Ch.22 Sample Quiz Questions

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

False

Companies report changes in accounting estimates retrospectively.

False

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

True

When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

True

Cullumber Co. purchased machinery that cost $2450000 on January 4, 2016. The entire cost was recorded as an expense. The machinery has a 9-year life and a $145000 residual value. The error was discovered on December 20, 2018. Ignore income tax considerations. Before the correction was made, and before the books were closed on December 31, 2018, retained earnings was understated by

$1937778.

On January 1, 2016, Crane Co., purchased a machine (its only depreciable asset) for $1010000. The machine has a 5-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2019, for financial statement reporting, Crane decided to change to the straight-line method for depreciation of the machine. Assume that Crane can justify the change. Crane's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2019, is $860000. The income tax rate for 2019, as well as for the years 2016-2018, is 30%. What amount should Crane report as net income for the year ended December 31, 2019?

$531300

Crane Company began operations on January 1, 2017, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Final Inventory 2017 2018 FIFO $375000 $ 415000 LIFO 295000 355000 Net Income (computed under the FIFO method) 555000 805000 Based upon the above information, a change to the LIFO method in 2018 would result in net income for 2018 of

$745000.

Carla Vista Company purchased a machine on January 1, 2016, for $850000. At the date of acquisition, the machine had an estimated useful life of 6 years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2019, Carla Vista determined, as a result of additional information, that the machine had an estimated useful life of 8 years from the date of acquisition with no salvage. An accounting change was made in 2019 to reflect this additional information. What is the amount of depreciation expense on this machine that should be charged in Carla Vista's income statement for the year ended December 31, 2019?

$85000

On January 1, 2016, Cullumber Corporation acquired machinery at a cost of $1310000. Cullumber adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of 10 years, with no residual value. At the beginning of 2019, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2019 would be

$95817.

Which of the following disclosures is required for a change from LIFO to FIFO?

-The cumulative effect on prior years, net of tax, in the current retained earnings statement -The justification for the change -Restated prior year income statements

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?

A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

Which of the following is not accounted for as a change in accounting principle?

A change to a different method of depreciation for plant assets

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?

Recomputation of current and future years' depreciation

Which of the following is not a retrospective-type accounting change?

Sum-of-the-years'-digits method to the straight-line method

Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

True

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

True

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

change in accounting estimate.

An example of a correction of an error in previously issued financial statements is a change

from the cash basis of accounting to the accrual basis of accounting.

On January 1, 2018, Crane Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $1140000 increase in the January 1, 2018 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Crane in its 2018

retained earnings statement as a $798000 addition to the beginning balance.

Blossom Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 contained the following errors: Dec. 31, 2017 Dec. 31, 2018 Ending inventory $133000 overstated $154000 understated Depreciation expense 113000 overstated - Insurance expense 77000 understated 77000 overstated Prepaid insurance 77000 overstated - In addition, on December 31, 2018 fully depreciated equipment was sold for $30200 but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Blossom's 2018 net income is

understated by $394200.