Question 1

What are two reasons why an accounting change may be permitted to give modified retrospective or prospective treatment?

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Question 2

Why are retrospective adjustments to past years' income and expenses recorded directly in retained earnings?

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Question 3

For a construction contract where the company uses the percentage of completion method and there is a change in the estimated total cost of the contract from 12 million to 13 million,the accountant should do the following:

Accepted Answer

When there is a change in the estimated total cost of a contract, the accountant should compute the percentage completed using the new cost total if the company uses the cost ratio to estimate percentage completed. This is because the percentage of completion method requires that the estimated total cost of the contract be adjusted for any changes in the estimated total cost. Using the average cost or the estimated costs determined at the beginning of the contract would not accurately reflect the current status of the project. Retrospective treatment is not applicable in this scenario.

Question 4

Why is the retrospective approach conceptually appropriate for changes in accounting policy?

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Question 5

Give an example of a change in accounting policy which does not require retrospective treatment and explain why.

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Question 6

During the audit of Keats Island Brewery for the fiscal year-ended June 30,2018,the auditors identified the following issues:
For each of the three issues described below,using the following table,identify both the direction (increase or decrease)and the amount of the effect relative to the amount without the accounting change.
a.The company sells beer for $1 each plus $0.10 deposit on each bottle.The deposit collected is payable to the provincial recycling agency.During 2017,the company had recorded $12,000 of deposits as revenue.The auditors believe this amount should have been recorded as a liability.
b.The company had been using the first-in,first-out cost flow assumption for its inventories.In fiscal 2018,management decided to switch to the weighted-average method.This change reduced inventory by $25,000 at June 30,2017,and $40,000 at June 30,2018.
c.The company has equipment costing $6,000,000 that it has been depreciating over 10 years on a straight-line basis.The depreciation for fiscal 2017 was $600,000 and accumulated depreciation on
June 30,2017,was $1,200,000.During 2018,management revises the estimate of useful life to 12 years,reducing the amount of depreciation to $480,000 per year.

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Question 7

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year,the accountant should do (or not do)the following:

Accepted Answer

DWhen a company changes the estimated useful life of an asset, it does not adjust prior year's depreciation (eliminating option B) but rather adjusts the depreciation expense going forward. The correct method is to compute the current year depreciation based on the new estimated useful life, which means recalculating the depreciation expense for the remaining life of the asset, not by applying a simple fraction like 15/20 to the carrying amount (making option D incorrect). The correct approach is to spread the remaining carrying amount (minus any residual value) over the new remaining useful life (not mentioned directly but implied as the correct method, making option A incorrect). Option C is correct because the accumulated depreciation as at the beginning of the year remains unchanged; only the future depreciation calculations are adjusted to reflect the new useful life.

Question 8

A retailer increases bad debts expense from 2.5% to 3% of credit sales.Given this information,which of the following statements is correct?

Accepted Answer

Increasing bad debts expense from 2.5% to 3% of credit sales is a change in estimate of the amount of bad debt that may occur in the future. This change should be treated prospectively by adjusting the bad debts expense for the current and future periods. No retrospective correction is required for this change in estimate.

Question 9

Define "a retrospective adjustment."

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Question 10

Evaluate each of the following independent situations to determine the type of accounting change (correction of error,change in accounting policy,or change in estimate)and the appropriate accounting treatment (retrospective or prospective).

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Question 11

How should enterprises reflect changes in accounting standards?

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Question 12

Why is the prospective treatment conceptually appropriate for changes in estimates?

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Question 13

Define the term "prospective adjustment." Which type of accounting changes is it applied to?

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Question 14

An analysis of a company's inventory indicates that inventory at the end of 2016 was understated by $30,000 due to an inventory count error.Inventory at the end of 2017 was correctly stated.The company uses the periodic system of inventory and its fiscal year-end is December 31.Given this information,which of the following statements is correct?

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Question 15

For each of the following scenarios,determine the effects (if any)of the accounting change (correction of error,change in accounting policy,or change in estimate)on the relevant asset or liability,equity,and comprehensive income in the year of change and the prior year.Use the following table for your response:
  a.Company A increases the allowance for doubtful accounts (ADA).Using the old estimate,ADA would have been $45,000.The new estimate is $50,000.
b.Company B omitted to record an invoice for a $10,000 sale made on credit at the end of the previous year and incorrectly recorded the sale in the current year.The related inventory sold has been accounted for.
c.Company C changes its revenue recognition to a more conservative policy.The result is a decrease in prior-year revenue by $4,000 and a decrease in current-year revenue by $5,000 relative to the amounts under the old policy.

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Question 16

Which statement is true regarding accounting accruals?

Accepted Answer

Accounting accruals involve the initial accrual to record an asset or liability followed by accrual reversals to reflect changes in the value of that item over time. The purchase of equipment is an example of this, involving an initial accrual to record the asset followed by subsequent accrual reversals in the form of depreciation expense and derecognition of the asset upon disposal. The other statements are not necessarily true regarding accounting accruals.

Question 17

For the following accounting changes,identify the appropriate treatment under IFRS.

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Question 18

How many balance sheets are required by IAS 1 when there is a change in accounting policy and why?

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Question 19

Which statement is true regarding accounting accruals?

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Accrual accounting involves recording revenues and expenses when they are incurred, regardless of when cash is exchanged. Accruals often reverse as actual cash transactions occur, aligning the accounting records with the cash flows.

Question 20

What types of accounting changes are treated retrospectively and why?

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Quiz 10: Accounting Changes

What are two reasons why an accounting change may be permitted to give modified retrospective or prospective treatment?

Why are retrospective adjustments to past years' income and expenses recorded directly in retained earnings?

For a construction contract where the company uses the percentage of completion method and there is a change in the estimated total cost of the contract from 12 million to 13 million,the accountant should do the following:

Why is the retrospective approach conceptually appropriate for changes in accounting policy?

Give an example of a change in accounting policy which does not require retrospective treatment and explain why.

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year,the accountant should do (or not do) the following:

A retailer increases bad debts expense from 2.5% to 3% of credit sales.Given this information,which of the following statements is correct?

Define "a retrospective adjustment."

Evaluate each of the following independent situations to determine the type of accounting change (correction of error,change in accounting policy,or change in estimate)and the appropriate accounting treatment (retrospective or prospective).

How should enterprises reflect changes in accounting standards?

Why is the prospective treatment conceptually appropriate for changes in estimates?

Define the term "prospective adjustment." Which type of accounting changes is it applied to?

Which statement is true regarding accounting accruals?

For the following accounting changes,identify the appropriate treatment under IFRS.

How many balance sheets are required by IAS 1 when there is a change in accounting policy and why?

Which statement is true regarding accounting accruals?

What types of accounting changes are treated retrospectively and why?