Deck 22: Accounting for Changes and Errors
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ملء الشاشة (f)
Deck 22: Accounting for Changes and Errors
1
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.
False
2
Errors affecting only the balance sheet are corrected with a journal entry and do not require a restatement of financial statements.
False
3
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
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
C
4
A change in a reporting entity is accounted for by a prospective adjustment so that all the future financial statements are presented consistently.
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5
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.
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.
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6
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.
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7
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.
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8
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
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
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9
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
A) change in accounting estimate
B) change in reporting entity
C) change in accounting principle
D) correction of an error
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10
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
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
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11
An advantage of retrospective adjustment method is that it achieves comparability and consistency between accounting periods.
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12
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
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
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13
A change in accounting estimate does not result in a retrospective adjustment to previously issued financial statements.
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14
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.
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15
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
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
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16
A counterbalancing error will automatically correct itself in the next accounting period even if it is never discovered.
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17
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.
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18
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
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
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19
The accounting changes identified by current GAAP include all of the following except
A) correction of an error
B) change in accounting principle
C) change in accounting estimate
D) change in reporting entity
A) correction of an error
B) change in accounting principle
C) change in accounting estimate
D) change in reporting entity
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20
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
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
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21
A change from LIFO to FIFO should be accounted for
A) by footnote disclosure only
B) prospectively only
C) currently and prospectively
D) retrospectively
A) by footnote disclosure only
B) prospectively only
C) currently and prospectively
D) retrospectively
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22
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
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
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23
On January 1, 2014, 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 2016, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. The depreciation expense to be included in 2016 net income was
A) $ 7,200
B) $24,000
C) $19,200
D) $38,400
A) $ 7,200
B) $24,000
C) $19,200
D) $38,400
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24
When disclosing the impact of a retrospective adjustment for the change from LIFO to FIFO in 2015, 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 2014
B) impact on 2014 net income
C) impact on ending inventory for 2015
D) impact on cost of goods sold for 2014
A) impact on beginning inventory for 2014
B) impact on 2014 net income
C) impact on ending inventory for 2015
D) impact on cost of goods sold for 2014
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25
The Max Company began its operations on January 1, 2014, and used an accelerated method of depreciation for its machinery and equipment. On January 1, 2016, Max adopted the straight-line method of depreciation. The following information is available regarding depreciation expense for each method:
What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2016, 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

What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2016, 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
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26
On January 1, 2014, 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, 2016, 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%, the restatement of January 1, 2016 retained earnings is
A) $ 0
B) $54,800
C) $62,640
D) $82,100
A) $ 0
B) $54,800
C) $62,640
D) $82,100
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27
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.
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.
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28
In cases where it is not practicable to determine the effect of applying a change in accounting principle to a prior period, GAAP requires
A) the change to be made prospectively
B) the change be made retrospectively to the earliest date practicable
C) that comparative financial statements for the present year with and without the change in accounting principle be shown
D) a and b
A) the change to be made prospectively
B) the change be made retrospectively to the earliest date practicable
C) that comparative financial statements for the present year with and without the change in accounting principle be shown
D) a and b
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29
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
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
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30
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
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
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31
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
A) footnote disclosure only
B) a cumulative effect adjustment
C) retrospective adjustment
D) prospective restatement
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32
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
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
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33
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
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
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34
The Jack Company began its operations on January 1, 2014, and used the LIFO method of accounting for its inventory. On January 1, 2016, Jack Company adopted FIFO in accounting for its inventory. The following information is available regarding cost of goods sold for each method:
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 2016 financial statements?
A) +$360,000 restatement
B) +$234,000 restatement
C) no restatement
D) ($700,000) restatement

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 2016 financial statements?
A) +$360,000 restatement
B) +$234,000 restatement
C) no restatement
D) ($700,000) restatement
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35
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
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
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36
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
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
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37
Betty Company began operations in 2014 and uses the average cost method in costing its inventory. In 2015, 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:

Assume a 40% tax rate.
If Betty adopted LIFO in 2015, net income would be
A) $ 80,000
B) $116,000
C) $170,000
D) $224,000

Assume a 40% tax rate.
If Betty adopted LIFO in 2015, net income would be
A) $ 80,000
B) $116,000
C) $170,000
D) $224,000
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38
Exhibit 22-1 On January 1, 2014, the Chrissy Company purchased a machine for $450,000 with an estimate useful life of six years and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and MACRS depreciation for income tax reporting. Effective January 1, 2016, Chrissy switched to the double-declining-balance depreciation method for financial statement reporting but not for income tax purposes. Chrissy can justify the change.
-Refer to Exhibit 22-1. Assuming an income tax rate of 35%, the cumulative effect change reported in Chrissy's 2016 income statement would be
A) $ 0
B) $ 77,000
C) $ 93,333
D) $110,000
-Refer to Exhibit 22-1. Assuming an income tax rate of 35%, the cumulative effect change reported in Chrissy's 2016 income statement would be
A) $ 0
B) $ 77,000
C) $ 93,333
D) $110,000
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39
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
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
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40
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
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
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41
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
A) using a prior period adjustment
B) retrospectively
C) using the cumulative effect method
D) prospectively
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42
On January 1, 2014, 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 should be accounted for in the seventh year 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
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
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43
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
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
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44
An item that would not be accounted for under current GAAP as a change in estimate would be
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
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
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45
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
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
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46
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
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
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47
Lavender Company purchased a machine on January 1, 2014, 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, 2017, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years (for a total of 7 1/2 years) and have no salvage value at the end of its useful life. Depreciation expense for the year ended December 31, 2017, related to this machine would be
A) $14,000
B) $10,400
C) $ 6,933
D) $ 8,167
A) $14,000
B) $10,400
C) $ 6,933
D) $ 8,167
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48
Brockmeyer, Inc. purchased some equipment on January 1, 2014, 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, 2016, 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 2016 income before depreciation and tax is $800,000, Brockmeyer's net income for 2016 would be
A) $534,800
B) $570,800
C) $764,000
D) $800,000
A) $534,800
B) $570,800
C) $764,000
D) $800,000
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49
Exhibit 22-3 Katrina Company acquired a truck on January 1, 2014, for $140,000. The truck had an estimated useful life of five years with no salvage value. Katrina used straight-line depreciation for the truck. On January 1, 2015, Katrina revises the estimated useful life of the truck. Katrina made the accounting change in 2015 to reflect the extended useful life.
-Refer to Exhibit 22-3. If the revised estimated useful life of the truck is a total of eight years, Katrina should report in its 2015 income statement depreciation expense of
A) $14,000
B) $16,000
C) $17,500
D) $28,000
-Refer to Exhibit 22-3. If the revised estimated useful life of the truck is a total of eight years, Katrina should report in its 2015 income statement depreciation expense of
A) $14,000
B) $16,000
C) $17,500
D) $28,000
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50
Exhibit 22-1 On January 1, 2014, the Chrissy Company purchased a machine for $450,000 with an estimate useful life of six years and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and MACRS depreciation for income tax reporting. Effective January 1, 2016, Chrissy switched to the double-declining-balance depreciation method for financial statement reporting but not for income tax purposes. Chrissy can justify the change.
-Refer to Exhibit 22-1. Assuming an income tax rate of 35%, depreciation expense related to the equipment reported in Chrissy's 2016 income statement would be
A) $124,000
B) $100,750
C) $140,000
D) $155,000
-Refer to Exhibit 22-1. Assuming an income tax rate of 35%, depreciation expense related to the equipment reported in Chrissy's 2016 income statement would be
A) $124,000
B) $100,750
C) $140,000
D) $155,000
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51
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
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
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52
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
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
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53
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
A) current period and future periods
B) current period and retroactively
C) retroactively only
D) current period only
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54
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. Lilly should
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
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
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55
Margaret Company purchased equipment on January 1, 2012, 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, 2017, based on updated information, Margaret decided that the equipment had a total estimated life of ten years and no salvage value. Depreciation expense on the equipment in 2017 should be
A) $56,250
B) $45,000
C) $21,875
D) $43,750
A) $56,250
B) $45,000
C) $21,875
D) $43,750
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56
Exhibit 22-2 On January 1, 2015, Nathan, Inc. purchased a machine for $56,000. Eight-year, straight-line depreciation with no salvage value was used through December 31, 2016. On January 1, 2017, it was estimated that the total useful life of the machine from acquisition date was ten years.
-Refer to Exhibit 22-2. Accordingly, the appropriate accounting change was made in 2017. How much depreciation expense for this machine should Nathan record for the year ended December 31, 2017?
A) $4,200
B) $5,250
C) $7,000
D) $ 0
-Refer to Exhibit 22-2. Accordingly, the appropriate accounting change was made in 2017. How much depreciation expense for this machine should Nathan record for the year ended December 31, 2017?
A) $4,200
B) $5,250
C) $7,000
D) $ 0
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57
During 2016, 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, 2014 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2016 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Assuming 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, 2016, was $180,000, Dragon's net income for 2016 should be
A) $80,000
B) $67,500
C) $56,000
D) $47,250
A) $80,000
B) $67,500
C) $56,000
D) $47,250
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58
Exhibit 22-2 On January 1, 2015, Nathan, Inc. purchased a machine for $56,000. Eight-year, straight-line depreciation with no salvage value was used through December 31, 2016. On January 1, 2017, it was estimated that the total useful life of the machine from acquisition date was ten years.
-Refer to Exhibit 22-2. The adjusting entry that should be made on January 1, 2017, will be in the amount of
A) $6,000
B) $3,600
C) $2,400
D) $ 0
-Refer to Exhibit 22-2. The adjusting entry that should be made on January 1, 2017, will be in the amount of
A) $6,000
B) $3,600
C) $2,400
D) $ 0
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59
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
A) change in accounting estimate
B) change in accounting principle
C) change in reporting entity
D) correction of an error
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60
Exhibit 22-3 Katrina Company acquired a truck on January 1, 2014, for $140,000. The truck had an estimated useful life of five years with no salvage value. Katrina used straight-line depreciation for the truck. On January 1, 2015, Katrina revises the estimated useful life of the truck. Katrina made the accounting change in 2015 to reflect the extended useful life.
-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%, Katrina should report in its 2015 income statement an effect on prior years of changing the useful life of the truck of
A) $ 0
B) $16,800
C) $ 5,600
D) $58,800
-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%, Katrina should report in its 2015 income statement an effect on prior years of changing the useful life of the truck of
A) $ 0
B) $16,800
C) $ 5,600
D) $58,800
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61
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
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
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62
An unstatement of reported net income for the current year may 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
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
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63
Walter Co. made the following errors in 2014:
Reported net income was $20,000. The correct 2014 net income was
A) $19,000
B) $21,000
C) $15,000
D) $ 4,000

A) $19,000
B) $21,000
C) $15,000
D) $ 4,000
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64
Which of the following errors will normally result in overstatement of 2015 net income?
A) failure to record merchandise purchases in 2014
B) understatement of 2014 ending merchandise inventory
C) failure to record accrued salaries expense in 2014
D) overstatement of prepaid expense in 2014
A) failure to record merchandise purchases in 2014
B) understatement of 2014 ending merchandise inventory
C) failure to record accrued salaries expense in 2014
D) overstatement of prepaid expense in 2014
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65
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
A) retrospectively
B) prospectively
C) by cumulative effect adjustment
D) by footnote disclosure only
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66
All of the following would be reported retrospectively by restating prior period's financial results except for a
A) change from the completed-contract method to the percentage-of-completion method for long-term construction contracts
B) correction of an error in previous periods
C) change from LIFO to FIFO
D) change from the straight-line depreciation method to the sum-of-the-years'-digits method
A) change from the completed-contract method to the percentage-of-completion method for long-term construction contracts
B) correction of an error in previous periods
C) change from LIFO to FIFO
D) change from the straight-line depreciation method to the sum-of-the-years'-digits method
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67
The December 31, 2014, ending inventory failed to include $25,000 of inventory that was received on December 27, 2014. The purchase on account was, however, properly recorded on the date of delivery. What effect will this error have on the December 31, 2014, assets, liabilities, and net income for the year then ended?

A) I
B) II
C) III
D) IV

A) I
B) II
C) III
D) IV
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68
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
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
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69
Changes in accounting entities that require retrospective restatement of past financial statements occur when
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) all of these
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) all of these
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70
Leah Co. reported $7,000 of net income for 2014. The following errors were then discovered:
Ignoring income taxes, compute correct 2014 net income.
A) $6,505
B) $5,895
C) $7,495
D) $6,655

A) $6,505
B) $5,895
C) $7,495
D) $6,655
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71
Eliza Company discovered the following errors in 2014:
Eliza reported net income of $45,000 for the year 2013. The corrected net income (ignoring income taxes) for 2013 should be
A) $45,000
B) $40,000
C) $46,000
D) $44,000

Eliza reported net income of $45,000 for the year 2013. The corrected net income (ignoring income taxes) for 2013 should be
A) $45,000
B) $40,000
C) $46,000
D) $44,000
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72
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
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
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73
Which of the following changes would normally require some footnote disclosure?
A) a correction of an error
B) a change in reporting entity
C) a change in accounting estimate
D) all of these
A) a correction of an error
B) a change in reporting entity
C) a change in accounting estimate
D) all of these
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74
On December 31, 2014, the Maggie Company recognized $15,000 in revenue from rent of $5,000 due in 2015 and $10,000 due in 2016, all collected in advance from another company. Ignoring income taxes, if this error is not detected
A) Retained Earnings at December 31, 2015, will be overstated by $10,000
B) Retained Earnings at December 31, 2015, 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, 2015, will be understated by $15,000
A) Retained Earnings at December 31, 2015, will be overstated by $10,000
B) Retained Earnings at December 31, 2015, 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, 2015, will be understated by $15,000
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75
Mark Company overstated the beginning inventory on January 1, 2014, by $20,000. No other errors were identified. If the error is not discovered, which of the following net income effects related to the inventory error are true? 
A) I
B) II
C) III
D) IV

A) I
B) II
C) III
D) IV
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76
Langley Company received merchandise on December 31, 2014. Langley failed to record the purchase on account because the invoice was inadvertently destroyed. The merchandise was, however, included in ending inventory. The effect of this event on the financial statements as of December 31, 2014, would be
A) assets and liabilities would be understated
B) assets and owners' equity would be overstated
C) liabilities would be understated and retained earnings overstated
D) liabilities would be overstated and retained earnings understated
A) assets and liabilities would be understated
B) assets and owners' equity would be overstated
C) liabilities would be understated and retained earnings overstated
D) liabilities would be overstated and retained earnings understated
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77
Bethany Corp. reported $80,000 of net income for 2014. The following errors were then discovered:
Ignoring income taxes, the correct 2014 net income is
A) $85,500
B) $84,500
C) $78,500
D) $76,500

A) $85,500
B) $84,500
C) $78,500
D) $76,500
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78
During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2014, the following was discovered:
Net income for 2014 (before any of the above items) was $250,000. The corrected net income, ignoring income taxes, for 2014 should be
A) $300,000
B) $208,000
C) $212,000
D) $218,000

A) $300,000
B) $208,000
C) $212,000
D) $218,000
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79
The correct 2014 net income for Magness Company, after error corrections, was $56,000. Two errors were found after net income was first reported. The January 1, 2014 inventory and the December 31, 2014, inventory were overstated by $5,000 and $10,000, respectively. The net income that must have been originally reported was
A) $41,000
B) $66,000
C) $71,000
D) $61,000
A) $41,000
B) $66,000
C) $71,000
D) $61,000
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80
On January 1, 2014, Tessa loaned $12,000 to another company on a three-year, 4% note. No interest was accrued in 2014. 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, 2015. Ignoring income taxes, the correct entry on December 31, 2015, should be
A) Interest Receivable 480
Retained Earnings 480
B) Interest Receivable 960
Interest Revenue 960
C) Interest Receivable 480
Interest Revenue 480
D) Interest Receivable 960
Interest Revenue 480
Retained Earnings 480
A) Interest Receivable 480
Retained Earnings 480
B) Interest Receivable 960
Interest Revenue 960
C) Interest Receivable 480
Interest Revenue 480
D) Interest Receivable 960
Interest Revenue 480
Retained Earnings 480
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