Chapter 20 Concept Overview Videos

Which of the following statements about a change in reporting entity are true? (Select all that apply.) - A change in reporting entity occurs as a result of changing specific companies that constitute the group for which consolidated or combined statements are prepared. - For changes in entity that result from changes in accounting rules, the prior-period financial statements that are presented for comparative purposes must be restated to appear as if the new entity existed in those periods. - When one company acquires another one, the prior-period financial statements that are presented for comparative purposes must be restated to appear as if the new entity existed in those periods. - When there is a change in reporting entity, disclosure note is not required.

- A change in reporting entity occurs as a result of changing specific companies that constitute the group for which consolidated or combined statements are prepared. - For changes in entity that result from changes in accounting rules, the prior-period financial statements that are presented for comparative purposes must be restated to appear as if the new entity existed in those periods.

Which of the following statements about changes in accounting estimates are correct? (Select all that apply.) - A revision of an original estimate made in bad faith should be accounted for as a correction of an error. - Changes in accounting estimates are accounted for prospectively. Changes in accounting estimates are accounted for retrospectively. - When a company revises a previous estimate, prior financial statements are revised. - When a company revises a previous estimate, prior financial statements are not revised.

- A revision of an original estimate made in bad faith should be accounted for as a correction of an error. - Changes in accounting estimates are accounted for prospectively. - When a company revises a previous estimate, prior financial statements are not revised.

At the end of Year 1, Schule Company incorrectly recorded notes payable as accounts payable. The error was discovered during Year 3. The company's Year 3 annual report includes comparative financial statements covering Years 2 and 3. The company should: (Select all that apply.) - Record a journal entry to correct the notes payable and accounts payable balances. - Retrospectively restate the Year 2 balance sheet to reflect the correction. - Report the correction as a prior period adjustment to the beginning balance of retained earnings reported for Year 2. - Include the nature of the error in a disclosure note.

- Record a journal entry to correct the notes payable and accounts payable balances. - Retrospectively restate the Year 2 balance sheet to reflect the correction. - Include the nature of the error in a disclosure note.

Companies are allowed to depart from the requirement that a change in accounting principle be reported retrospectively when: (Select all that apply.) - disclosure is made of the impact of the choice not to apply the change to the amounts reported in the financial statements. - it is impracticable to determine some period-specific effects. - it is impracticable to determine the cumulative effect of prior years. - the prospective approach is mandated by authoritative accounting literature.

- it is impracticable to determine some period-specific effects. - it is impracticable to determine the cumulative effect of prior years. - the prospective approach is mandated by authoritative accounting literature.

Starling Company purchased machinery at the beginning of Year 1 at a cost of $86,100. The machinery has an estimated life of five years and an estimated residual value of $4,305. Accumulated depreciation using the SYD depreciation method amounted to $49,077 at the end of Year 2 (comprised of $27,265 for Year 1 and $21,812 for Year 2). Starling switched to the straight-line depreciation method at the beginning of Year 3. What is the Year 3 depreciation expense relating to this machinery?

10,906 Calculation: Original cost 86,100 Less: Residual value 4,305 Less: Accumulated depreciation 49,077) Equals Undepreciated cost 32,718 Divided by remaining useful life 3 Equals Annual depreciation 10,906

Melas Company changed from the LIFO to the FIFO inventory costing method on January 1, Year 3. Inventory values at the end of each year since the inception of the company are as follows: Year 1 FIFO: 195,000 LIFO: 177,500 Year 2 FIFO: 390,000 LIFO: 355,000 Ignoring income tax considerations, prepare the appropriate journal entry, dated January 1, Year 3, to report this accounting change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Debit Inventory 52,500 Credit Retained earnings 52,500 Calculation: Inventory (FIFO), Y1 195,000 Less Inventory (LIFO), Y1 177,500 Equals Difference Y1 17,500 Inventory (FIFO), Y2 390,000 Less Inventory (LIFO), Y2 355,000 Equals Difference Y2 35,000 Difference Y1 17,500 Plus Difference Y2 35,000 Equals Inventory increase 52,500

Simpson Company purchased $900 of equipment by paying cash and recorded the expenditure as a purchase of land. The error was discovered a week later. Prepare the two journal entries required to correct the error. (First, reverse the error and then record the appropriate entry.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Event 1: Debit Cash 900 Credit Land 900 Event 2: Debit Equipment 900 Credit Cash 900

The new standard is applied only to the adoption period and balance of retained earnings at the beginning of the adoption period is adjusted.

Modified retrospective approach

Match each approach to reporting an accounting change with its description. The effects of the change are reflected in the financial statements of the period of the change and future periods only.

Prospective approach

Financial statements issued prior to the change are adjusted to reflect the impact of the change whenever those statements are presented again for comparative purposes. the adoption period and balance of retained earnings at the beginning of the adoption period is adjusted.

Retrospective approach

Kasper Company includes three years in the statement of shareholders' equity in its annual report. During Year 4, management corrected an error that had understated the net income reported in Year 1 by $10,000. How should Kasper reflect the correction of this error in the statement of shareholders' equity included in its Year 4 annual report? - A change in reporting entity should be reported in Year 4. - A prior period adjustment to the beginning-of-the-year retained earnings balance should be reported in the Year 4 amount. - A prior period adjustment to the beginning-of-the-year retained earnings balance should be reported in the Year 2 amount. - A prior period adjustment to the beginning-of-the-year retained earnings balance should be reported in the Year 3 amount.

- A prior period adjustment to the beginning-of-the-year retained earnings balance should be reported in the Year 2 amount.

On January 1, Year 1, Burnham Company purchased a machine for $2,580,000; however, the cost of the machine was recorded as repairs expense. The machine's useful life was expected to be 12 years with no residual value. Burnham uses straight-line depreciation. What is the amount of the credit to retained earnings in the journal entry to correct the error if the error is discovered during year 4 (after 3 years)? Ignore income tax.

1,935,000 Calculation: Equipment cost 2,580,000 Divided by Useful life 12 Multiplied by Years to depreciate 3 Equals Accumulated depreciation 645,000 Subtracted from Equipment cost 2,580,000 Equals Credit to Retained Earnings 1,935,000