Intermediate Accounting 2 - Chapter 20 - Changes & Error Corrections

For U.S. GAAP, which of the following are considered accounting changes?

- Change in accounting estimate - Change in reporting entity - Change in accounting principle (change in reporting period is a type of tax change)

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.

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

- Restate previous years' financial statements that are incorrect. - Prepare a journal entry to correct the error. - Disclose the nature of the error and the impact of the error on net income.

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

Changes in related economic conditions

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.

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 Reason: Beginning inventory of year 2 (closing inventory of year 1) has decreased, resulting in increase of COGS and decrease of Net income of year 1. Thus EPS decreased

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 Reason: Year 1 the entire $100,000 was expensed. Year 2 should have had a depreciation deduction of $10,000.

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

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

Which of the following are considered a change in reporting entity?

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

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

Prospective

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

Prospective approach

What is the approach used for an error correction?

Restatement of previous years' financial statements

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? y.)

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

Which of the following are acceptable reasons for an accounting change?

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

A prior period adjustment is

an addition or reduction in the beginning balance of retained earnings due to an error correction.

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.

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

change in accounting estimate.

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.

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.)

earnings per share net income cost of goods sold

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

Accounting changes include changes in

principles, estimates, or entities.

An addition or reduction of the beginning balance of retained earnings is referred to as a(n) ______ _______ adjustment

prior period

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

prospective

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

prospective

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.

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.

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

Prospective application

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