Chapter 20

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Liberty University *

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47788

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Accounting

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Apr 3, 2024

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 A prior period adjustment requires an adjustment to – the beginning balance of retained earnings  For U.S. GAAP, which of the following are considered accounting changes? – change in accounting estimate, accounting principle, and reporting entity  An example of a change in accounting estimate that is effected by a change in accounting principle is a change in – depreciation methods  Which of the following is a change in accounting principle – change the method of inventory costing  Which of the following are changes in accounting estimates – change in estimate of periods benefited by tangible asset, change in useful life of a depreciable asset  The correction of a material error in the prior year’s financial statements is considered a – prior period adjustment  A company’s choice of accounting method is important because – it affects comparability with peer firms; it impacts reported net income  In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted-average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change? – earnings per share for year 1 decreased  A change in ____ relates to a change in method of accounting for an item, whereas a change in ____ arises from a new calculation due to new information or new experience. – accounting principle; accounting estimate  Which of the following are considered a change in accounting principle? – Change from the cost to equity method; adopt a new FASB standard  Which of the following is a change in accounting estimate? – change in actuarial calculations pertaining to pension plan  In year 2, Rogers Corp. changes its inventory from FIFO to the weighted-average method. Under the weighted=average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects on the change in accounting principle? – Year 1 net income will decrease; Year 1 ending inventory will decrease  The selection of an accounting method is important because it can – reduce comparability; influence financial ratios; complicate comparisons  When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? – the adjusted net income for each year is shown on the retained earnings statement for that year; retained earnings is adjusted for the earliest period presented  Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement? – earnings per share; cost of goods sold; net income  Chage in accounting principle – change from one generally accepted method to another generally accepted method of accounting  Change in accounting estimate – revision of an amount due to new information or new experience  Change in reporting entity – consolidate a subsidiary not previously included in consolidated financial statements  If a company changes its inventory method, what financial statement accounts are affected? – inventory; cost of goods sold  In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher

than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principles? – Year 1 net income will increase; year 1 retained earnings will increase  When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected – in the beginning balance of retained earnings for the earliest year presented for the years prior to that date.  Candy changes inventory methods in year 2, resulting in a $20,000 increase to beginning inventory in year 2. The tax rate is 40%. The journal entry required to record the change in accounting principles will require – credit to retained earnings for $12,000; debit to inventory for $20,000  When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ___ approach is used. – modified retrospective  When a company changes its inventory method from LIFO to FIFO, what accounts are affected to the comparative financial statements? – cost of goods sold; income tax payable; retained earnings; inventory  When is the prospective approach used in accounting changes? – for a change in accounting principle if it is impracticable to determine the effect of the change on previous years; for a change in accounting estimate  A change in accounting estimate is accounted for using the ____ approach. – prospective  A change in depreciation method is treated as a(n) – change in accounting estimate  On January 1, year 1, Weston Corp. purchases equipment for $100,000. The equipment has a 10- year useful life with no residual value. Weston uses the double-declining balance method of depreciation and depreciates the equipment $20,000 in year 1 and $16,000 in year 2. In year 3, Weston changes its depreciation method to straight-line depreciation. The journal entry in year 3 to record the depreciation expense will include which of the following journal entries? – debit depreciation expense $8,000  Which of the following are considered a change in reporting entity? – presenting consolidated financial statements in place of individual statements; changing specific companies that are included in the consolidated statements  What method is used to account for a change in accounting estimate? – prospective application  If a company discovers an error in previously issued financial statements, it must – restate the financial statements  What approach is used to account for a change in depreciation method? – prospective approach  On January 1, year 1, Yuri Corp. purchases equipment for $120,000. The equipment has a 6-year useful life with no residual value. Yuri uses the double-declining method of depreciation, and depreciates the equipment $40,000 in year 1. In year 2, Yuri changes its depreciation method to straight-line depreciation. The journal entry in year 2 to record the depreciation expense will include which of the following journal entries? – debit depreciation expense $16,000; credit accumulated depreciation $16,000  Which of the following are requirements for the correction of an accounting error? – restate previous years’ financial statements that are incorrect; prepare a journal entry to correct the error; disclose the nature of the error and the impact of the error on net income.  After a recent acquisition, Joann In. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in ____. – reporting entity  Iris Company purchased equipment for cash and incorrectly recorded the entry as a debit to repair expense and a credit to cash. The entry required to correct the error is to – debit equipment; credit repair expense

 What is the approach used for an error correction? – restatement of previous years’ financial statements  Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following? – credit inventory $100,000; debit equipment $100,000  Which of the following errors will self-correct? – miscounting ending inventory at the end of the year  Gris Corp. purchases inventory on account and incorrectly records a debit to equipment and a credit to cash. Which entries would be used to reverse and correct this error? – debit inventory; credit accounts payable  An error in which of the following accounts typically does not self-correct? – land  In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? – credit retained earnings $10,000; debit inventory $10,000  Mirage Corp. miscounts and understates its ending inventory in year 1 by $5,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? – understate assets; understate net income; understate retained earnings  Which of the following errors would self-correct in the following year? – miscounting ending inventory; failure to accrue salaries in the current year  If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? – net income; inventory; cost of goods sold  Which of the following errors typically do not self-correct? – recording equipment purchased in the land account  Glimmer Corp. miscounts and overstates its ending inventory in year 1, by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? – overstate net income $10,000; overstate assets $10,000.  Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? – total fixed assets; depreciation expense; retained earnings 

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