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Exam 20: Accounting Changes

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Question 21

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

A) True
B) False

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Question 22

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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 (IFRS) ?

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.

E) All of the above
F) B) and D)

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Question 23

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

Orange Corp.constructed a machine at a total cost of $70 million.Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013.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 2016,Orange decided to change to the straight-line method.Ignoring income taxes,what will be Orange's depreciation expense for 2016?

Which of the following changes is not usually accounted for retrospectively?

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?

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:

During 2016,P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2014 $120,000 understated 2015 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 1,2016,would be:

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

A change in accounting estimate and a change in reporting entity are types of changes in accounting principle.

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.

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?

B Co.reported a deferred tax liability of $24 million for the year ended December 31,2015,related to a temporary difference of $60 million.The tax rate was 40%.The temporary difference is expected to reverse in 2017 at which time the deferred tax liability will become payable.There are no other temporary differences in 2015-2017.Assume a new tax law is enacted in 2016 that causes the tax rate to change from 40% to 30% beginning in 2017.(The rate remains 40% for 2016 taxes. )Taxable income in 2016 is $90 million. Required: Determine the effect of the change and prepare the appropriate journal entry to record B's income tax expense in 2016.What adjustment,if any,is needed to revise retained earnings as a result of the change?

Which of the following is not a change in estimate?

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

For 2015,P Co.estimated its two-year equipment warranty costs based on $23 per unit sold in 2015.Experience during 2016 indicated that the estimate should have been based on $25 per unit.The effect of this $2 difference from the estimate is reported:

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

During 2016,Hoffman Co.decides to use FIFO to account for its inventory transactions.Previously,it had used LIFO.

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:

Which of the following is accounted for prospectively?