Int II unit 8
A company purchases a machine on January 1 of Year 1 for $10,000 that was estimated to have a five-year life and $0 salvage value. Straight-line depreciation is used. On January 1 of Year 3, the company estimates that the machine will last until the end of Year 7, with a salvage value of $500.How much depreciation expense is recorded in Year 4? $1,100 $1,900 $1,200 $2,000
$1,100 = (($10,000 - (($10,000 / 5) × 2)) - 500) / (7 - 2)). The book value at the time of the estimated life changed should be divided by the remaining life.
A charter airplane company purchases a jet for $5,000,000 on January 1, Year 1. On the date of purchase, the company estimates the jet to have a useful life of 5 years and no salvage value. The company records depreciation using the straight-line method for each of the Year 1, Year 2, and Year 3 calendar years. On January 1, Year 4, the company revises its estimate of the jet's useful life, and it now believes the jet will have a total life of 10 years.Which amount of depreciation expense will the company record for this asset for the calendar year that ended December 31, Year 4? $285,714 $500,000 $200,000 $428,571
$285,714 = ($5,000,000 - (1,000,000 × 3) ) / 7. The original depreciation would have been $1,000,000 per year (calculated as $5,000,000 / 5 years). Thus, the book value at January 1, Year 4, would have been $2,000,000 (calculated as $5,000,000 - ( 3 × $1,000,000)). This correctly calculates prospective depreciation expense over the seven years that remain in the new useful life of the asset.
What is an example of an balance sheet statement error? Purchasing bad debt expense Recording interest revenue as part of sales Depreciating expense as interest expense Classifying a note payable as an account payable
. Examples of balance sheet errors are 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.
A company discovers an accounting error related to a prior period.How should the correction of this material error be reported? On the retained earnings statement as a gain or loss On the retained earnings statement as an adjustment to the opening balance On the balance sheet as a gain or loss On the income statement as an adjustment to income from continuing operations
A prior period adjustment is made to the opening Retained Earnings balance.
A company experiences a change in reporting entity.Which event triggered this change? Changing the companies included in the combined financial statements Changing the company's name on the financial statements Purchasing 10% of the common stock of another company Purchasing treasury stock amounting to 10% of outstanding stock
Changing the companies included in the combined financial statements his is a change in reporting entity.
A company has historically used the LIFO method to value its inventory. However, in Year 3, the company decides to adopt the FIFO method because management believes it will better reflect the inventory value, given the current market conditions.Information for the company can be seen in the following table: Net IncomeYearLIFOFIFOYear 1$200,000$240,000Year 2125,000175,000Total at beginning of Year 3$325,000$415,000Year 3$95,000$115,000 Which part of a journal entry should the company record at the beginning of Year 3 to account for the impact on Inventory to reflect the change from LIFO to FIFO? Credit Inventory for $50,000 Debit Inventory for $90,000 Debit Inventory for $50,000 Credit Inventory for $90,000
Debit Inventory for $90,000 $90,000 = ($240,000 - 200,000) + ($175,000 - 125,000). The change from LIFO to FIFO results in an increase to Inventory.
The classification of a note payable as an account payable is which type of error? Balance Sheet Cash Flow Past Period Income Statement
Examples of balance sheet errors are 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.
What is the reason why companies prefer certain accounting methods? Comparability Asset allocation Asset structure Bonus payments
Studies have found that if compensation plans tie mangers' bonus payments to income, management will select accounting methods that maximize their bonus payments.
Which approach does the FASB require when accounting for changes in accounting principle? Retrospective Prospective Cumulative Allowance
The FASB requires that companies use the retrospective approach. Because it provides financial statement users with more useful information than the cumulative-effect or prospective approaches.
A company did not accrue annual insurance expense in the prior year's financial statements. The error resulted in a material overstatement of last year's net income, and the books are closed for last year.Which account should the company adjust in the books for the current year to correct this error? Lease Liability Retained Earnings Net Income Purchases
The books are closed for last year; therefore, the company should adjust for the error through retained earnings.
On December 31, 2020, Dodd Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement purposes. The change will result in an increase in the Inventory account at January 1, 2020. The amount of the change, net of tax is, $2,300,000 (all tax effects should be ignored).What is the cumulative effect of this accounting change that should be reported by Dodd Inc, in 2020? Retained earnings statement as a $2,300,000 addition to the beginning balance Income statement as a $2,300,000 cumulative effect of accounting change Income statement as a $2,300,000 deduction from the beginning balance Retained earnings statement as a $2,300,000 addition to the ending balance
The cumulative effect of this accounting change should be reported by Dodd Inc, in 2020 in the retained earnings statement as a $2,300,000 addition to the beginning balance.
At December 31, 2020, Sorrento Inc. estimated bad debts as 3% of the outstanding balance of Accounts Receivable. At December 31, 2020, Sorrento determined that it should increase its estimate to 6.5%.On which basis is this change handled? Cumulative basis Retrospective basis Speculative basis Prospective basis
This change of estimated bad debt estimate increase is handled on a prospective basis.
A company using periodic inventory methods discovered it had understated inventory by $8,000,000 after the books had been closed for Year 1. The company's tax rate is 18%.Which partial entry should be included to correct this error in the financial statements for Year 2? Credit Retained Earnings for $6,560,000 Debit Cost of Goods Sold for $8,000,000 Credit Inventory for $8,000,000 Debit Taxes Payable for $1,440,000
$6,560,000 = $8,000,000 - ($8,000,000 × 0.18). The understated inventory would result in overstated cost of goods sold and thus an understated income tax expense. This means net income is understated and would be corrected by a credit to Retained Earnings.
A company needs to update one of its accounting estimates and report this update in the financial statements.How should this change be reported? As a change that is described by a note disclosure By retrospectively applying the change to prior periods As a prior period adjustment to retained earnings By prospectively applying the change to current and future periods
A change in accounting estimate is handled prospectively for current and future periods.
Which type of error(s) affects both the income statement and balance sheet? Balance Sheet Counterbalancing and Noncounterbalancing Prior period Adjustment Income Statement
A counterbalancing or noncounterbalancing error affects both the income statement and balance sheet.
What is an example of a correction of an error in previously issued financial statements? Change in the tax assessment related to a prior period Change from the cash basis of accounting to the accrual basis of accounting Change to compensation expense for bonuses earned in the prior period that are paid in the subsequent period Change from the FIFO method of inventory valuation to the LIFO method
Bonuses are to be accrued in the period earned and not in the period paid.
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. There is no salvage value.Based on this information, how should the accountant record depreciation and adjustments, if any? 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
Changes in useful lives of assets are classified as a change in accounting estimate. Changes in accounting estimates are reported prospectively. Therefore, no adjustments are necessary. The company will depreciate the remaining book value over the remaining 10 years (the remaining life of the asset).
Which item is considered an accounting error in accrual accounting? Revising the useful life in the calculation of depreciation expense for a building Recognizing revenue upon job completion in the prior period when cash was received in the current period Changing the inventory cost flow assumption from last-in, first-out to first-in, first-out Recoding the incorrect inventory value due to a mathematical mistake
Recoding the incorrect inventory value due to a mathematical mistake This is an accounting error.
On December 31, Year 1, a company records revenue for $150,000 that applied to Year 2. The books have already been closed in Year 2.Which action, if any, should the company take to address the error? The company should record a debit to retained earnings. The company should record a credit to cash. The company should record a debit to revenue. The company should take no action as the error is counterbalanced.
The books are closed, therefore, no entry is required as the errors have counter balanced. Revenue is understated in Year 1 by $150,000 and overstated in Year 2 by $150,000 with a net effect of $0.
A company that previously issued separate financial statements for several subsidiaries is now choosing to issue consolidated financial statements.Which accounting change was made by this company? Accounting estimate Accounting principle Reporting entity Reporting revision
This scenario describes a change in reporting entity where previously each entity was reporting separate financial statements, changing to consolidated statements.
In 2019, PWT Company failed to record depreciation expense on some of its assets.When the error is discovered in 2020, how will the error be accounted for? As a future period adjustment Using pro forma data Prospectively As a prior period adjustment
As soon as a company discovers an error, it must correct the error. Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period. Such corrections are called prior period adjustments. Failure to record depreciation is accounted for as a prior period adjustment.
A company president is comparing the company's circumstances in the current period to that of the prior period and noticed several changes. The president has determined that the circumstances qualify as a change in the reporting entity.Which change will require this treatment? Changing the numbers reported to correct a mathematical mistake Changing the estimated useful life of a building Changing from FIFO inventory to LIFO inventory Changing the included companies in consolidated financial statements
Changing the included companies in consolidated financial statements Altering the companies included within combined financial statements represents a change in the reporting entity.
In 2021, Stone Company changed its method of pricing inventories from FIFO to LIFO. Stone prepares comparative financial statements, comparing both years, 2020 and 2021.According to FASB, how should this type of accounting change be presented in Stone's financial statements? As a change in accounting estimate; 2020 financial statements should be presented as previously reported. As a change in accounting estimate; 2020 financial statements should be restated. As a change in accounting principle; 2020 financial statements should be presented as previously reported. As a change in accounting principle; 2020 financial statements should be restated.
A change in inventory valuation is defined as a change in accounting principle. FASB requires that changes in accounting principles use the retrospective approach when presenting financial statements. The retrospective approach requires the company to "go back" and adjust (restate) prior year financial statements.
A company has elected to change from using the LIFO method for valuing its inventory from the previously reported FIFO method. As a result of the change, the prior year's net income increases, requiring the company to pay an additional profit-sharing bonus to its employees.Which statement accurately depicts how this change should be accounted for as it relates to profit-sharing? Recognize an indirect effect and record the change in expense in the current period Recognize a direct effect and record a retrospective adjustment of the expense Recognize an indirect effect and record a retrospective adjustment of the expense Recognize a direct effect and record the change in expense in the current period
Recognize an indirect effect and record the change in expense in the current period Because the scenario is an indirect impact of a change in accounting principle, the expense is recorded in the current period and is not required to be retrospectively adjusted.
On December 31, 2020, Paiva Inc. appropriately changed its inventory valuation method to weighted-average cost from FIFO cost for financial statement purposes. The change will result in a decrease in the inventory account at January 1, 2020. The amount of the change, net of tax is, $1,480,000 (all tax effects should be ignored).Where should the cumulative effect of this accounting change should be reported by Paiva Inc. in 2020? Retained earnings statement as a $1,480,000 deduction from the beginning balance Income statement as a $1,480,000 cumulative effect of accounting change Retained earnings statement as a $1,480,000 addition to the beginning balance Income statement as a $1,480,000 deduction to the ending balance
The cumulative effect of this accounting change should be reported by Paiva Inc. in 2020 in the retained earnings statement as a $1,480,000 deduction from the beginning balance.
Which disclosure is required for a change from sum-of-the-years-digits to straight-line depreciation method? Restatement of prior years' income statements The cumulative effect on prior years, net of tax, in the current retained earnings statement Recomputation of current and future years' depreciation Recomputation of current years' depreciation only
The disclosure of recomputation of current and future years' depreciation is required for a change from sum-of-the-years-digits to straight-line depreciation method.
What happens when there is a failure to record accrued wages in the previous period? Accrued wages payable is overstated Net Income for the first period is overstated Net Income for the first period is understated Wages expense is overstated
The failure to record accrued wages in the previous period means (1) net income for the first period is overstated, (2) accrued wages payable is understated, and (3) wages expense is understated.
How is the failure to record depreciation expense in a given year accounted for? By showing pro forma data As a prior period adjustment Prospectively Currently as an expense adjustment
The failure to record depreciation expense in a given year accounted for as a prior period adjustment.
A manufacturing company measured its raw materials inventory using the LIFO method for all years prior to Year 2. Beginning with January 1, Year 2, the company elects to use the FIFO method and will present two years in the financial statements.How should the company account for any additional changes? By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to the cost of goods sold for the year ended December 31, Year 2 By reporting inventory using LIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1 By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1 By reporting inventory using LIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to the cost of goods sold for the year ended December 31, Year 2
A change in accounting principle requires a company to restate prior-year financial statements that are included in the current presentation.
An accounting company identifies a material understatement of prior-year amortization expenses on a client's financial statement.What is part of the current year's entry for the correction of the error? Credit Net Income Credit Retained Earnings Debit Retained Earnings Debit Net Income
A debit to Retained Earnings will be required to address the overstatement in Net Income.
What is accounted for as a change in accounting principle? A change in inventory valuation from average-cost to LIFO A change from double-declining balance method to the straight-line method of calculating depreciation A change in the residual value of plant assets A change from the cash basis of accounting to the accrual basis of accounting
By definition, a change in accounting principle involves a change from one generally accepted accounting principle to another. For example, a company may change the basis of inventory pricing from average-cost to LIFO.
A company purchases equipment costing $50,000 that is expected to have a useful life of five years with no salvage value. In Year 3, after two years of depreciation have been recorded, the company changes methods and decides the asset should be depreciated using a declining balance method.Which disclosure completely illustrates the treatment required for this change? Companies need to disclose only the effect on income from operations prospectively. Companies need to disclose only the effect on income from operations for the current period. Companies need to disclose the effect on income from operations and the related per share amounts for the current period. Companies need to disclose the effect on income from operations, the related per share amounts for the current period, and why the new method is preferred.
Companies need to disclose the effect on income from operations, the related per share amounts for the current period, and why the new method is preferred. All of these are required disclosures for a change in estimate caused by a change in accounting principle.
A company purchases $1,000 of inventory that is subsequently sold. The company incorrectly records the purchase for $10,000.Which entry should be used to correct this material error on the balance sheet? Debit Retained Earnings for $9,000; Credit Inventory for $9,000 Debit Inventory for $9,000; Credit Retained Earnings for $9,000 Debit Inventory for $10,000; Credit Retained Earnings for $10,000 Debit Retained Earnings for $10,000; Credit Inventory for $10,000
Debit Retained Earnings for $9,000; Credit Inventory for $9,000 The entry decreases Retained Earnings and Inventory.
Company A acquires all shares of Company B on January 1 of Year 2. Both companies have conducted operations for the past 10 years. Company A presents two years of its financial position and results of operations when preparing financial statements.What is the appropriate financial statement treatment for this situation? Company A should report consolidated information for both Year 1 and Year 2 financial statements. Company A should restate the past 10 years to reflect consolidated information. Both Years 1 and 2 financial statements should report Company A's information, and Company A should begin reporting consolidated information after Year 2. Year 1 financial statements should report Company A's information, and Year 2 financial statements should report consolidated information.
This situation is a change in reporting entity. When changing a reporting entity, U.S. GAAP requires companies to restate all prior periods presented. Because Company A presents two years of financial results, both Years 1 and 2 should be presented on a consolidated basis.
Company A acquires all shares of Company B on January 1 of Year 2. Both companies have conducted operations for the last 10 years. Company A presents two years of its financial position and results of operations when preparing financial statements.What is the appropriate financial statement disclosure for Company A in this situation? Report the nature of and reason for the change in the disclosure notes for Year 2 and for all subsequent periods Report the nature of and reason for the change in the disclosure notes for Year 2, with no requirement to repeat the disclosure for subsequent periods Report the reason for the change in the disclosure notes for Year 2, with no requirement to repeat the disclosure for subsequent periods Report the reason for the change in the disclosure notes for Year 2 and for all subsequent periods
This situation is a change in the reporting entity. U.S. GAAP requires both disclosures in the year of the change but does not require repeated disclosure in subsequent periods.