Intermediate 3 Final

change in accounting entity

A ___________________________ results in presenting consolidated financial statements in addition to statements of individual companies.

Change in accounting principle

A change from one generally accepted accounting principle to another generally accepted accounting principle, including a change in the method of applying an accounting principle

1. a company presents consolidated or combined statements in place of statements of individual companies 2. there is a change in the specific subsidiaries that make up the group of companies for which consolidated financial statements are presented, or 3. the companies included in the combined financial statements change.

A change in a reporting entity occurs when:

prospectively

A change in accounting estimate is always accounted for

change in company management and new company policy.

A change in accounting principle does not include a

C. proposed changes to subsidiaries are included in future financial statements.

A change in an accounting entity is limited mainly to presenting all of the following except A. consolidated or combined financial statements in place of the statements of individual companies. B. changing specific subsidiaries that make up the group of companies for which consolidated financial statements are presented. C. proposed changes to subsidiaries are included in future financial statements. D. changing the companies included in combined financial statements.

Change in reporting entity

A change in the type of entity being reported

change in accounting estimate.

A change in unit depletion rate would be accounted for as a

is a correction of an error and accounted for by a prior-period adjustment.

A change to GAAP from a principle that is not generally accepted

prior period restatement

A charge to beginning retained earnings as a result of a change in accounting principle, change in accounting entity, or a correction of an error in a prior period.

Change in Accounting Estimate

A revision of an estimate used in the accounting process due to new or additional information or experience

change in accounting estimate effected by a change in accounting principle

An accounting change in which a company cannot distinguish between a change in accounting principle and a change in accounting estimate; such a change is accounted for as a change in estimate (prospectively)

Prospective method

An accounting change is accounted for in current and future periods.

prior period adjustment

An adjustment to the beginning balance of retained earnings for the discovery of a material error made in a previous period.

an accounting change that should be reported by retrospectively restating the financial statements of all prior periods presented.

Candy Cane Co. has included in its 2016 financials (the current year) Reindeer Co., a subsidiary acquired in 2012 that was appropriately excluded from consolidation last year. This results in

changes in accounting principle

Compared to IFRS, U.S.GAAP only allows an impracticability exception for

why the new principle is preferable.

Disclosure of a retrospective adjustment should include

counterbalancing errors

Errors that are automatically corrected by the accounting system in the next accounting period, even if they are not discovered.

noncounterbalancing errors

Errors that are not automatically corrected by the accounting system in the next accounting period.

Change in an accounting principle Change in an accounting estimate Change in a reporting entity

GAAP defines three types of accounting changes:

the retrospective adjustment method and the prospective method

GAAP provides two possible methods of reporting a change as what?

current period; future periods

GAAP requires that a company accounts for a change in an accounting estimate in the _______________ of the change, and ___________ if affected.

retrospectively adjusting the financial statements of all prior periods presented.

How is a change in reporting entity accounted for?

is preferable to the old principle

If a company adopts a new accounting principle, it must justify the change on the grounds that the new principle

Debit Retained Earnings $22,500; Credit Allowance for Doubtful Accounts $22,500.

JJ Company failed to accrue an allowance for doubtful accounts of $22,300 in 2015. Upon discovery of this error in 2016, prior to making its estimate of doubtful accounts, what correcting journal entry should JJ make? Ignore income taxes.

depreciating the remaining book value over six years.

On January 1, 2016, the Master Company purchased a machine for $36,000 that had a ten-year estimated useful life and no estimated salvage value. At the start of the seventh year of use, a new energy saving device was added to the machine that extended its original useful life an additional two years. This change in the seventh year should be accounted for by

A. Revenues are correct and expenses are understated by $5,000

Parker Company failed to accrue $5,000 of interest expense. Which of the following is correct? A. Revenues are correct and expenses are understated by $5,000. B. Expenses are overstated by $5,000 and net income is overstated by $5,000. C. Assets are correct and liabilities are overstated by $5,000. D. Liabilities are overstated by $5,000 and shareholders' equity is understated by $5,000.

C. the company can determine the effect on a prior period but does not have the resources available to make the changes

Retrospective adjustments are considered impracticable for all of the following reasons except when A. the company cannot, after reasonable effort, determine the effect on prior periods. B. retrospective adjustments depend on management's intent that cannot be independently verified. C.the company can determine the effect on a prior period but does not have the resources available to make the changes. D.significant estimates are required that cannot be objectively verified.

change in accounting principle for which the financial statements of prior periods included for comparative purposes are restated.

The Bronson Company changed its method of determining inventories from LIFO to FIFO. This change represents a

direct effect of a change in accounting principle

The amount by which a company's prior years' income is increased or decreased specifically as a result of the change in accounting principle.

indirect effect of a change in accounting principle

The amount by which the company's prior years' income is affected by how the change in accounting principle affects other elements of income.

cash and accounts payable balances

The application of GAAP in changing an accounting estimate includes all of the following except

retained earning statement as an adjustment of the opening balance.

The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current

Retrospective adjustment method

The current period's financial statements, along with any other financial statements presented, are revised as if the newly adopted principle had always been used.

company's prior year's income

The indirect effect of a change in accounting principle is the amount by which a _________________ is/are increased or decreased specifically as a result of the change in accounting principle.

beginning in the period of change.

The new estimate is incorporated into the accounting records prospectively

errors

The result of mathematical mistakes, mistakes in the application of GAAP, or the oversight or misuse of facts that existed when the financial statements were prepared.

Cumulative effect of the change in net income at the end of the period presented

What is not part of step 4 of the retroactive adjustment method?

FASB ASC 250-1045

What is the FASB for the Accounting Changes and Error Corrections?

retrospective change method

What provides a more faithful representation of financial information by presenting the effect of prior economic events and transactions in the period in which they occurred instead of the period in which an accounting change is made?

leave the error as changing it would distort prior financial statements

When a company makes a material error in a prior period it does not

only the earliest possible date from which it can be applied prospectively.

When applying retrospective adjustments, current GAAP requires the change to be applied so that it includes

in the period of the change

A company accounts for a change in a reporting entity in the notes to its financial statements

retrospective period

A company accounts for a change in reporting entity as a ________________ adjustment.

c. prepaid expense adjusted incorrectly

Which of the following is a counterbalancing error? a. understated depletion expense b. bond premium under-amortized c. prepaid expense adjusted incorrectly d. overstated depreciation expenses

c. depreciation expense overstated for the year

Which of the following is a noncounterbalancing error? a. accrued expenses not recognized at year-end b. accrued revenues that have not been collected or recognized at year-end c. depreciation expense overstated for the year d. prepaid expenses not recognized at year-end

C. If the error is found before financial statements are prepared, the company should wait until after the statements are prepared to make the correction

Which of the following is not correct? A. Errors happen in unpredictable and often illogical ways. B. Many errors are discovered automatically through proper use of the double-entry system. C. If the error is found before financial statements are prepared, the company should wait until after the statements are prepared to make the correction. D. Many errors are found by the company's internal or external auditors before being included in its financial statements.

D. Financial statements will repeat disclosures of retrospective adjustments.

Which of the following statements is false? A. A change in an accounting entity results in presenting consolidated or combined financial statements in place of the statements of individual companies. B. A company accounts for a change in a reporting entity in the notes to its financial statements in the period of the change. C. A company accounts for a change in reporting entity as a retrospective adjustment so that all the financial statements presented are for the same entity. D. Financial statements will repeat disclosures of retrospective adjustments.

C. An advantage of the prospective method is that the information in the current period is more comparable to the previously reported information.

Which of the following statements is false? A. The major advantage of a retrospective adjustment method is that it achieves comparability and consistency between accounting periods. B.In the prospective method the accounting change is accounted for in current and future periods. C. An advantage of the prospective method is that the information in the current period is more comparable to the previously reported information. D. Revising prior period financial statements may impact a company's contractual agreements.

A. An error is accounted for as a future period adjustment.

Which of the following statements is not correct? A. An error is accounted for as a future period adjustment. B. A change in an accounting principle is accounted for by the retrospective application of the new accounting principle. C. A change in an accounting estimate is accounted for prospectively. D.A change in a reporting entity is accounted for by a retrospective adjustment so that all the financial statements presented are for the same entity.

B. The disclosure requirements of IFRS for accounting changes and error corrections are considered more extensive than those required under U.S. GAAP.

Which of the following statements is not true? A. IFRS do not address when the indirect effects of a change in accounting principle should be reported nor the disclosures required. B. The disclosure requirements of IFRS for accounting changes and error corrections are considered more extensive than those required under U.S. GAAP. C. Under U.S. GAAP, indirect effects are accounted for in the current period. D. IFRS allow an impracticability exception to this requirement. If restatement is impracticable for all prior periods, the error can be corrected by restating the financial statements for the earliest period practicable (which may be the current period).

A. A change in the depreciation method is treated as a change in an estimate under GAAP.

Which of the following statements is true? A. A change in the depreciation method is treated as a change in an estimate under GAAP. B. A change in the depreciation method is treated as a change in an accounting principle. C. A change in the deprecation method is treated in the current accounting period only. D.A change in the depreciation method is adjusted in prior financial statements.