Question 1

Lindy Company's auditor discovered two errors. No errors were corrected during 2012. The errors are described as follows:
(1.) Merchandise costing $4,000 was sold to a customer for $9,000 on December 31, 2012, but it was recorded as a sale on January 2, 2013. The merchandise was properly excluded from the 2012 ending inventory. Assume the periodic inventory system is used.
(2.) A machine with a five-year life was purchased on January 1, 2012. The machine cost $20,000 and has no expected salvage value. No depreciation was taken in 2012 or 2013. Assume the straight-line method for depreciation.
Required:
Prepare appropriate journal entries (assume the 2013 books have not been closed). Ignore income taxes.

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Question 2

What are the situations deemed to constitute a change in reporting entity? Describe the way changes in reporting entity are reported.

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Question 3

Nash Industries changed its method of accounting for warranties from the cash basis to the accrual basis on January 1, 2013. The company's accountant determined that a liability of $70,000 should be established. Ignore income taxes.
Required:
Prepare the journal entry to record the accounting change.

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Question 4

Describe the way we account for a change in estimate. What is the appropriate accounting if we are unable to determine whether a change is a change in estimate or a change in principle?

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Question 5

Cherokee Company's auditor discovered some errors. No errors were corrected during 2012. The errors are described as follows:
(1.) Beginning inventory on January 1, 2012, was understated by $5,000.
(2.) A two-year insurance policy purchased on April 30, 2012, in the amount of $24,000 was debited to Prepaid Insurance. No adjustment was made on December 31, 2012, or on December 31, 2013.
Required:
Prepare appropriate journal entries (assume the 2013 books have not been closed). Ignore income taxes.

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Question 6

Some inventory errors are described as "self-correcting" in that they have the opposite financial statement effect in the period following the errors, thereby "correcting" the original account balance errors.
Required:
Given this "self-correcting" feature, discuss why these errors should not be ignored and describe the steps needed to correct these errors.

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Question 7

We record and report most changes in accounting principle retrospectively, but sometimes report the changes prospectively. Explain when it is appropriate to report the changes prospectively. Provide examples.

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Question 8

How are accounting errors treated?

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Question 9

Branch Industries changes from declining balance depreciation to straight-line depreciation for existing assets. Describe in detail the way Branch would account for the change and include reasons for the accounting.

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Question 10

Describe the approaches of reporting changes in accounting principles.

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Question 11

Describe in detail the way companies report most voluntary changes in accounting principle.

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Question 12

Describe the way we account for an error when that error is discovered in a subsequent reporting period.

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Question 13

There is not always a clear-cut distinction between a change in estimate and a change in principle or a simultaneous change in estimate and change in principle. How are such situations accounted for?

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Question 14

Name and briefly describe the three categories of accounting changes.

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Question 15

What are the changes in accounting principle that require the prospective approach?

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Question 16

What is the difference between U.S. GAAP and IFRS with regard to the correction of accounting errors?

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Question 17

If inventory is understated at the end of 2012 and the error is not discovered, how will net income be affected in 2013?

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Question 18

A company changes depreciation methods. Briefly describe the steps the company should take to report this accounting change in its current comparative financial statements.

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Question 19

How may accounting changes detract from accounting information?

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Quiz 20: Accounting Changes and Error Corrections