Chapter 20: Accounting Changes and Error Corrections

Which of the following are considered a change in accounting principle? (Select all that apply.)

-Adopt a new FASB standard -Change from the cost to equity method

Which of the following are acceptable reasons for an accounting change? (Select all that apply.)

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

In year 2, Rogers Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

-Year 1 ending inventory will decrease. -Year 1 net income will decrease.

For U.S. GAAP, which of the following are considered accounting changes? (Select all that apply.)

-change in accounting principle -change in reporting entity -change in accounting estimate

Which of the following is a change in accounting principle?

Change the method of inventory

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.

Credit retained earnings. Debit sales revenue.

In year 1, Regal Corp. purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense in year 1 and year 2. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3 assuming straight line depreciation?

Debit retained earnings $20,000.

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

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 entity

Change in accounting estimate

Revision of an amount due to new information or new experience

A prior period adjustment is

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

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

change in accounting estimate

A change in depreciation method is treated as a

change in estimate achieved by a change in accounting principle.

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.

If a company discovers an error in previously issued financial statements, it must

restate the financial statements

The term "prior period adjustment" is used for

the correction of an error

In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? (Select all that apply.)

-Credit retained earnings $10,000. -Debit inventory $10,000.

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 -Cost of goods sold -Net income

Which of the following is a change in accounting estimate?

Change in actuarial calculations pertaining to pension plan.

Which of the following is a change in accounting estimate achieved by a change in accounting principle?

Change in depreciation methods.

Change in reporting entity

Consolidate a subsidiary not previously included in consolidated financial statements

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

An error in which of the following accounts typically does not self-correct?

Land

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

Prospective application

If a company changes its inventory method, what financial statement accounts are affected? (Select all that apply.)

-Cost of goods sold -Inventory

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

-Year 1 retained earnings will increase. -Year 1 net income will increase.

Candy changes inventory methods in year 2, resulting in a $20,000 increase to beginning inventory in year 2. The tax rate is 40%. The journal entry required to record the change in accounting principles will require (Select all that apply.)

-debit to inventory for $20,000 -credit to retained earnings for $12,000

Change in accounting principle

Change from one generally accepted method to another generally accepted method of accounting

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

A voluntary accounting change can be made only if it is justified as bein _____ to the previous method.

Preferred/preferable

Which of the following errors typically do not self-correct?

Recording equipment purchased in the land account

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

What is the approach used for an error correction?

Restatement of previous years' financial statements

A change in ______ relates to a change in method of accounting for an item, whereas a change in ______ arises from a new calculation due to new information or new experience.

accounting principle; accounting estimate

Kroft changes inventory methods in year 2, resulting in a $10,000 increase to beginning inventory in year 2. The tax rate is 30%. The journal entry required to record the change in accounting principles will require a

credit to retained earnings for $7,000. -If beginning inventory is increased, ending inventory in the previous year is also increased. Cost of goods sold in previous years decreased, resulting in higher income. $10,000 x (1 - 30% tax rate) = $7,000 total increase to retained earnings, and a credit is made to retained earnings to adjust the beginning retained earnings.

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

in the beginning balance of retained earnings for the earliest year presented for the years prior to that date

A voluntary accounting principle change:

must be justified as being preferable

Accounting changes include changes in accounting _____, in accounting _____, and in reporting entity.

principle; estimate

Accounting changes include changes in

principles, estimates, or entities

An addition to 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

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

Changes in related economic conditions

Which of the following are considered a change in reporting entity? (Select all that apply.)

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

Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following entries?

-Credit inventory $100,000 -Debit equipment $100,000

Which of the following errors would self-correct in the following year? (Select all that apply.)

-Miscounting ending inventory. -Failure to accrue salaries in the current year.

Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

-Overstate net income $10,000. -Overstate assets $10,000

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. -Restate previous years' financial statements that are incorrect. -Disclose the nature of the error and the impact of the error on net income.

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

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? (Select all that apply.)

-Retained earnings is adjusted for the earliest period presented. -The adjusted net income for each year is shown on the retained earnings statement for that year.

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? (Select all that apply.)

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

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

In year 1, Clark Corp. failed to record an entry to record a sale on account. In year 2, Clark recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would be

debit sales revenue; credit retained earnings.

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3?

Credit retained earnings $60,000 -Repair expense is overstated in year 1 by $100,000. Depreciation expense is understated in years 1 and 2 by $40,000 ($20,000 each year). Therefore, the adjustment to retained earnings is to increase retained earnings by $60,000 ($100,000 - $40,000).

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 -expense overstated by $100,000 less the omitted depreciation expense of $10,000

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 Appraoch

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?

-Retained earnings -Cost of goods sold -Income tax payable -Inventory

Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? (Select all that apply.)

-retained earnings -depreciation expense -total fixed assets

Which of the following are changes in accounting estimates? (Select all that apply.)

-Change in estimate of periods benefited by intangible asset -Change in useful life of a depreciable asset

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? (Select all that apply.)

-inventory -net income -cost of goods sold

Which of the following errors will self-correct?

Miscounting ending inventory at the end of the year