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Exam 20: Accounting Changes and Error Corrections

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Question 1

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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?

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) B) and C)
F) All of the above

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Question 2

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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.

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

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Question 3

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If undetected, what is the effect of this error on Berkshire's 12/31/2012 balance sheet?

Which of the following is an example of a change in accounting principle?

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2013. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2013, would be:

Describe the approaches of reporting changes in accounting principles.

Prior to 2013, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2013, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2011, had an estimated useful life of five years and no estimated residual value. To account for the change in 2013, Trapper John:

A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Green reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life.

All changes reported using the retrospective approach require prior period adjustments.

No entry is required as this is treated prospectively under GAAP. 2.

Prior years' financial statements are restated under the:

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:

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

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

On January 2, 2013, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2013, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2013 earnings is:

When the retrospective approach is used for a change to the FIFO method, which of the following accounts is usually not adjusted?

How many acceptable approaches are there for changes in accounting principles?

Z Company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in:

B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2012, related to a temporary difference of $60 million. The tax rate was 40%. The temporary difference is expected to reverse in 2014 at which time the deferred tax liability will become payable. There are no other temporary differences in 2012-2014. Assume a new tax law is enacted in 2013 that causes the tax rate to change from 40% to 30% beginning in 2014. (The rate remains 40% for 2013 taxes.) Taxable income in 2013 is $90 million. Required: Determine the effect of the change and prepare the appropriate journal entry to record B's income tax expense in 2013. What adjustment, if any, is needed to revise retained earnings as a result of the change?

Both changes in reporting entities and material error corrections are reported prospectively.