Acc 3120: SmartBook Chapter 20

An addition to or reduction of the beginning balance of retained earnings is referred to as a(n) _ _ adjustment. (Enter one word per blank.)

Blank 1: prior Blank 2: period

When it is impracticable to measure the period-specific effects of a change in accounting principle, the _ approach should be used.

Blank 1: prospective

Which of the following is a change in accounting estimate?

Change in actuarial calculations pertaining to pension plan.

Which of the following is a change in accounting estimate achieved by a change in accounting principle?

Change in depreciation methods.

Which of the following is a change in accounting principle?

Change the method of inventory.

Which of the following situations would be an appropriate reason for an accounting principle change?

Changes in related economic conditions

On January 1, year 1, Yuri Corp. purchases equipment for $120,000. The equipment has a 6-year useful life with no residual value. Yuri uses the double-declining-balance method of depreciation, and depreciates the equipment $40,000 in year 1. In year 2, Yuri changes its depreciation method to straight-line depreciation. The journal entry in year 2 to record the depreciation expense will include which of the following journal entries? (Select all that apply.)

Credit accumulated depreciation $16,000. Debit depreciation expense $16,000.

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3?

Credit retained earnings $60,000.

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.)

Credit retained earnings. Debit sales revenue.

Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following entries?

Debit equipment $100,000. Credit inventory $100,000.

In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? (Select all that apply.)

Debit inventory $10,000. Credit retained earnings $10,000.

In year 1, Regal Corp. purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense in year 1 and year 2. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3 assuming straight line depreciation?

Debit retained earnings $20,000.

In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. Which of the following entries would be required to record the correction of the error including tax effects?

Debit retained earnings $28,000

If a change in accounting principle does not require additional taxes to be paid or taxes to be refunded, which account is used to record the tax effects of a change in accounting principle?

Deferred tax asset or liability accounts

In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted-average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change?

Earnings per share for year 1 decreased.

What factors strongly contribute to the need for changes in estimates? (Select all that apply.)

Experience relating to the estimates New information becomes available

When is the prospective approach used in accounting changes? (Select all that apply.)

For a change in accounting estimate. For a change in accounting principle if it is impracticable to determine the effect of the change on previous years.

Adam needs to correct an error that affected prior year income. Adam correctly judges that retrospective reporting is impracticable for this error. Under which accounting standards may Adam report the effect of the error in the current period?

IFRS only

A difference in accounting rules for accounting changes for U.S. GAAP and IFRS is

IFRS permits the effect of an error to be reported in the current period if it is not considered practicable to report it retrospectively.

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?

Income tax payable Retained earnings Inventory Cost of goods sold

In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. What is the tax effect of the prior period adjustment in year 3?

Increase income tax receivable $12,000

In year 2, Rocco changes its inventory method from the weighted-average to the FIFO method. If FIFO would have been used in year 1, cost of goods sold would be $20,000 lower. Rocco has an effective tax rate of 21%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method?

Increase retained earnings $15,800

Which of the following errors will self-correct?

Miscounting ending inventory at the end of the year.

Which of the following are acceptable reasons for an accounting change? (Select all that apply.)

To be consistent with others in the industry. To apply a new method that is more appropriate.

In year 2, Rogers Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

Year 1 ending inventory will decrease. Year 1 net income will decrease.

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

Year 1 net income will increase. Year 1 retained earnings will increase.

A company's choice of accounting method is important because

affects comparability with peer firms it impacts reported net income

Modified retrospective application for a change in accounting principle requires that

an adjustment is made to retained earnings at the beginning of the adoption period.

Retrospective application for a change in accounting principle requires that

an adjustment is made to retained earnings for the earliest period presented.

An exception to the retrospective application of voluntary changes in accounting principles is when

authoritative literature requires prospective application for a change in accounting methods.

A change in depreciation method is treated as a(n)

change in accounting estimate.

A change in depreciation method is treated as a

change in estimate achieved by a change in accounting principle.

The rationale for a change of depreciation method to be treated as a change in accounting estimate is that

changing depreciation method is done to reflect changes in estimated future benefits.

Kroft changes inventory methods in year 2, resulting in a $10,000 increase to beginning inventory in year 2. The tax rate is 30%. The journal entry required to record the change in accounting principles will require a

credit to retained earnings for $7,000.

Error correction requires disclosure of the: (Select all that apply.)

effect of its correction on operations nature of the error

When it is impossible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in _.

estimate

New information that becomes available about an event or transaction frequently results in a change in

estimate.

When it is not possible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in

estimate.

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

in the beginning balance of retained earnings for the earliest year presented for the years prior to that date.

Which items are considered a correction of an error when the financial statements are adjusted? (Select all that apply.)

mathematical mistakes change from the cash basis of accounting to accrual basis failing to record a transaction

When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ______ approach is used.

modified retrospective

Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement? (Select all that apply.)

net income cost of goods sold earnings per share

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? (Select all that apply.)

net income inventory cost of goods sold

When it is impracticable to determine the cumulative effect of prior years of a voluntary change in accounting principle, then the new method is applied _ beginning in the earliest year practicable.

prospectively

Schumacher Company used the LIFO inventory costing method for its first 5 years of operations, generating tax savings of $75,000. In year 6, Schumacher switches from LIFO to FIFO. The company

records a current and noncurrent liability to show that it must repay the $75,000 over time.

The selection of an accounting method is important because it can (Select all that apply.)

reduce comparability. complicate comparisons. influence financial ratios.

After a recent acquisition, Joann Inc. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in _____.

reporting entity

If a company discovers an error in previously issued financial statements, it must

restate the financial statements.

Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? (Select all that apply.)

retained earnings total fixed assets depreciation expense

When financial statements are revised to reflect the impact of a change in accounting principle, the ______ approach is used.

retrospective

If it is impracticable to adjust each year reported for the effect of a voluntary accounting principle change, the change is applied

retrospectively to the earliest year practicable.

A voluntary accounting change can be made only if it is justified as being _ to the previous method.

Blank 1: preferable or preferred

Which of the following are changes in accounting estimates? (Select all that apply.)

Change in useful life of a depreciable asset. Change in estimate of periods benefited by intangible asset.

In year 2, Reynolds changes its inventory method from FIFO to the weighted-average method. If the weighted-average method would have been used in year 1, cost of goods sold would be $10,000 higher. Reynolds has an effective tax rate of 40%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method?

Decrease retained earnings $6,000.

Which of the following are considered a change in reporting entity? (Select all that apply.)

Presenting consolidated financial statements in place of individual statements. Changing specific companies that are included in the consolidated statements.

What approach is used to account for a change in depreciation method?

Prospective approach

True or false: A prior period adjustment requires an adjustment to the beginning balance of retained earnings for the year following the error or for the earliest year being reported in the comparative financial statements if the error occurred prior to the earliest year presented.

True

The term "prior period adjustment" is used for

correction of an error

Failure to record an adjusting entry is a change that requires a:

correction of error

If a company changes its inventory method, what financial statement accounts are affected? (Select all that apply.)

cost of goods sold inventory

In year 1, Clark Corp. failed to record an entry to record a sale on account. In year 2, Clark recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would be

debit sales revenue; credit retained earnings.

A change in accounting estimate is accounted for using the _ approach.

prospectively

If an accountant discovers an error in the current year accounting records before the financial statements are prepared, the accountant should

reverse the incorrect entry and prepare a correct entry.

If a company records an error correction, it must disclose _____________ in its notes to the financial statements.

the nature of the error

Mirage Corp. miscounts and understates its ending inventory in year 1 by $5,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

Understate assets. Understate net income. Understate retained earnings.

Which of the following is an exception to retrospective application of voluntary changes in accounting principle? (select all that apply)

When authoritative literature requires prospective application When there is insufficient information to determine the cumulative effect of prior years

An error in which of the following accounts typically does not self-correct?

Land

Retrospective application requires that

previous financial statements are revised to reflect the use of the new method.

Investors should be alert to accounting method changes that may be based on these hidden motivations: (Select all that apply.)

A desire to hide potential debt covenant violations Increases in earnings not based on changes in effectiveness or efficiency Effect on executive compensation

Accounting changes include changes in accounting _, in accounting _, and in reporting entity.

Blank 1: principle Blank 2: estimate or estimates

A change in ______ relates to a change in method of accounting for an item, whereas a change in ______ arises from a new calculation due to new information or new experience.

accounting principle; accounting estimate

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and

an adjustment is made to retained earnings at the beginning of the adoption period.

Jill accrues salaries and records the transaction by debiting salary expense and crediting notes payable. The entry to correct this error is

debit notes payable; credit salaries payable.

Candy changes inventory methods in year 2, resulting in a $20,000 increase to beginning inventory in year 2. The tax rate is 40%. The journal entry required to record the change in accounting principles will require (Select all that apply.)

debit to inventory for $20,000 credit to retained earnings for $12,000

Accounting changes include changes in

principles, estimates, or entities.

Which of the following errors would self-correct in the following year? (Select all that apply.)

Failure to accrue salaries in the current year. Miscounting ending inventory.

In year 1, Regal Corporation purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation is used. Regal's tax rate is 40%. What is the tax effect of the prior period adjustment in year 3?

Increase income tax receivable $8,000

If a lack of information makes it impracticable to report a voluntary accounting change retrospectively, then (select all that apply)

the new method is applied prospectively as of the beginning of the year of change. the company should disclose the reason why retrospective application was impracticable.

A voluntary accounting principle change:

must be justified as being preferable

On January 1, year 1, Weston Corp. purchases equipment for $100,000. The equipment has a 10-year useful life with no residual value. Weston uses the double-declining-balance method of depreciation, and depreciates the equipment $20,000 in year 1 and $16,000 in year 2. In year 3, Weston changes its depreciation method to straight-line depreciation. The journal entry in year 3 to record the depreciation expense will include which of the following journal entries?

Debit depreciation expense $8,000.

In year 1, Durham Corp. failed to record a sale for $50,000. Durham also failed to record this revenue on the tax return. In year 2, the error was discovered. Durham's tax rate is 40%. Which of the following entries would be required to record the correction of the error including tax effects? (Select all that apply.)

Credit retained earnings $30,000. Credit income taxes payable $20,000.

Rex Corp. purchased supplies on account and recorded it in the inventory account. What is the journal entry to correct this error?

Debit supplies; credit inventory.

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take? (Select all that apply.)

Reverse the incorrect entry. Prepare the correct journal entry for the transaction.

Which of the following are estimates used in asset depreciation? (Select all that apply.)

future benefits from the asset pattern of receiving benefits

When an adjustment is made to the balance of retained earnings at the beginning of the adoption period to reflect the impact of a change in accounting principle, the ______ approach is used.

modified retrospective

Which of the following are considered a change in accounting principle? (Select all that apply.)

Change from the cost to equity method. Adopt a new FASB standard.

For U.S. GAAP, which of the following are considered accounting changes? (Select all that apply.)

change in accounting principle change in reporting entity change in accounting estimate

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? (Select all that apply.)

Retained earnings is adjusted for the earliest period presented. The adjusted net income for each year is shown on the retained earnings statement for that year.

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 balance sheet? (Select all that apply.)

Retained earnings is understated by $80,000 Assets are understated by $80,000

Emile Company utilized the LIFO inventory costing method for the past ten years and saved $350,500 in taxes. If Emile switches away from LIFO, the company

must repay the prior years' tax savings to the IRS.

The prior period adjustment is applied to ______ for the year following the error or for the earliest period being reported in the comparative financial statements.

retained earnings

If a change in accounting principle requires prior tax savings to be repaid, the tax effects are recorded in a ________ account; however, if the tax law does not require a recapture of prior tax savings, then the tax effects are recorded in a _________ account.

taxes payable; deferred tax liability

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 1 income statement?

Net income understated by $90,000

Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

Overstate net income $10,000. Overstate assets $10,000.

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 income statement?

Overstated by $10,000

Which of the following are requirements for the correction of an accounting error? (Select all that apply.)

Prepare a journal entry to correct the error. Report a prior period adjustment to the beginning balance in retained earnings for the earliest year affected. // Prepare a journal entry to correct the error. Disclose the nature of the error and the impact of the error on net income. Restate previous years' financial statements that are incorrect.

If it is impracticable to measure the period-specific effects of a change in accounting principle, what approach is used?

Prospective

What method is used to account for a change in accounting estimate?

Prospective application

Which of the following errors typically do not self-correct?

Recording equipment purchased in the land account

What hidden motivations should investors and creditors be wary of when a company makes an accounting method change?

Report inflated earnings that are not associated with increased economic performance Avoid irregular earnings patterns Increase executive compensation

What is the approach used for an error correction?

Restatement of previous years' financial statements