ch. 21

On August 31 of the current​ year, Harvey Co. decided to change from the FIFO periodic inventory system to the​ weighted-average periodic inventory system. Harvey uses U.S. GAAP​, is on a calendar year​ basis, and does not present comparative financial statements. The cumulative effect of the change is​ determined:

As of January 1 of the current year

A firm may choose to apply indirect effects of an accounting principle change either prospectively or retrospectively.

FAlse

Mandatory accounting changes require retrospective application of the new accounting standard.

False

Prior​ years' financial statements are restated for changes in material accounting estimates.

False

Many errors are due to misapplication of accounting policies.

True

John Pickens writes mystery novels. His publisher pays him royalties for the number of books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received​ $42,000 in​ September, 2018. The publisher estimated that his royalties for the second half of the year would be​ $53,000. On March​ 31, 2019, he received​ $57,500. Assuming that he recorded​ $53,000 in royalties at December​ 31, 2018, how would you account for this​ change?

as a change in estimate

​Energy, Inc began operations in 2018 using LIFO inventory methods. In​ 2019, management decided they should have chosen FIFO. The beginning inventory for 2019 using LIFO was​ $128,000. Under the FIFO​ method, the beginning inventory would have been​ $157,000. The adjustment to inventory for the change in accounting principle for 2019 would be​ ________.

$29,000 debit

Balance sheet errors are typically the result of misclassification of accounts in the process of recording a transaction and require correction upon discovery.

True

Tarleton Company discovered ending inventory errors in 2017 and 2018. The 2017 ending inventory was overstated by $260,000 whereas the 2018 ending inventory was understated by $115,000. Ignoring income tax​ effects, by what amount should the beginning retained earnings be adjusted on January​ 1, 2019?

$115,000 credit

Johnston Controls began operation in 2017 using FIFO inventory methods. In​ 2018, management decided they should have chosen LIFO to more accurately portray financial position and performance. The beginning 2018 inventory using FIFO was $ 180 comma 000$180,000. Under the LIFO method the beginning inventory would have been $ 195 comma 000$195,000. The adjustment to inventory for the accounting principle change for 2017 would be​ ________.

0

Humphrey Contractors purchased customized equipment in​ January, 2017 for​ $620,000. The manufacturer warranted the equipment for six years. Humphrey used double−declining balance depreciation with a useful life of eight years and no salvage value. After two full​ years, he now believes that the equipment will only last a total of five years. Compute his depreciation expense for 2019 if he switches to straight−line depreciation.​

116,250

Peoples Corporation purchased a building on December​ 29, 2014 that cost​ $1,400,000 and occupied it on January​ 2, 2015. The owner estimated that the building would last 40 years with a salvage value of​ $150,000 using straight−line depreciation. In early​ 2018, Mr. Peoples learned that due to a permanent highway​ closure, the company needs to relocate at the end of 2020. He believes that the salvage value of the building at that time will be​ $800,000. Compute the amount of depreciation to record during​ 2018, and each of the two years thereafter

168,750

Miller Manufacturing purchased a packaging machine for​ $300,000 on January​ 2, 2015. The seller assumed that the machine would be functional for at least five years with no salvage value. In​ 2018, Miller decided that the machine would last an additional five years with a salvage value of​ $25,000. The company uses straight−line depreciation for all assets. What amount of depreciation should Miller record in 2018 and following​ years?

19,000

Emma's Clothes, Inc. has accounts receivable of​ $210,000. In the current​ economy, she has noticed an increase in uncollectible accounts. In​ 2018, her sales were​ $3,380,000 and in​ 2019, sales were​ $3,960,000. Before​ 2019, she estimated that​ 2% of sales would eventually be uncollectible. In​ 2019, Emma believes that her losses were closer to​ 3% in 2018. What should be the bad debt expense for 2018 and 2019 in the comparative income statements for 2018 and​ 2019?

2018, $67,600; 2019, $118,800

On December​ 31, Year​ 10, Brown Company changed its inventory valuation method from the​ weighted-average method to FIFO for financial statement purposes. The change will result in an​ $800,000 decrease in the beginning inventory at January​ 1, Year 10. The tax rate is​ 30%. The cumulative effect of this accounting change for the year ended December​ 31, Year​ 10, in the statement of retained earnings​ is:

560000

Jenkins, Inc. builds custom machines for manufacturers using robotic equipment. In​ 2018, the company decided to change from straight−line to double−declining balance depreciation for its robotic equipment. It changed the life expectancy as​ follows: Determine the correct amount of depreciation to expense for 2018.

590,000

Hampton's Construction, Inc. decided to change from the completed−contract method of accounting to the percentage−of−completion method. The following information is available for net income. Ignore income tax​ effects:

Construction in Progress ​ 106,000 Retained Earnings ​ 106,000

The bookkeeper for​ Phillips, Inc. mistakenly recorded a​ $300,000 one−year trade note receivable as a long−term note receivable in 2017. Interest revenue was correctly recorded. The error was discovered in 2019 by the​ company's auditors. What is the proper way to correct the​ error?

Correct the classification in 2019 retrospectively for comparative balance sheets.

Austin Motor Works declared and distributed a 6% stock dividend in 2018 when the stock was selling for $18 per share. There were 6,000,000 shares outstanding at the time of the dividend declaration. The controller recorded the distribution at par value​ ($1 per​ share) resulting in a debit to Dividends and a credit to Common Stock for $360,000. Upon review in early 2019 when the 2018 books were still​ open, the CFO made which of the following correcting​ entries?

Dividends 6,120,000 APIC in Excess of Par−Common 6,120,000

Changes in depreciation methods are changes in accounting principle that are accounted for retrospectively.

False

Fraud is a type of accounting error.

False

JAT Corp. loaned $400,000 for three years to a major supplier on July​ 1, 2017. The note stipulated 12​% interest to be paid annually each June 30. Since this was an unusual​ transaction, no one billed the supplier for the interest in 2018 or recorded the accrued interest at the year−end (December). The supplier did not send in any interest in 2018. On March​ 1, 2019, after the 2018 books were​ closed, the CFO found the error. Which one of the following is the correct journal entry to correct the errors thru March​ 1, 2019

Interest Receivable 80,000 Interest Revenue 8,000 Retained Earnings Prior−Period Adjustment 72,000

Butler Products decided to change inventory methods on January​ 1, 2020 to more effectively report its results of operations. In the​ past, management has measured its ending inventories by the average−cost method and they now believe that FIFO is a better representation of its financial position and profitability.​ Butler's tax rate is​ 35% for all years.

Inventory 125,000 Deferred Tax Liability 43,750 Retained Earnings 81,250

Butler Products decided in 2020 to change inventory methods to more effectively report its results of operations. In the​ past, management has measured its ending inventories by the average−cost method and they now believe that FIFO is a better representation of its profitability. Ignoring income​ tax, which one of the following journal entries correctly records the change in the accounting principle at January​ 1, 2020?

Inventory 54,000 Retained Earnings 54,000

At the end of​ 2017, the payroll supervisor for​ Claro, Inc. failed to accrue​ $30,100 in commissions for their outside salespersons. The cost was recorded in 2018 when the commissions were paid and Commission Expense was debited and Cash credited for the full amount. The error was not discovered until late in 2018 while reconciling years−end expense for 2018. The tax rate for both years was​ 40%. What is the proper journal entry to correct the error for​ 2018?

Retained Earnings ​ 18,060 Taxes Receivable ​12,040 Commission Expense ​30,100

​Woods, Inc. purchased a new engine for a long−distance truck in​ January, 2017. The engine cost​ $380,000 and should give the truck an additional​ 400,000 miles of life.​ Inadvertently, the engine was charged to truck repairs expense. The error was found in​ December, 2018. The company records depreciation based on miles driven with no salvage value. Miles driven in 2017 were​ 85,000 and​ 70,000 in 2018. Which one of the following entries properly corrects all the errors through December​ 31, 2018?

Truck ​ 380,000 Depreciation Expense−Truck ​(2018) ​ 66,500 Accumulated Depreciation−Truck ​147,250 Retained Earnings ​299,250

A change in the specific subsidiaries that make up the group of entities for which consolidated financial statements are presented is a change in a reporting entity.

True

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

True

Presenting consolidated statements instead of individual financial statements is a change in a reporting entity.

True

​Georgio, Inc. decided to move its business from its current location to another larger plant. Management should examine the salvage value of the building in the future and the change in the useful life to see if a change in the depreciation of the current building is warranted.

True

Langley Corporation replaced an HVAC system in one of its warehouses in​ July, 2017, at a cost of​ $410,000. The accountant recording the purchase charged it to repairs and maintenance expense. The error was discovered late in 2018 while reconciling depreciation expense for 2018. The system should last about 7 years with no salvage value. What entry should be made before the 2018 books are closed if the company uses straight−line ​depreciation?

Warehouse ​ 410,000 Depreciation Expense ​(2018)long dash—Warehouse ​ 58,571 Accumulated Depreciation minus−Warehouse ​87,857 Retained Earnings long dash—Prior Period Adjustment ​380,714

Gonzales Company purchased a machine on January​ 1, Year​ 1, for​ $600,000. On the date of​ acquisition, the machine had an estimated useful life of 6 years with no salvage value. The machine was being depreciated on a​ straight-line basis. On January​ 1, Year​ 4, Gonzales determined that the machine had an estimated life of 8 years from the date of acquisition. An accounting change was made in Year 4. What is the amount of the depreciation expense that should be recorded for the year ended Year​ 4?

60,000

In completing the adjusting entries for 2017 in early​ 2018, the internal auditor discovered that a​ patent, with an estimated eight year life that was registered in​ January, 2017 had not been amortized. The patent cost​ $440,000. The income tax rate is​ 40%. The books are still open in 2017. What is the journal entry to correct the​ error?

Amortization Expense−Patent ​ 55,000 Patent ​55,000

John Pickens writes mystery novels. His publisher pays him royalties for books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received​ $42,000 in​ September, 2018. The publisher estimated that his royalties for the second half of the year would be $55,000. On March​ 31, 2019, he received $58,000. Assuming that he recorded $55,000 at December​ 31, 2018, which one of the following is the correct journal entry on March​ 31, 2019? His tax rate is​ 35%.

Cash 58,000 Royalties Receivable 55,000 Royalty Revenue 3,000

A change in reporting entity must be treated retrospectively for a maximum of two prior years.

False

On August 31 of the current​ year, Harvey Co. decided to change from the FIFO periodic inventory system to the​ weighted-average periodic inventory system. Harvey uses IFRS and is on a​ calendar-year basis. The cumulative effect of the change is shown as an adjustment to beginning retained earnings on the balance sheet​ for:

January 1 of the prior year

During​ 2017, a​ $50,000 loss on the sale of machinery was incorrectly recorded as a factory equipment repair. The error was not discovered until the books were closed and the financial statements were issued for 2018. What adjustment is​ necessary?

Make no​ entry, but if​ $50,000 is a material​ amount, retrospectively adjust the 2017 comparative income statement.

Jett Company purchased an umbrella liability policy in​ January, 2017 and paid a five−year premium for​ $400,000. It was recorded as Insurance Expense. The error was discovered late in 2017 when the accountants were reconciling 2017 for adjusting entries. What is the proper entry to correct the error at December​ 31, 2017?

Prepaid Insurance ​ 320,000 Insurance Expense ​ 320,000

A material error is one​ that, if not​ corrected, would impact a​ user's decisions.

True

The auditor for Universal​ Tools, Inc. discovered in 2019 that the warranty liability account showed a​ $25,000 debit balance. She investigated and discovered that the 3​% estimate based on sales for warranty expense was recorded and​ understated, and it was more likely 3.5​%. Sales for 2019 were $7,000,000. What is the appropriate journal entry as a result of this​ discovery?

Warranty Expense 35,000 Warranty Liability 35,000

Accounting changes detract from which one of the following enhancing qualitative characteristics of accounting​ information?

comparability

Retrospective changes require all but which of the​ following?

detailed numerical comparisons of all prior periods to restated statements

Which one of the following might be affected by a change in revenue recognition requiring a prospective​ change?

management compensation

When a self−correcting error is discovered after closing the books for the second year​

no entry is necessary because all permanent accounts are correctly stated

Which of the following is not an estimate that might be revised as a natural part of the accounting​ process?

salary expense

When a firm has a change in reporting​ entity, it must disclose​

the effect of the change on net income and EPS for each year presented

When a company makes a change in an accounting​ principle, IFRS additionally requires a company to report​ ________.

three years of balance sheets and two years of other financial statements

There are four types of accounting changes long dash— ​principles, estimates, entities and errors.

FAlse

Accounting entity changes are handled prospectively.

False

The proper accounting treatment to account for a change in inventory valuation from FIFO to LIFO under U.S. GAAP​ is:

Prospective application