Deck 20: Accounting Changes and Error Corrections

Question 1

Most, but not all, changes in accounting principle are reported using the retrospective approach.

Answer 1

True

Question 2

Both changes in reporting entities and material error corrections are reported prospectively.

Answer 2

False

Question 3

Which of the following is not one of the approaches for reporting accounting changes?

A)The change approach.
B)The retrospective approach.
C)The prospective approach.
D)All three of the above are approaches for reporting accounting changes.

Answer 3

A

Question 4

Error corrections require restatement of all the affected prior year financial statements reported in comparative financial statements.

Question 5

Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements after the change is made.

Question 6

The after-tax cumulative effect on income is no longer required for changes in accounting principles.

Question 7

When an accounting change is reported under the retrospective approach, prior years' financial statements are:

A)Revised to reflect the use of the new principle.
B)Reported as previously prepared.
C)Left unchanged.
D)Adjusted using prior period adjustment procedures.

Question 8

Which of the following changes should be accounted for using the retrospective approach?

A)A change in the estimated life of a depreciable asset.
B)A change from straight-line to declining balance depreciation.
C)A change to the LIFO method of costing inventories.
D)A change from the completed-contract method of accounting for long-term construction contracts.

Question 9

Prior years' financial statements are restated when the prospective approach is used.

Question 10

When a change in accounting principle is reported, what is sometimes sacrificed?

A)Relevance.
B)Consistency.
C)Conservatism.
D)Representational faithfulness.

Question 11

All changes reported using the retrospective approach require prior period adjustments.

Question 12

Accounting changes occur for which of the following reasons?

A)Management is being fair and consistent in financial reporting.
B)Management compensation is affected.
C)Debt agreements are impacted.
D)All of the above.

Question 13

All changes in estimate are accounted for retrospectively.

Question 14

An accounting change that is reported by the prospective approach is reflected in the financial statements of:

A)Prior years only.
B)Prior years plus the current year.
C)The current year only.
D)Current and future years.

Question 15

Which of the following changes would not be accounted for using the prospective approach?

A)A change to LIFO from average costing for inventories.
B)A change from the individual application of the LCM rule to aggregate approach.
C)A change from straight-line to double-declining balance depreciation.
D)A change from double-declining balance to straight-line depreciation.

Question 16

Regardless of the type of accounting change that occurs, the most important responsibility is:

A)To properly determine the tax effect.
B)To communicate that a change has occurred.
C)To compute the correct amount of the change.
D)None of the above is correct.

Question 17

A change in reporting entity requires note disclosure in all subsequent financial statements prepared for the new entity.

Question 18

How many acceptable approaches are there for changes in accounting principles?

A)One.
B)Two.
C)Three.
D)Four.

Question 19

A change to the LIFO method of valuing inventory usually requires use of the retrospective method.

Question 20

Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards?

A)Change in reporting entity.
B)Change to the LIFO method from the FIFO method.
C)Change in accounting estimate.
D)Change in depreciation methods.

Question 21

Which of the following is an example of a change in accounting principle?

A)A change in inventory costing methods.
B)A change in the estimated useful life of a depreciable asset.
C)A change in the actuarial life expectancies of employees under a pension plan.
D)Consolidating a new subsidiary.

Question 22

Disclosure notes related to a change in accounting principle under the retrospective approach should include:

A)The effect of the change on executive compensation.
B)The auditor's approval of the change.
C)The SEC's permission to change.
D)Justification for the change.

Question 23

Which of the following changes should be accounted for using the retrospective approach?

A)A change in the estimated useful life of a depreciable asset.
B)A change from straight-line to double-declining-balance depreciation.
C)A change from percentage-of-completion to the completed contract method.
D)A change to LIFO from FIFO inventory costing.

Question 24

On January 2, 2013, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2013, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2013 earnings is:

A)An increase of $40,000.
B)A decrease of $40,000.
C)An increase of $24,000.
D)None of the above is correct.

Question 25

Which of the following would not be accounted for using the retrospective approach?

A)A change from LIFO to FIFO inventory costing.
B)A change from the completed contract method to the percent-of-completion method for long-term construction contracts.
C)A change in depreciation methods.
D)A change from the full cost method in the oil industry.

Question 26

Prior years' financial statements are restated under the:

A)Current approach.
B)Prospective approach.
C)Retrospective approach.
D)None of the above is correct.

Question 27

During 2013, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.

A)Hoffman is not required to make any accounting adjustments.
B)Hoffman has made a change in accounting principle requiring retrospective adjustment.
C)Hoffman has made a change in accounting principle requiring prospective application.
D)Hoffman needs to correct an accounting error.

Question 28

Which of the following accounting changes should not be accounted for prospectively?

A)The correction of an error.
B)A change from declining balance to straight-line depreciation.
C)A change from straight-line to declining balance depreciation.
D)A change in the expected salvage value of a depreciable asset.

Question 29

National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:

A)Current income tax payable increases.
B)The cumulative effect decreases current period earnings.
C)Prior periods' financial statements are restated.
D)None of the above is correct.

Question 30

When an accounting change is reported under the retrospective approach, account balances in the general ledger:

A)Are not adjusted.
B)Are closed out and then updated.
C)Are adjusted net of the tax effect.
D)Are adjusted to what they would have been had the new method been used in previous years.

Question 31

Companies should report the cumulative effect of an accounting change in the income statement:

A)In the quarter in which the change is made.
B)In the annual financial statements only.
C)In the first quarter of the fiscal year in which the change is made.
D)Never.

Question 32

Which of the following would not be accounted for using the prospective approach?

A)A change to LIFO from FIFO for inventory costing.
B)A change in price indexes used under the LIFO method of inventory costing.
C)A change in estimate.
D)A change from the cash basis to accrual accounting.

Question 33

JFS Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes:

A)A credit to accumulated depreciation.
B)A debit to accumulated depreciation.
C)A debit to a depreciable asset.
D)The change does not require a journal entry.

Question 34

Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2009, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2013 (before adjusting and closing entries). What is the appropriate patent amortization expense in 2013?

A)$4 million.
B)$5 million.
C)$10 million.
D)$20 million.

Question 35

A change that uses the prospective approach is accounted for by:

A)Implementing it in the current year.
B)Reporting pro forma data.
C)Retrospective restatement of all prior financial statements in a comparative annual report.
D)Giving current recognition of the past effect of the change.

Question 36

If a change is made from straight-line to SYD depreciation, one should record the effects by a journal entry including:

A)A credit to deferred tax liability.
B)A credit to accumulated depreciation.
C)A debit to depreciation expense.
D)No journal entry is required.

Question 37

Which of the following is not an example of a change in accounting principle?

A)A change in the useful life of a depreciable asset.
B)A change from LIFO to FIFO for inventory costing.
C)A change to the full costing method in the extractive industries.
D)A change from the cost method to the equity method of accounting for investments.

Question 38

B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2013. The change affects machinery purchased at the beginning of 2011 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B's 2013 depreciation expense?

A)$9,120.
B)$13,680.
C)$15,840.
D)$19,200.

Question 39

The cumulative effect of most changes in accounting principle is reported:

A)In the income statement between extraordinary items and net income.
B)In the income statement after income and before income tax.
C)In the income statement between discontinued operations and extraordinary items.
D)In the balance sheet accounts affected.

Question 40

When the retrospective approach is used for a change to the FIFO method, which of the following accounts is usually not adjusted?

A)Deferred Income Taxes.
B)Inventory.
C)Retained Earnings.
D)All of the above usually are adjusted.

Question 41

Hepburn Company bought a copyright for $90,000 on January 1, 2010, at which time the copyright had an estimated useful life of 15 years. On January 5, 2013, the company determined that the copyright would expire at the end of 2018. How much should Hepburn record as amortization expense for this copyright for 2013?

A)$14,400.
B)$7,200.
C)$8,000.
D)$12,000.

Question 42

Lundholm Company purchased a machine for $100,000 on January 1, 2011. Lundholm depreciates machines of this type by the straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2013, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2013? The tax rate is 40%.

A)$20,000.
B)$16,000.
C)$17,778.
D)$26,667.

Question 43

Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2009 and the machine was placed in service at the beginning of 2010. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2013, Red decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, what will be Red's depreciation expense for 2013?

A)$4.8 million.
B)$5.4 million.
C)$6.6 million.
D)$11.55 million.

Question 44

In 2013, internal auditors discovered that Fay, Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2010. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

A)$140,000.
B)$280,000.
C)$420,000.
D)$700,000.

Question 45

Z Company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in:

A)An accounting change that should be reported prospectively.
B)A correction of an error.
C)An accounting change that should be reported by restating the financial statements of all prior periods presented.
D)Neither an accounting change nor a correction of an error.

Question 46

Diversified Systems, Inc., reports consolidated financial statements this year in place of statements of individual companies reported in previous years. This results in:

A)An accounting change that should be reported prospectively.
B)An accounting change that should be reported by restating the financial statements of all prior periods presented.
C)A correction of an error.
D)Neither an accounting change nor a correction of an error.

Question 47

For 2012, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2012. Experience during 2013 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

A)In 2013 income from continuing operations.
B)As an accounting change, net of tax, below 2013 income from continuing operations.
C)As an accounting change requiring 2012 financial statements to be restated.
D)As a correction of an error requiring 2012 financial statements to be restateD.The change in the estimate for warranty costs is based on new information obtained from experience and qualifies as a change in accounting estimate.A change in accounting estimate affects current and future periods and is not accounted for by restating prior periods.The accounting change is a part of continuing operations but is not reported net of taxes.

Question 48

Gore Inc. recorded a liability in 2013 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.

A)Gore has made a change in accounting principle, requiring retrospective adjustment.
B)Gore needs to correct an accounting error.
C)Gore is required to adjust a change in accounting estimate prospectively.
D)Gore is not required to make any accounting adjustments.

Question 49

Which of the following is not a change in estimate?

A)A change in the useful life of a depreciable asset.
B)A change in the mortality rate used for pension computations.
C)A change from the cost to the equity method in accounting for investments.
D)A change in the warranty expense percentage.

Question 50

Which of the following is a change in reporting entity?

A)A change to the full cost method in the extractive industries.
B)Switching to the completed contract method.
C)A change from the cost to the equity method.
D)Consolidating a subsidiary not previously included in consolidated financial statements.

Question 51

An item that should be reported as a prior period adjustment is the:

A)Correction of an error in depreciation from last year.
B)Payment of taxes due to a tax audit of last year's tax return.
C)Payment of a previously recorded warranty expense.
D)Receipt of the proceeds of a note receivable that was due last year.

Question 52

Prior to 2013, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2013, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2011, had an estimated useful life of five years and no estimated residual value. To account for the change in 2013, Trapper John:

A)Would retrospectively report $600,000 in depreciation expense annually for 2011 and 2012, and report $600,000 in depreciation expense for 2013.
B)Would adjust accumulated depreciation and retained earnings for the excess charges made in 2011 and 2012.
C)Would report depreciation expense of $400,000 in its 2013 income statement.
D)None of the above is correct.

Question 53

Mobic Inc. acquired some manufacturing equipment in January 2010 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2013, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2016. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2013, Mobic should:

A)Charge $280,000 in depreciation expense.
B)Report the book value of the equipment in its12/31/2013 balance sheet at $210,000.
C)Make an adjustment to retained earnings for the error in measuring depreciation during 2010-2012.
D)None of the above is correct.

Question 54

Retrospective restatement usually is appropriate for a change in:

A)Option a
B)Option b
C)Option c
D)Option d

Question 55

Which of the following is not a change in reporting entity?

A)Reporting using comparative financial statements for the first time.
B)Changing the companies that comprise a consolidated group.
C)Presenting consolidated financial statements for the first time.
D)All are changes in reporting entity.

Question 56

A change in the residual value of equipment is accounted for:

A)As a prior period adjustment.
B)Prospectively.
C)Retrospectively.
D)None of the above is correct.

Question 57

Cooper Inc. took physical inventory at the end of 2012. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.

A)Cooper needs to correct an accounting error.
B)Cooper has made a change in accounting principle, requiring retrospective adjustment.
C)Cooper is required to adjust a change in accounting estimate prospectively.
D)Cooper is not required to make any accounting adjustments.

Question 58

Goosen Company bought a copyright for $90,000 on January 1, 2010, at which time the copyright had an estimated useful life of 15 years. On January 5, 2013, the company determined that the copyright would expire at the end of 2018. How much should Goosen record retrospectively as the effect of change?

A)$0.
B)$12,000.
C)$8,000.
D)$14,400.

Question 59

Which of the following is a change in estimate?

A)A change from the full costing method in the extractive industries.
B)A change from percentage-of-completion to the completed contract method.
C)Consolidating a subsidiary for the first time.
D)A change in the termination rate of employees under a pension plan.

Question 60

Orange Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2009 and the machine was placed in service at the beginning of 2010. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $4 million. At the beginning of 2013, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2013?

A)$4.8 million.
B)$5.4 million.
C)$6.6 million.
D)$9.4 million.

Question 61

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

A)Report a prior period adjustment decreasing retained earnings by $600,000.
B)Report a prior period adjustment decreasing retained earnings by $1,400,000.
C)Report a current period charge decreasing net income by $600,000.
D)Report a current period charge decreasing net income by $1,400,000.

Question 62

A company failed to record unrealized gains of $20 million on its trading security investments. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:

A)Understated by $14 million.
B)Understated by $7 million.
C)Understated by $20 million
D)UnaffecteD.Unrealized gains on trading securities are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 x (1 - 30%) = $14,000,000.

Question 63

During 2013, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2011 $120,000 understated
2012 150,000 overstated
P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2013, would be:

A)Correct.
B)$30,000 overstated.
C)$150,000 overstated.
D)$270,000 overstateD.The $120,000 understated ending inventory would cause the 2011 COGS to be overstated, understating NI and RE.That same error would cause 2012 beginning inventory to be understated, overstating NI and RE by the same amount, effectively correcting the RE balance.The $150,000 overstated ending inventory would cause the 2012 COGS to be understated, overstating NI and RE.

Question 64

Powell Company had the following errors over the last two years: 2011: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.
2012: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000.
By how much should retained earnings be adjusted on January 1, 2013? (Ignore taxes)

A)Increase by $15,000.
B)Decrease by $25,000.
C)Decrease by $6,000.
D)Increase by $25,000.

Question 65

Popeye Company purchased a machine for $300,000 on January 1, 2012. Popeye depreciates machines of this type by the straight-line method over a five-year period using no salvage value. Due to an error, no depreciation was taken on this machine in 2012. Popeye discovered the error in 2013. What amount should Popeye record as depreciation expense for 2013? The tax rate is 40%.

A)$120,000.
B)$60,000.
C)$36,000.
D)$72,000.

Question 66

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2013. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2013, would be:

A)Overstated by $14 million.
B)Understated by $14 million.
C)Overstated by $6 million.
D)Understated by $6 million.

Question 67

If undetected, what is the effect of this error on Berkshire's 12/31/2012 balance sheet?

A)Assets understated by $600,000 and shareholders' equity understated by $600,000.
B)Assets understated by $420,000 and shareholders' equity understated by $420,000.
C)Assets understated by $600,000, liabilities understated by $180,000, and shareholders' equity understated by $420,000.
D)None of the above is correct.

Question 68

In 2013, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2013 would have been $10 million higher had the new life been used. Barney's tax rate is 30%. Barney's retained earnings as of December 31, 2013, would be:

A)Overstated by $7 million.
B)Overstated by $3 million.
C)Overstated by $10 million.
D)UnaffecteD.This is a change in estimate.No prior period adjustment is needed.

Question 69

At the end of the current year, a company overstated prepaid insurance by $80,000 and understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this error, net income is:

A)Overstated by $108,000.
B)Overstated by $12,000.
C)Understated by $108,000.
D)Understated by $12,000.

Question 70

Moonland Company's income statement contained the following errors: Ending inventory, December 31, 2013, understated by $6,000
Depreciation expense for 2013 overstated by $1,000
What is the effect of the errors on 2013 net income before taxes?

A)Overstated by $5,000.
B)Understated by $5,000.
C)Understated by $7,000.
D)Overstated by $7,000.

Question 71

A company failed to record unrealized gains of $20 million on its available for sale security investments. Its tax rate is 30%. As a result of this error, comprehensive income would be:

A)Understated by $14 million.
B)Understated by $6 million.
C)Understated by $20 million
D)UnaffecteD.Unrealized gains on securities available for sale are reported net of tax in other comprehensive income.

Question 72

After issuing its financial statements, a company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was:

A)Understated by $70,000.
B)Overstated by $70,000.
C)Understated by $30,000.
D)Overstated by $30,000.

Question 73

What is the effect of the error on Berkshire's 2013 income statement?

A)Net income is understated by $420,000.
B)Cost of goods sold is understated by $420,000.
C)There are no errors in the 2013 income statement.
D)None of the above is correct.

Question 74

What is the effect of the error on Berkshire's 12/31/2013 balance sheet?

A)There are no errors in the 12/31/2013 balance sheet.
B)Assets understated by $600,000 and shareholders' equity understated by $600,000.
C)Assets understated by $420,000 and shareholders' equity understated by $420,000.
D)Liabilities understated by $180,000 and shareholders' equity overstated by $420,000.

Question 75

Washburn Co. spent $10 million to purchase a new patented technology, debiting an intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets and plans to amortize the intangible asset on a straight-line basis.

A)Washburn is not required to make any accounting adjustments.
B)Washburn is required to adjust a change in accounting estimate prospectively.
C)Washburn has made a change in accounting principle, requiring retrospective adjustment.
D)Washburn needs to correct an accounting error.

Question 76

In December 2013, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2014 flagged this transaction.

A)Kojak needs to correct an accounting error.
B)Kojak has made a change in accounting principle, requiring retrospective adjustment.
C)Kojak is required to adjust a change in accounting estimate prospectively.
D)Kojak is not required to make any accounting adjustments.

Question 77

C Co. reported a retained earnings balance of $200,000 at December 31, 2012. In September 2013, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2012, had been paid and fully expensed in 2012. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2013 statement of retained earnings?

A)$210,000.
B)$214,000.
C)$220,000.
D)$221,000.

Question 78

A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result of this error, income tax expense is:

A)Unaffected.
B)Overstated by $60,000.
C)Understated by $60,000.
D)Understated by $140,000.

Question 79

A company failed to report the $600,000 additional liability for its underfunded pension plan. Its tax rate is 30%. As result of this error, retained earnings would be:

A)Unaffected.
B)Overstated by $600,000.
C)Overstated by $420,000.
D)Overstated by $180,000.

Question 80

Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2013. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2013, would be:

A)Overstated by $36 million.
B)Understated by $36 million.
C)Overstated by $24 million.
D)Understated by $24 million.