Deck 22: Accounting for Changes and Errors

Question 1

Generally accepted methods of accounting for a change in accounting principle include

A) restating prior years' financial statements presented for comparative purposes.
B) including the cumulative effect of the change in current period net income.
C) prospective changes.
D) making a prior period adjustment.

Answer 1

A

Question 2

Which of the following accounting changes is always accounted for prospectively?

A) change in accounting estimate
B) change in reporting entity
C) change in accounting principle
D) correction of an error

Answer 2

A

Question 3

A change in a reporting entity is accounted for by a prospective adjustment so that all financial statements are presented for the same entity.

Answer 3

False

Question 4

When a company makes a change in accounting estimate, the company must disclose in the notes the effect of the change in its income from continuing operations.

Question 5

A change in accounting principle because an Accounting Standard Update has been issued and the former principle is no longer generally accepted is treated under the prospective method.

Question 6

A conglomerate corporation must make retrospective adjustments to account for a material change in reporting entity every year that it adds a new subsidiary or sells off a formerly owned subsidiary.

Question 7

Which of the following statements does not properly state a basic principle for reporting an accounting change?

A) retrospectively apply a change in accounting principle
B) prospectively account for a change in accounting estimate
C) retrospectively adjust for a change in reporting entity
D) retrospectively apply a change in accounting estimate

Question 8

An advantage of retrospective adjustment method is that it achieves comparability and consistency between accounting periods.

Question 9

Sometimes a change in estimate and a change in accounting principle are undistinguishable therefore a company should account for the change as a change in accounting principle.

Question 10

The FASB requires the use of the retrospective adjustment method because it provides financial statement users with more useful information when accounting for a change in accounting principles.

Question 11

Every correction of an error that requires restatement of prior year financial statements requires a journal entry to increase or decrease the beginning balance of Retained Earnings.

Question 12

The accounting changes identified by current GAAP include all of the following except

A) change in correction of an error.
B) change in accounting principle.
C) change in accounting estimate.
D) change in reporting entity.

Question 13

Which statement concerning accounting for accounting changes and errors is false?

A) An error is accounted for retrospectively.
B) A change in accounting principle is accounted for prospectively.
C) A change in accounting principle may be accounted for retrospectively.
D) A change in accounting estimate is accounted for prospectively.

Question 14

The effect of a prior period adjustment made to correct an error is similar to a retrospective adjustment required for a change in accounting principle.

Question 15

Correction of an error involves corrections to reported financial statements similar to changes in estimates.

Question 16

A change in accounting estimate does not result in a retrospective adjustment to previously issued financial statements.

Question 17

A change in accounting entity is limited to presenting consolidated or combined financial statements in place of individual statements or a change in the subsidiaries that make up a group of companies in which one would report either as consolidated financial statements or changing the mix of companies included in the financial statements.

Question 18

A company accounts for a change in reporting entity as a prospective adjustment so that all the financial statements are presented for the same entity.

Question 19

An example of a change in accounting principle is the change from the direct method of accounting for uncollectable accounts to the aging-of-receivables method.

Question 20

A counterbalancing error will automatically correct itself in the next accounting period even if it is never discovered.

Question 21

Which of the following is an example of a change in accounting principle that is accounted for retrospectively?

A) an Accounting Standards Update has been issued and a former principle is no longer generally accepted
B) initial adoption of a generally accepted accounting principle because of events or transactions occurring for the first time
C) change to a generally accepted accounting principle from a principle that is not generally accepted
D) modification of an accounting principle for transactions or events that are clearly different in substance from those previously occurring

Question 22

A retrospective adjustment requires a change in the

A) prior period financial statements to look like the current period financial statements.
B) current period income to reflect the cumulative effect of new method.
C) prior period financial statements to reflect how they would have been presented had the new method been used in prior periods.
D) current period accounts in the financial statements to what they would have been had the previous method been used in the current period.

Question 23

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

A) change in accounting estimate that should be treated prospectively.
B) change in accounting principle that should be treated prospectively.
C) change in accounting estimate for which the financial results of previous years are restated.
D) change in accounting principle for which the financial statements of prior periods included for comparative purposes are restated.

Question 24

Generally accepted methods of accounting for a change in accounting principle include

A) restating prior years' financial statements presented for comparative purposes.
B) including the cumulative effect of the change in net income.
C) prospective changes.
D) making a prior-period adjustment.

Question 25

When changing from LIFO to FIFO, the least likely result would be

A) disclosing an increase in the inventory balance.
B) disclosing an increase in the deferred taxes account.
C) removing the LIFO reserve.
D) obtaining a tax refund from the IRS.

Question 26

The mandatory adoption of a new accounting principle as a result of a new FASB statement requires

A) footnote disclosure only.
B) a cumulative effect adjustment.
C) retrospective adjustment.
D) prospective restatement.

Question 27

Disclosure of a retrospective adjustment should include

A) why the new principle is preferable.
B) the net impact on assets of the retrospective adjustment.
C) the retrospective computation of earnings per share only for the current period.
D) ending balance in Retained Earnings before and after the retrospective adjustment.

Question 28

A change in accounting principle from one that is not generally accepted to one that is generally accepted should be treated as

A) an error and corrected by prior period adjustment.
B) a change in accounting principle and the cumulative effect included in net income.
C) a change in accounting principle and prior period financial statements are restated.
D) a change in accounting principle and adjustments made prospectively.

Question 29

Arguments in favor of the retrospective application method include

A) the adjustments to be made when reading the financial statements are easier to determine.
B) a company's current years earnings should not be penalized decreased) by events beyond the control of company's management.
C) all financial statements presented at a given date are consistent.
D) evaluating financial statements is easier when all principles used are known by the reader.

Question 30

Prospective adjustments are expected to

A) impact financial statements of only previous years.
B) impact financial statements of previous years and current years as if the accounting principle had always been used.
C) produce no impact on the financial statements of previous years.
D) impact the financial statements of the current year only.

Question 31

Change in an accounting principle is accounted for

A) prospectively.
B) by a prior period adjustment.
C) by a retrospective application of a new accounting principle.
D) by constructive application of a new accounting principle.

Question 32

The Jack Company began its operations on January 1, 2016, and used the LIFO method of accounting for its inventory. On January 1, 2018, Jack Company adopted FIFO in accounting for its inventory. The following information is available regarding cost of goods sold for each method: LIFO Cost of FIFO Cost of
Year Goods Sold Goods Sold
2016 $470,000 $350,000
2017 690,000 450,000
2018 700,000 540,000
Assuming a tax rate of 35% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in opening retained earnings on the 2018 financial statements?

A) +$360,000 restatement
B) +$234,000 restatement
C) -$700,000 restatement
D) no restatement

Question 33

A change from LIFO to FIFO should be accounted for

A) by footnote disclosure only.
B) prospectively only.
C) currently and prospectively.
D) retrospectively.

Question 34

Retrospective adjustments are expected to

A) impact financial statements of only previous years.
B) impact financial statements of previous years and current years as if the accounting principle had always been used.
C) produce no impact on the financial statements of previous years.
D) produce no impact on the financial statements of the current year.

Question 35

When making a retrospective adjustment, all of the following steps are included except

A) computing the cumulative effect of the new accounting principle as of the beginning of the first period presented.
B) adjusting the current period net income for the cumulative effect of the change.
C) adjusting the carrying value of impacted assets and liabilities.
D) disclose the nature and reason for the change in accounting principle, including the new principle is preferable.

Question 36

Disadvantages of using the retrospective application method do not include which of the following?

A) Numbers must be changed on previously released financial statements.
B) The cost of determining the effect of the change may be greater than the benefits obtained from the increase in comparability.
C) It has possible impacts on contractual arrangements.
D) All financial statements consistently apply the same revenue recognition principles.

Question 37

In situations where the change in accounting principle has both direct and indirect effects on prior years' income, GAAP states that a company recognize

A) only the direct effect retrospectively.
B) the direct effect and discuss the indirect effect in the notes to the financial statements.
C) only the indirect effect.
D) the direct effect prospectively.

Question 38

When disclosing the impact of a retrospective adjustment for the change from LIFO to FIFO in 2017, which of the following impacts is not expected to be reported in the comparative financial statements when two-year comparative statements are presented?

A) impact on beginning inventory for 2016
B) impact on 2016 net income
C) impact on ending inventory for 2017
D) impact on cost of goods sold for 2016

Question 39

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

A) increases the relevance of the financial statements.
B) increases the reliability of the financial statements.
C) is preferable to the old principle.
D) increases the transparency of the financial statements.

Question 40

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

A) only the years disclosed in the currently published financial statements.
B) all possible years.
C) only the earliest possible date from which it can be applied prospectively.
D) retroactive application for up to two years and prospective application for the remainder of the periods.

Question 41

Which of the following should be reported as a change in accounting estimate?

A) change in the reported beginning inventory amount due to a discovery of a bookkeeping error
B) increase in bad debt rate applied to net sales
C) change from completed-contract method to the percentage-of-completion for revenue recognition
D) change made to comply with a new FASB pronouncement

Question 42

Which of the following items would not be accounted for under current GAAP as a change in estimate?

A) an increase in the expected life of a piece of manufacturing equipment
B) a decrease in the estimated residual value of a delivery van
C) a change from FIFO to LIFO for a small subsidiary
D) an increase in defective items for the best selling video game

Question 43

Lilly Company has been depreciating equipment for 10 years with an estimated total useful life of 25 years. Lilly has revised the estimated life to be only 17 years, with 7 years remaining in the asset's useful life. What is the appropriate action that Lilly should do now?

A) record a change in estimate by recomputing depreciation of prior periods and restating prior period financial results accordingly
B) record a change in estimate by recomputing depreciation of prior periods and presenting the net depreciation adjustment as a cumulative effect change in accounting principle in the current period
C) continue to depreciate the equipment over the original 25-year life
D) depreciate the remaining book value over the remaining 7 years of the asset's useful life

Question 44

A change in accounting estimate affected by a change in accounting principle should be reported as

A) a change in accounting principle.
B) a change in accounting estimate and a change in accounting principle.
C) a change in accounting estimate.
D) neither a change in accounting estimate nor a change in accounting principle.

Question 45

Refer to Exhibit 22-1. Assuming an income tax rate of 35%, what is the amount of cumulative effect change reported in Chrissy's 2018 income statement ?

A) $0
B) $77,000
C) $93,333
D) $110,000

Question 46

Refer to Exhibit 22-3. If the revised estimated useful life of the truck is a total of seven years, and assuming an income tax rate of 35%, what is the amount of the prior-years effect that Katrina should report in its 2017 income statement as a result of changing the useful life of the truck?

A) $0
B) $5,600
C) $16,800
D) $58,800

Question 47

Refer to Exhibit 22-2. what is the amount of the adjusting entry that should be made on January 1, 2019?

A) $6,000
B) $3,600
C) $2,400
D) $0

Question 48

On January 1, 2016, Margo Company acquired machinery at a cost of $160,000. This machinery was being depreciated by the double-declining-balance method over an estimated life of five years with no salvage value. At the beginning of 2018, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. What is the amount of depreciation expense to be included in 2018 net income?

A) $7,200
B) $24,000
C) $19,200
D) $38,400

Question 49

Which of the following is the proper time period in which to record a change in accounting estimate?

A) current period and future periods
B) current period and retroactively
C) retroactively only
D) current period only

Question 50

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

A) correction of an accounting error.
B) change in accounting principle.
C) change in accounting estimate.
D) change in accounting estimate effected through a change in accounting principle.

Question 51

A change in accounting estimate is always accounted for

A) using a prior period adjustment.
B) retrospectively.
C) using the cumulative effect method.
D) prospectively.

Question 52

Refer to Exhibit 22-2. Accordingly, the appropriate accounting change was made in 2019. How much depreciation expense for this machine should Nathan record for the year ended December 31, 2019?

A) $4,200
B) $5,250
C) $7,000
D) $0

Question 53

Betty Company began operations in 2016 and uses the average cost method in costing its inventory. In 2017, Betty is investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect such a change will have on net income. Betty has compiled the following information: $\begin{array}{lrr}&2016&2017\\\hline\text { Ending Inventory using: } \\\text { Average cost } & \$ 180,000 & \$ 200,000 \\\text { LIFO } & \$ 180,000 & 110,000 \\\text { Net income (computed using the average- } & & \\\text { cost method) } & 120,000 & 170,000\end{array}$ Assume a 40% tax rate.
If Betty adopted LIFO in 2017, net income would be

A) $80,000.
B) $116,000.
C) $170,000.
D) $224,000.

Question 54

Current GAAP requires a company to account for a change in accounting estimate that impacts multiple periods during

A) the period of change.
B) the period of change and future periods.
C) the period of change and past periods.
D) the period of change, past periods, and future periods.

Question 55

When a change in method is inseparable from a change in estimate, the change is accounted for

A) prospectively.
B) by the retrospective adjustment or restatement.
C) by a retrospective application of a new accounting principle.
D) by constructive application of a new accounting principle.

Question 56

Brockmeyer, Inc. purchased some equipment on January 1, 2016, for $300,000 that had a five-year useful life and no salvage value. Brockmeyer used double-declining-balance depreciation for both financial reporting and income tax purposes. On January 1, 2018, Brockmeyer changed to the straight-line depreciation method for this equipment and can justify the change. Brockmeyer will continue to use double-declining balance depreciation for income tax reporting. Brockmeyer's income tax rate is 30%. Assuming Brockmeyer's 2018 income before depreciation and tax is $800,000, what is the amount of Brockmeyer's net income for 2018?

A) $534,800
B) $570,800
C) $764,000
D) $800,000

Question 57

Refer to Exhibit 22-1. Assuming an income tax rate of 35%, what is the amount of depreciation expense related to the equipment reported in Chrissy's 2018 income statement?

A) $124,000
B) $100,750
C) $140,000
D) $155,000

Question 58

On January 1, 2016, Roy Company acquired equipment at a cost of $500,000. Roy used the double-declining-balance method to depreciate the equipment with a ten-year life and no salvage value. On January 1, 2018, Roy changed to straight-line depreciation for this equipment, and the IRS accepted this change as being eligible as a change in accounting estimate with prospective treatment. Assuming an income tax rate of 30%, what is the amount of the restatement of January 1, 2018 retained earnings?

A) $0
B) $54,800
C) $62,640
D) $82,100

Question 59

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) including the cumulative effect of the change in net income for the current period.
B) depreciating the remaining book value over four years.
C) retroactively adjusting income of prior periods using the newly adjusted useful life.
D) depreciating the remaining book value over six years.

Question 60

The Max Company began its operations on January 1, 2016, and used an accelerated method of depreciation for its machinery and equipment. On January 1, 2018, Max adopted the straight-line method of depreciation. The following information is available regarding depreciation expense for each method: $$\begin{array} { l r r } \text { Year } & \begin{array} { r } \text { Accelerated } \\\text { Depreciation }\end{array} & \begin{array} { r } \text { Straight-line } \\\text { Depreciation }\end{array} \\\hline2016 & \$ 175,000 & \$ 150,000 \\2017 & 200,000 & 180,000 \\2018 & 245,000 & 230,000\end{array}$$ What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2018, due to changing to a different depreciation method?

A) $0
B) a decrease of $45,000
C) an increase of $45,000
D) an increase of $60,000

Question 61

Lavender Company purchased a machine on January 1, 2016, for $80,000. The machine has an estimated useful life of 5 years with a salvage value of $10,000. It is being depreciated using the straight-line method. On January 1, 2018, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years for a total of 7 years) and have no salvage value at the end of its useful life. What is the amount of depreciation expense related to this machine for the year ended December 31, 2018?

A) $14,000
B) $10,400
C) $8,400
D) $7,430

Question 62

Walter Co. made the following errors in 2016: · Ending inventory was overstated by $2,000.
· Beginning inventory was understated by $6,000.
· Purchases were overstated by $3,000.
Reported net income was $20,000. What is the correct amount of 2016 net income?

A) $19,000
B) $21,000
C) $15,000
D) $4,000

Question 63

On December 31, 2016, the Maggie Company recognized $15,000 in revenue from rent of $5,000 due in 2017 and $10,000 due in 2018, all collected in advance from another company. Ignoring income taxes, if this error is not detected

A) Retained Earnings at December 31, 2017, will be overstated by $10,000.
B) Retained Earnings at December 31, 2017, will be understated by $10,000.
C) Retained Earnings will be overstated by $15,000 until the error is discovered.
D) Retained Earnings at December 31, 2017, will be understated by $15,000.

Question 64

A company accounts for the correction of a material error of a past period that it discovers in the current period as

A) a retrospective accounting change.
B) an adjustment to the current period.
C) a prospective adjustment.
D) a prior period restatement.

Question 65

A company changes from capitalizing and amortizing preproduction costs to recording them as an expense when incurred, because future benefits associated with those costs have become doubtful. This accounting change should be recognized as a

A) change in accounting estimate.
B) change in accounting principle.
C) change in reporting entity.
D) correction of an error.

Question 66

Refer to Exhibit 22-3. If the revised estimated useful life of the truck is a total of eight years, what is the amount of depreciation expense that Katrina should report in its 2017 income statement?

A) $14,000
B) $16,000
C) $17,500
D) $28,000

Question 67

Bethany Corp. reported $80,000 of net income for 2016. The following errors were then discovered: · Ending 2016 accrued expense was overstated by $2,000.
· 2016 earned revenue was overstated by $3,000.
· Ending 2016 prepaid expense was overstated by $500.
Ignoring income taxes, what is the correct amount of 2016 net income?

A) $85,500
B) $84,500
C) $78,500
D) $76,500

Question 68

On January 1, 2016, Tessa loaned $12,000 to another company on a three-year, 4% note. No interest was accrued in
2016. Cash will not be received for the interest until the end of the three-year period. The error was discovered before adjusting and closing entries were posted on December 31, 2017. Ignoring income taxes, what should be the correct journal entry on December 31 $$\begin{array} { l c c } \text { a. Interest Receivable } & 480 & \\\quad \text { Retained Earnings } & & 480 \\\text { b. Interest Receivable } & 960 & \\\quad \text { Interest Revenue } & & 960 \\\begin{array} { c c c } \text { c. Interest Receivable }\end{array} & 480 & \\\quad \text { Interest Revenue } & & 480 \\\text { d. Interest Receivable } & 960 & \\\quad \text { Interest Revenue } & & 480 \\\text { Retained Earnings } & & 480\end{array}$$

Question 69

An understatement of reported net income for the current year would result from

A) an overstatement of ending inventory in the previous period.
B) an overstatement of ending inventory in the current period.
C) failure to record accrued payroll liabilities.
D) failure to record expiration of prepaid insurance.

Question 70

All of the following are considered to be changes in accounting entities that require retrospective restatement of past financial statements except

A) there is a change in the specific subsidiaries that make up the group of companies that are consolidated when financial statements are presented.
B) consolidated or combined statements are presented in place of the statements of individual companies.
C) the companies included in the combined financial statements change.
D) a company acquires a trademark and changes the name of its business operations.

Question 71

Eliza Company discovered the following errors in 2016: · Ending inventory at December 31, 2015, was understated by $2,000.
· Accrued expenses of $3,000 were not recorded at December 31, 2015.
Eliza reported net income of $45,000 for the year 2015. What is the amount of the corrected net income ignoring income taxes) for 2015?

A) $45,000
B) $40,000
C) $46,000
D) $44,000

Question 72

If consolidated statements are presented for the first time instead of statements of several individual companies, this change should be accounted for

A) retrospectively.
B) prospectively.
C) by cumulative effect adjustment.
D) by footnote disclosure only.

Question 73

Margaret Company purchased equipment on January 1, 2014, for $500,000. At the date of acquisition, the equipment had an estimated useful life of eight years with a $50,000 salvage value, and it was depreciated using the straight-line method. On January 1, 2019, based on updated information, Margaret decided that the equipment had a total estimated life of ten years and no salvage value. What is the amount of depreciation expense on the equipment in 2019?

A) $56,250
B) $45,000
C) $21,875
D) $43,750

Question 74

During 2018, Dragon Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and a salvage value of $50,000. The equipment was acquired on January 1, 2016 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2018 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change if any) for the year ended December 31, 2018, was $180,000. What is the amount of Dragon's net income for 2018?

A) $80,000
B) $67,500
C) $56,000
D) $47,250

Question 75

Which of the following errors normally would not be automatically corrected over two accounting periods?

A) failure to record prepaid revenue
B) failure to record accrued payroll liabilities
C) failure to record depreciation expense
D) failure to count inventory in transit at year-end

Question 76

Which of the following accounting treatments is proper for a change in reporting entity?

A) restatement of all financial statements presented
B) restatement of current period financial statements
C) note disclosure and supplementary schedules
D) adjustment to retained earnings and note disclosure

Question 77

The correct 2016 net income for Magness Company, after error corrections, was $56,000. Two errors were found after net income was first reported. The January 1, 2016 inventory and the December 31, 2016, inventory were overstated by $5,000 and $10,000, respectively. What is the amount of the net income that must have been originally reported?

A) $41,000
B) $66,000
C) $71,000
D) $61,000

Question 78

Which of the following errors will normally result in overstatement of 2017 net income?

A) failure to record merchandise purchases in 2016
B) understatement of 2016 ending merchandise inventory
C) failure to record accrued salaries expense in 2016
D) overstatement of prepaid expense in 2016

Question 79

An understatement of reported net income for the current year may result from

A) an understatement of beginning inventory in the previous period.
B) an overstatement of ending inventory in the current period.
C) failure to record accrued payroll liabilities.
D) failure to record accrued interest revenue.

Question 80

Leah Co. reported $7,000 of net income for 2016. The following errors were then discovered: · Ending 2015 accrued expense was understated by $800.
· Ending 2016 unearned revenue was overstated by $75.
· Ending 2015 unearned revenue was overstated by $380.
Ignoring income taxes, what is the correct amount of 2016 net income?

A) $6,505
B) $5,895
C) $7,495
D) $6,655