Question 1

Powell Company had the following errors over the last two years:
2014: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.
2015: 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 1,2016? (Ignore taxes)
A)Increase by $15,000.
B)Decrease by $25,000.
C)Decrease by $6,000.
D)Increase by $25,000.

Accepted Answer

The answer of Powell Company had the following errors over...

Question 2

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.

Accepted Answer

The answer of After issuing its financial statements,a company discovered...

Question 3

At the end of the current year,a company failed to accrue interest of $500,000 on its investments in municipal bonds.Its tax rate is 30%.As a result of this error,net income is:
A)Unaffected.
B)Understated by $350,000.
C)Understated by $500,000.
D)Understated by $150,000.

Accepted Answer

The failure to accrue interest of $500,000 on the company's investments in municipal bonds means that the company did not recognize this income as revenue, resulting in an understatement of net income. Since the tax rate is 30%, the company would have paid $150,000 less in taxes if it had recognized the interest income, which further adds to the understatement. Therefore, the understatement in net income is equal to $500,000 plus the tax savings of $150,000, or $650,000. Thus, choice C is the correct answer.

Question 4

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.

Accepted Answer

Unrealized gains on available-for-sale securities are included in other comprehensive income. The after-tax effect of the $20 million unrealized gain is $20 million * (1 - 0.30) = $14 million. Therefore, comprehensive income is understated by $14 million.

Question 5

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.

Accepted Answer

The answer of At the end of the current year,a...

Question 6

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.

Accepted Answer

Unrealized gains on trading securities affect net income and thus retained earnings. The after-tax effect is $20 million * (1 - 0.30) = $14 million, so equity is understated by $14 million.

Question 7

Due to an error in computing depreciation expense,Crote Corporation understated accumulated depreciation by $60 million as of December 31,2016.Crote has a tax rate of 40%.Crote's retained earnings as of December 31,2016,would be:
A)Overstated by $36 million.
B)Understated by $36 million.
C)Overstated by $24 million.
D)Understated by $24 million.

Accepted Answer

The understatement of accumulated depreciation by $60 million means that the net income was overstated by $60 million before tax. After accounting for the 40% tax rate, the net income was overstated by $36 million ($60 million * (1 - 0.40)). This overstatement in net income leads to an overstatement in retained earnings by the same amount, $36 million.

Question 8

In 2016,management discovered that Dual Production had debited expense for the full cost of an asset purchased on January 1,2013,at a cost of $36 million with no expected residual value.Its useful life was 5 years.Dual uses straight-line depreciation.The correcting entry,assuming the error was discovered in 2016 before preparation of the adjusting and closing entries,includes:
A)A debit to accumulated depreciation of $14.4 million
B)A credit to accumulated depreciation of $21.6 million.
C)A credit to an asset of $36 million.
D)A debit to retained earnings of $14.4 million.

Accepted Answer

The asset was purchased on January 1, 2013 and had a useful life of 5 years, which means that by the end of 2016, the asset would have been fully depreciated for a total of $21.6 million (i.e. $36 million / 5 years x 4 years). Since the expense was incorrectly recorded as the full cost of the asset, an adjusting entry is needed to recognize the accumulated depreciation up to 2016. Therefore, a credit of $21.6 million should be made to accumulated depreciation.

Question 9

Green Company overstated its inventory by $50 million at the end of 2016.The discovery of this error during 2017,before adjusting or closing entries,would require:
A)An increase in retained earnings.
B)A prospective adjustment in the 2017 income statement.
C)A debit to inventory of $50 million.
D)None of these answer choices above.

Accepted Answer

The error affects prior period financial statements and should be corrected by restating prior period financials, not by adjusting current period entries.

Question 10

A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a violation of FCC rules.Its tax rate is 30%.As a result of this error,net income was:
A)Unaffected.
B)Overstated by $400,000.
C)Overstated by $280,000.
D)Overstated by $120,000.

Accepted Answer

The $400,000 fine should have been recorded as an expense in the current year, which would have reduced the company's net income. Since it was not accrued, the net income was overstated by $400,000. The tax rate being 30% does not affect the calculation of the overstated net income.

Question 11

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards (IFRS)?
A)The error can be reported in the current period if it's not considered practicable to report it retrospectively.
B)The error can be reported in the current period if it's not considered practicable to report it prospectively.
C)The error can be reported prospectively if it's not considered practicable to report it retrospectively.
D)Retrospective application is required with no exception.

Accepted Answer

According to IAS 8, if it's not practicable to determine the period-specific effects of the error, the error can be corrected retrospectively by restating the beginning balance of the earliest period presented or alternatively by restating the comparative information. However, if it's not considered practicable to determine the period-specific effects of the error, the entity must correct the error prospectively by adjusting the carrying amount of the affected asset or liability in the current period. Therefore, the correct statement is that the error can be reported in the current period if it's not considered practicable to report it retrospectively.

Question 12

In 2016,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 2016 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 31,2016,would be:
A)Overstated by $7 million.
B)Overstated by $3 million.
C)Overstated by $10 million.
D)Unaffected.

Accepted Answer

The answer of In 2016,due to a change in marketing...

Question 13

Which of the following statements is not true regarding the correction of an error?
A)The correction is reported prospectively and previous financial statements are not revised.
B)A journal entry is needed to correct any account balances that are incorrect as a result of the error.
C)Prior years' financial statements are restated to reflect the correction of the error (if the error affected those statements).
D)A disclosure note should describe the nature of the error and the impact of its correction on net income,income before extraordinary items,and earnings per share.

Accepted Answer

The correction of an error is reported retrospectively, meaning previous financial statements are restated to reflect the correction of the error. Choice A states that the correction is reported prospectively, which is not true. Therefore, it is the statement that is not true. The other statements (B, C, and D) are true.

Question 14

Using International Financial Reporting Standards (IFRS),which of the following statements is true regarding correcting errors in previously issued financial statements?
A)Retrospective application is required with no exception.
B)The error can be reported in the current period if it's not considered practicable to report it prospectively.
C)The error can be reported prospectively if it's not considered practicable to report it retrospectively.
D)The error can be reported in the current period if it's not considered practicable to report it retrospectively.

Accepted Answer

The answer of Using International Financial Reporting Standards (IFRS),which of...

Question 15

Early in 2016,Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2013 was debited to insurance expense.The correcting entry would include:
A)A credit to retained earnings of $20,000.
B)A debit to insurance expense of $20,000.
C)A debit to prepaid insurance of $30,000.
D)A debit to prepaid insurance of $50,000.

Accepted Answer

The answer of Early in 2016,Benton Well Supplies discovered that...

Question 16

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.

Accepted Answer

The answer of A company failed to report the $600,000...

Question 17

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.

Accepted Answer

The answer of A company overstated its liability for warranties...

Question 18

In the previous year,a firm failed to record premium amortization of $40,000 and $30,000,respectively,on its bonds payable and held to maturity bond investments.These errors affect both income before tax and taxable income.The firm's tax rate is 30%.As a result of this error,net income was:
A)Understated by $7,000.
B)Overstated by $7,000.
C)Understated by $33,000.
D)Overstated by $33,000.

Accepted Answer

The answer of In the previous year,a firm failed to...

Question 19

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.

Accepted Answer

The answer of A company switched from the cash basis...

Question 20

Due to an error in computing depreciation expense,Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31,2016.Prewitt has a tax rate of 30%.Prewitt's retained earnings as of December 31,2016,would be:
A)Overstated by $14 million.
B)Understated by $14 million.
C)Overstated by $6 million.
D)Understated by $6 million.

Accepted Answer

The answer of Due to an error in computing depreciation...

Quiz 20: Accounting Changes

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:

At the end of the current year,a company failed to accrue interest of $500,000 on its investments in municipal bonds.Its tax rate is 30%.As a result of this error,net income is:

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:

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 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:

Due to an error in computing depreciation expense,Crote Corporation understated accumulated depreciation by $60 million as of December 31,2016.Crote has a tax rate of 40%.Crote's retained earnings as of December 31,2016,would be:

Green Company overstated its inventory by $50 million at the end of 2016.The discovery of this error during 2017,before adjusting or closing entries,would require:

A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a violation of FCC rules.Its tax rate is 30%.As a result of this error,net income was:

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards (IFRS) ?

Which of the following statements is not true regarding the correction of an error?

Using International Financial Reporting Standards (IFRS) ,which of the following statements is true regarding correcting errors in previously issued financial statements?

Early in 2016,Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2013 was debited to insurance expense.The correcting entry would include:

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

In the previous year,a firm failed to record premium amortization of $40,000 and $30,000,respectively,on its bonds payable and held to maturity bond investments.These errors affect both income before tax and taxable income.The firm's tax rate is 30%.As a result of this error,net income was:

Due to an error in computing depreciation expense,Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31,2016.Prewitt has a tax rate of 30%.Prewitt's retained earnings as of December 31,2016,would be: