalancing errors generally involve errors that impact both the income statement and the balance sheet. the balance sheet only. neither the income statement nor the balance sheet. the income statement only.

both the income statement and the balance sheet. Counterbalancing errors are those that will be offset or corrected over two periods. Most errors in accounting that affect both the balance sheet and income statement are counterbalancing errors.

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? changes in accounting principle changes in reporting entity changes in accounting estimate changes due to error

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

Jax's company has had to make an accounting change. To do this, the company will not make any adjustments to the current-period opening balances. However, they will report the current and future financial positions on a new basis. Based on this information, which of the following changes is this an example of? changes due to error changes in accounting estimate changes in reporting entity changes in accounting principle

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

Which of the following is not an example of a balance sheet error? classification of plant assets as inventory classification of a short-term receivable as part of the investment section classification of a note payable as an account payable classification of interest revenue as part of sales

classification of interest revenue as part of sales Income statement errors involve the improper classification of revenues or expenses. Examples include recording interest revenue as part of sales, purchases as bad debt expense, and depreciation expense as interest expense. An income statement classification error has no effect on the balance sheet and no effect on net income.

All of the following are included in the three types of accounting changes, EXCEPT change from LIFO to FIFO. correction of understated depreciation expense in a prior period. change in the estimated useful life of an asset. change in reporting entity.

correction of understated depreciation expense in a prior period. The FASB has established a reporting framework, which involves three types of accounting changes: 1. Change in accounting principle. 2. Change in accounting estimate. 3. Change in reporting entity.A fourth category necessitates changes in accounting, though it is not classified as an accounting change: 4. Errors in financial statements

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, which of the following should the accountant do? depreciate the remaining book value over the remaining life of the asset adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years continue to depreciate the building over the original 50-year life

depreciate the remaining book value over the remaining life of the asset When there has been a change in the estimate of the useful life of a building, the accountant would need to depreciate the remaining book value over the remaining life of the asset. You would not want to keep depreciating it at the original life because that is not giving an accurate picture of the life of the building.

Which of the following can be determined by dividing the book value of an asset by its remaining service life? asset life depreciation exception accumulated depreciation depreciation charge

depreciation charge The depreciation charge is determined by dividing the book value of an asset by its remaining service life. Accumulated depreciation is calculated by subtracting the estimated scrap/salvage value at the end of its useful life from the initial cost of an asset.

To find the depreciation charge using the straight-line method, it is necessary to ________ the remaining service life. add the book value of the asset to multiply the book value of the asset by subtract the book value of the asset from divide the book value of the asset by

divide the book value of the asset by With the straight-line depreciation method, the value of an asset is reduced uniformly over each period until it reaches its salvage value. To calculate the depreciation charge using the straight-line method, you need to divide the book value by the remaining service life.

Of these options, the one accounted for as a change in accounting principle is a change in inventory valuation from average cost to FIFO. in the estimated useful life of plant assets. from expensing immaterial expenditures to deferring and amortizing them as they become material. from the cash basis of accounting to the accrual basis of accounting.

in inventory valuation from average cost to FIFO. Inventory valuation being changed from average cost to FIFO is a change in account principle. A change in estimated useful life is a change in accounting estimate. Adopting a new principle in recognizing events that have occurred for the first time or were previously immaterial is not an accounting change.

Recording purchases as bad debt expense and recording interest revenue as part of sales are both examples of which type of error? counterbalancing error income statement error non-counterbalancing error balance sheet error

income statement error Income statement errors involve the improper classification of revenues or expenses. Non-counterbalancing errors are those that are not offset in the next accounting period. Counterbalancing errors are those that will be offset or corrected over two periods. Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account.

Which of the following has no impact on net income? income statement errors balance sheet and income statement errors Non-counterbalancing errors counterbalancing errors

income statement errors Income statement errors have no effect on net income. A company must make a reclassification entry when it discovers the error; if it makes the discovery in the same year in which the error occurs.

Neither the balance sheet nor __________ are impacted by an income statement classification error.

net income Income statement errors involve the improper classification of revenues or expenses. An income statement classification error has no effect on the balance sheet and no effect on net income.

If the books have already been closed for the current year, and the error that was made is already counterbalanced, then ________ is required. no entry a note on the balance sheet an entry a note in the financial statement

no entry For counterbalancing errors, you need to first determine if they have closed the books in the current year, if they have and the error is already counterbalanced, no entry is necessary. If it was not yet counterbalanced, then you would make an entry to adjust the present balance of retained earnings.

Which of the following would be misclassified as an income statement error? recording interest revenue as part of sales recording depreciation expense as interest expense recording a note payable as an account payable recording purchases as bad debt expense

recording a note payable as an account payable Income statement errors involve the improper classification of revenues or expenses. The ones classified as an income statement error are recording depreciation expense as interest expense, recording purchases as bad debt expenses, and recording interest revenue as part of sales. The misclassification would be recording a note payable as an account payable.

When prior period effects cannot be determined, which of the following should not be used? retrospective application the prospective approach LIFO FIFO

retrospective application Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

The proper time period(s) to record the effects of a change in accounting estimate would be retrospectively only. the current period and retrospectively. the current period and prospectively. the current period only.

the current period and prospectively. When making changes in accounting estimates you want to record the changes in the current period prospectively. The company does not need to do retrospectively, they just need to make sure the changes happen going forward.

Which of the following is a non-counterbalancing error? the failure to record prepaid expenses the understatement of inventory the overstatement of purchases the failure to adjust for bad debts

the failure to adjust for bad debts An example of a non-counterbalancing error is the failure to adjust for bad debts. Whereas, the failure to record prepaid expenses, overstatement of purchases, and understatement of inventory are counterbalancing errors.

Which of the following is a non-counterbalancing error? the failure to record prepaid expenses the understatement of purchases the overstatement of ending inventory the failure to record depreciation

the failure to record depreciation Failure to capitalize equipment that has a useful life of five years would be an example of a noncounterbalancing error because it would not correct itself within two years due to lack of depreciation expense being recorded.