Accounting Changes And Error Ch20 Complete Test Bank

Intermediate Accounting, 10e (Spiceland)

Chapter 20 Accounting Changes and Error Corrections

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

Difficulty: 2 Medium

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

2) A change in reporting entity and a material error correction are both reported prospectively.

Difficulty: 1 Easy

Topic: Distinguish Principle-Estimate-Entity-Error; Distinguish retrospective and prospective; Change in reporting entity; Error correction

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-05 Describe the situations that constitute a change in reporting entity.; 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

3) Most, but not all, changes in accounting principle are reported using the retrospective approach.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

5) Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements that the change is made.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

6) All changes reported using the retrospective approach require cumulative effect adjustments of the change.

Difficulty: 2 Medium

Topic: Distinguish retrospective and prospective; Change in accounting principle–Retrospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

7) A change to the LIFO method of valuing inventory usually requires use of the retrospective method.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

8) All changes in estimate are accounted for retrospectively.

Difficulty: 1 Easy

Topic: Change in accounting estimate

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

9) A change in reporting entity requires note disclosure in all subsequent financial statements prepared for the new entity.

Difficulty: 1 Easy

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

10) Error corrections require restatement of all the affected prior year financial statements reported in comparative financial statements.

Difficulty: 1 Easy

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

11) Which of the following is accounted for as a change in accounting principle for a publicly traded corporation?

A) A change in the estimated life of a depreciable asset.

B) A change from cash accounting to accrual accounting.

C) A change from the FIFO method of costing inventories to the LIFO method.

D) A change in depreciation methods.

Difficulty: 1 Easy

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

12) When a change in accounting principle is reported, what is sometimes sacrificed?

A) Relevance.

B) Consistency.

C) Conservatism.

D) Representational faithfulness.

Difficulty: 1 Easy

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

13) Regardless of the type of accounting change that occurs, the most important responsibility is:

A) To properly determine the tax effect.

B) To communicate that a change has occurred.

C) To compute the correct amount of the change.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Evaluate

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) A change in inventory costing methods.

B) A change in the estimated useful life of a depreciable asset.

C) A change in the actuarial life expectancies of employees under a pension plan.

D) Consolidating a new subsidiary.

Difficulty: 2 Medium

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

15) Accounting changes occur for which of the following reasons?

A) Management is being fair and consistent in financial reporting.

B) Management compensation is affected.

C) Debt agreements are impacted.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

16) Which of the following is not one of the approaches for reporting accounting changes?

A) The change approach.

B) The retrospective approach.

C) The prospective approach.

D) All of these answer choices are approaches for reporting accounting changes.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

17) An accounting change that is reported by the prospective approach is reflected in the financial statements of:

A) Prior years only.

B) Prior years plus the current year.

C) The current year only.

D) Current and future years.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

18) The prospective approach usually is required for:

A) A change in accounting principle.

B) A change in reporting entity.

C) A change in estimate.

D) A correction of an error.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting estimate

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

19) A change that uses the prospective approach is accounted for by:

A) Implementing it in the current year.

B) Reporting pro forma data.

C) Retrospective restatement of all prior financial statements in a comparative annual report.

D) Giving current recognition of the past effect of the change.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) Retrospective restatement usually is not used for a:

A) Change in accounting estimate.

B) Change in accounting principle.

C) Change in entity.

D) Correction of error.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

21) When an accounting change is reported under the retrospective approach, prior years' financial statements are:

A) Revised to reflect the use of the new principle.

B) Reported as previously prepared.

C) Left unchanged.

D) Adjusted using prior period adjustment procedures.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

22) Prior years' financial statements are restated under the:

A) Current approach.

B) Prospective approach.

C) Retrospective approach.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Retrospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

23) The modified retrospective approach requires:

A) a modification of prior years' financial statements.

B) a journal entry to adjust account balances in the beginning of the year of change.

C) both a modification of prior years' financial statements and a journal entry to adjust account balances in the beginning of the year of change.

D) neither a modification of prior years' financial statements nor a journal entry to adjust account balances in the beginning of the year of change.

Difficulty: 2 Medium

Topic: Distinguish retrospective and prospective; Change in accounting principle–Retrospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

24) Which of the following changes should be accounted for using the retrospective approach?

A) A change in the estimated life of a depreciable asset.

B) A change from straight-line to declining balance depreciation.

C) A change to the LIFO method of costing inventories.

D) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Retrospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

25) Which of the following changes should not be accounted for using the retrospective approach?

A) A change in the estimated useful life of a depreciable asset.

B) A change from the FIFO method of inventory costing to the average method.

C) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

D) A change from the LIFO method of costing inventories.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) Which of the following is not a change in accounting principle that usually is accounted for by retrospectively revising prior financial statements?

A) Change from FIFO to the average method of inventory costing.

B) Change from SYD to DDB depreciation.

C) Change from the average method of inventory costing to FIFO.

D) Change from the LIFO to the FIFO method of inventory costing.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective; Change in depreciation method

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

27) Retrospective restatement usually is appropriate for a change in: 

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Retrospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

28) Companies should report the cumulative effect of an accounting change in the income statement:

A) In the quarter in which the change is made.

B) In the annual financial statements only.

C) In the first quarter of the fiscal year in which the change is made.

D) Never.

Difficulty: 1 Easy

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

29) The cumulative effect of most changes in accounting principle is reported:

A) In the income statement between income from continuing operations and net income.

B) In the income statement after income and before income tax.

C) In the income statement before income from continuing operations.

D) In the balance sheet accounts affected.

Difficulty: 1 Easy

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

30) When an accounting change is reported under the retrospective approach, account balances in the general ledger:

A) Are not adjusted.

B) Are closed out and then updated.

C) Are adjusted net of the tax effect.

D) Are adjusted to what they would have been had the new method been used in previous years.

Difficulty: 1 Easy

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

31) Disclosure notes related to a change in accounting principle under the retrospective approach should include:

A) The effect of the change on executive compensation.

B) The auditor's approval of the change.

C) The SEC's permission to change.

D) Justification for the change.

Difficulty: 1 Easy

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) Which of the following would not be accounted for using the retrospective approach?

A) A change from LIFO to FIFO inventory costing.

B) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

C) A change in depreciation methods.

D) A change from the equity method of accounting for investments.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

33) Which of the following is not an example of a change in accounting principle?

A) A change in the useful life of a depreciable asset.

B) A change from LIFO to FIFO for inventory costing.

C) A change to the full costing method in the extractive industries.

D) A change to the equity method of accounting for investments.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Income Taxes Payable.

B) Inventory.

C) Retained Earnings.

D) All of these answer choices are usually adjusted.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

35) During 2021, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.

A) Hoffman is not required to make any accounting adjustments.

B) Hoffman has made a change in accounting principle requiring retrospective adjustment.

C) Hoffman has made a change in accounting principle requiring prospective application.

D) Hoffman needs to correct an accounting error.

Difficulty: 1 Easy

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) La Casita Restaurants changed from the FIFO method of inventory costing to the weighted average method during 2021. When reported in the 2021 comparative financial statements, the 2020 inventory amount will be:

A) Increased.

B) Decreased.

C) Increased or decreased, depending on how prices changed.

D) Unaffected.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Change from expensing extraordinary repairs to capitalizing the expenditures.

B) Change from FIFO to LIFO.

C) Change in the composition of firms reporting on a consolidated basis.

D) Change from LIFO to FIFO.

Difficulty: 1 Easy

Topic: Distinguish Principle-Estimate-Entity-Error; Distinguish retrospective and prospective; Change in accounting principle–Prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

38) Which of the following changes would not be accounted for using the prospective approach?

A) A change to LIFO from average costing for inventories.

B) A change from application of the LCNRV rule from individual item costing to an aggregate costing approach.

C) A change from straight-line to double-declining balance depreciation.

D) A change from double-declining balance to straight-line depreciation.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

39) Which of the following accounting changes should not be accounted for prospectively?

A) The correction of an error.

B) A change from declining balance to straight-line depreciation.

C) A change from straight-line to declining balance depreciation.

D) A change in the expected salvage value of a depreciable asset.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

40) Which of the following would not be accounted for using the prospective approach?

A) A change to LIFO from FIFO for inventory costing.

B) A change in price indexes used under the LIFO method of inventory costing.

C) A change in estimate.

D) A change from the cash basis to accrual accounting.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

41) Which of the following changes in inventory costing usually should not be reported by revising the financial statements of prior periods?

A) The weighted-average method to the LIFO method.

B) The weighted-average method to the FIFO method.

C) FIFO method to the weighted-average method.

D) LIFO method to the weighted-average method.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective; Change in accounting principle–Prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

42) Which of the following is a change in estimate?

A) A change from the full costing method in the extractive industries.

B) A change from recognizing construction contract revenue over time to recognizing revenue at a point in time.

C) Consolidating a subsidiary for the first time.

D) A change in the termination rate of employees under a pension plan.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

43) Which of the following is accounted for prospectively?

A) Changes from the weighted-average method of inventory costing to FIFO.

B) Change in reporting entity.

C) Change in the percentage used to determine warranty expense.

D) Correction of an error.

Difficulty: 1 Easy

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

44) Which of the following is not a change in estimate?

A) A change in the useful life of a depreciable asset.

B) A change in the mortality rate used for pension computations.

C) A change from the cost to the equity method in accounting for investments.

D) A change in the warranty expense percentage.

Difficulty: 1 Easy

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) A change in the residual value of equipment is accounted for:

A) As a prior period adjustment.

B) Prospectively.

C) Retrospectively.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

46) Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2017, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2021 (before adjusting and closing entries). What is the appropriate patent amortization expense in 2021?

A) $4 million.

B) $5 million.

C) $10 million.

D) $20 million.

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

47) For 2020, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2020. Experience during 2021 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

A) In 2021 income from continuing operations.

B) As an accounting change, net of tax, below 2021 income from continuing operations.

C) As an accounting change requiring 2020 financial statements to be restated.

D) As a correction of an error requiring 2020 financial statements to be restated.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

48) Gore Inc. recorded a liability in 2021 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.

A) Gore has made a change in accounting principle, requiring retrospective adjustment.

B) Gore needs to correct an accounting error.

C) Gore is required to adjust a change in accounting estimate prospectively.

D) Gore is not required to make any accounting adjustments.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

49) Mobic Inc. acquired some manufacturing equipment in January 2018 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2021, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2024. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2021, Mobic should:

A) Charge $280,000 in depreciation expense.

B) Report the book value of the equipment in its December 31,2021 balance sheet at $210,000.

C) Make an adjustment to retained earnings for the error in measuring depreciation during 2018-2020.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) Hepburn Company bought a copyright for $90,000 on January 1, 2018, at which time the copyright had an estimated useful life of 15 years. On January 5, 2021, the company determined that the copyright would expire at the end of 2026. How much should Hepburn record as amortization expense for this copyright for 2021?

A) $14,400.

B) $7,200.

C) $8,000.

D) $12,000.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

51) Goosen Company bought a copyright for $90,000 on January 1, 2018, at which time the copyright had an estimated useful life of 15 years. On January 5, 2021, the company determined that the copyright would expire at the end of 2026. How much should Goosen record retrospectively as the effect of change?

A) $0.

B) $12,000.

C) $8,000.

D) $14,400.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Lundholm Company purchased a machine for $100,000 on January 1, 2019. Lundholm depreciates machines of this type by the straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2021, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2021? The tax rate is 25%.

A) $20,000.

B) $16,000.

C) $17,778.

D) $26,667.

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) FIFA Footballs acquired a patent in 2018 at a cost of $150 million and amortizes the patent on a straight-line basis. During 2021 management decided that the benefits from the patent would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. FIFA's 2021 financial statements should include:

A) A patent balance of $150 million.

B) A patent balance of $102 million.

C) Patent amortization expense of $15 million.

D) Patent amortization expense of $7.5 million.

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) PK Precision Tools changed from accelerated depreciation to straight-line depreciation for some equipment it purchased eight years ago. Management decided to account for the change as a change in accounting principle. Which of the following is an accurate statement regarding the company's policy?

A) This approach is conceptually correct and consistent with changes in inventory costing and other method changes.

B) The policy is inappropriate because companies cannot change depreciation methods for existing assets, only for assets placed in service after the date of the change, and the new method is simply applied prospectively.

C) The company should account for the change as a change in accounting estimate because when a company changes the way it depreciates an asset in midstream, the change would be made to reflect a change in estimated future benefits from the asset, the pattern of receiving the benefits, or knowledge about the benefits.

D) The policy is inappropriate because the change should be accounted for by the modified retrospective approach.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

55) JFS Co. changed from straight-line to double-declining-balance depreciation. The journal entry to record the change includes:

A) A credit to accumulated depreciation.

B) A debit to accumulated depreciation.

C) A debit to a depreciable asset.

D) The change does not require a journal entry.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

56) National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:

A) Current income tax payable increases.

B) The cumulative effect decreases current period earnings.

C) Prior periods' financial statements are restated.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

57) If a change is made from straight-line to units-of-production depreciation, one should record the effects by a journal entry including:

A) A credit to deferred tax liability.

B) A credit to accumulated depreciation.

C) A debit to depreciation expense.

D) No journal entry is required.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

58) On January 2, 2021, 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, 2021, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 25%. The separately reported change in 2021 earnings is:

A) An increase of $40,000.

B) A decrease of $40,000.

C) An increase of $30,000.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze; Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

59) SkiPark Company purchased a gondola for $440,000 (no residual value) at the beginning of 2018. The gondola was being depreciated over a 10-year life using the double-declining method. At the beginning of 2021, it was decided to change to straight-line. An accompanying disclosure note would include each of the following except:

A) The effect of a change on any financial statement line items affected for all periods reported.

B) Justification that the change is preferable.

C) The cumulative effect of the change.

D) The effect of a change on per share amounts affected for all periods reported.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

60) Tangerine Corp. constructed a machine at a total cost of $140 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. By that method, accumulated depreciation at the end of 2020 is $64.8 million. The residual value is expected to be $8 million. At the beginning of 2021, Tangerine decided to change to the straight-line method. Ignoring income taxes, what will be Tangerine's depreciation expense for 2021?

A) $9.6 million.

B) $10.8 million.

C) $13.2 million.

D) $18.8 million.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

61) Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2021, Red decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, what will be Red's depreciation expense for 2021?

A) $4.80 million.

B) $5.40 million.

C) $6.60 million.

D) $11.55 million.

Difficulty: 3 Hard

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

62) B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2021. The change affects machinery purchased at the beginning of 2019 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B's 2021 depreciation expense?

A) $9,120.

B) $13,680.

C) $15,840.

D) $19,200.

Difficulty: 3 Hard

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

63) Orange Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. 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 2021, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2021?

A) $4.8 million.

B) $5.4 million.

C) $6.6 million.

D) $9.4 million.

Difficulty: 3 Hard

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

64) Doug Smith Industries purchased warehouses for $55 million (no residual value) at the beginning of 2018. The warehouses were being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2021, management decided to change to straight-line. Ignoring taxes, the 2021 adjusting entry will include a debit to depreciation expense of:

A) $3.6 million

B) $4 million

C) $4.3 million

D) $34 million

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

65) Doug Smith Industries purchased warehouses for $55 million (no residual value) at the beginning of 2018. The warehouses were being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2021, management decided to change to straight-line. An accompanying disclosure note would include each of the following except:

A) The cumulative effect of the change.

B) Justification that the change is preferable.

C) The effect of a change on any financial statement line items affected for all periods reported.

D) The effect of a change on per share amounts affected for all periods reported.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

66) Venice Company purchased a gondola for $440,000 (no residual value) at the beginning of 2018. The gondola was being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2021, it was decided to change to straight-line. Ignoring taxes, the 2021 adjusting entry will include a debit to depreciation expense of:

A) $76,000

B) $44,000

C) $32,000

D) $22,000

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

67) Prior to 2021, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2021, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2019, had an estimated useful life of five years and no estimated residual value. To account for the change in 2021, Trapper John:

A) Would retrospectively report $600,000 in depreciation expense annually for 2019 and 2020, and report $600,000 in depreciation expense for 2021.

B) Would adjust accumulated depreciation and retained earnings for the excess charges made in 2019 and 2020.

C) Would report depreciation expense of $400,000 in its 2021 income statement.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

68) Diversified Systems, Inc. reports consolidated financial statements this year in place of statements of individual companies reported in previous years. This results in:

A) An accounting change that should be reported prospectively.

B) An accounting change that should be reported by restating the financial statements of all prior periods presented.

C) A correction of an error.

D) Neither an accounting change nor a correction of an error.

Difficulty: 2 Medium

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) An accounting change that should be reported prospectively.

B) A correction of an error.

C) An accounting change that should be reported by restating the financial statements of all prior periods presented.

D) Neither an accounting change nor a correction of an error.

Difficulty: 2 Medium

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

70) Which of the following is a change in reporting entity?

A) A change to the full cost method in the extractive industries.

B) Discontinuing a segment of operations.

C) A change from the cost to the equity method.

D) Consolidating a subsidiary not previously included in consolidated financial statements.

Difficulty: 1 Easy

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

71) Which of the following is not a change in reporting entity?

A) Reporting using comparative financial statements for the first time.

B) Changing the companies that comprise a consolidated group.

C) Presenting consolidated financial statements for the first time.

D) All are changes in reporting entity.

Difficulty: 3 Hard

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Correction of an error in depreciation from last year.

B) Payment of taxes due to a tax audit of last year's tax return.

C) Payment of a previously recorded warranty expense.

D) Receipt of the proceeds of a note receivable that was due last year.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

73) 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 from continuing operations, and earnings per share.

Difficulty: 1 Easy

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

74) Washburn Co. spent $10 million to purchase a new patented technology, debiting an intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets and plans to amortize the intangible asset on a straight-line basis. The appropriate accounting treatment is that:

A) Washburn is not required to make any accounting adjustments.

B) Washburn is required to adjust a change in accounting estimate prospectively.

C) Washburn has made a change in accounting principle, requiring retrospective adjustment.

D) Washburn needs to correct an accounting error.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Evaluate

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

75) In 2021, internal auditors discovered that Fay, Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2018. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

A) $140,000.

B) $280,000.

C) $420,000.

D) $700,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

76) Popeye Company purchased a machine for $300,000 on January 1, 2020. Popeye depreciates machines of this type by the straight-line method over a five-year period using no salvage value. Due to an error, no depreciation was taken on this machine in 2020. Popeye discovered the error in 2021. What amount should Popeye record as depreciation expense for 2021? The tax rate is 25%.

A) $120,000.

B) $60,000.

C) $45,000.

D) $90,000.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

77) Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2021. Prewitt has a tax rate of 25%. Prewitt's retained earnings as of December 31, 2021, would be:

A) Overstated by $15 million.

B) Understated by $15 million.

C) Overstated by $5 million.

D) Understated by $5 million.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2021. Crote has a tax rate of 25%. Crote's retained earnings as of December 31, 2021, would be:

A) Overstated by $45 million.

B) Understated by $45 million.

C) Overstated by $15 million.

D) Understated by $15 million.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

79) In 2021, management discovered that Dual Production had debited expense for the full cost of an asset purchased on January 1, 2018, 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 2021 before preparation of the adjusting and closing entries, includes (ignore taxes):

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.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

80) Green Company overstated its inventory by $50 million at the end of 2021. The discovery of this error during 2022, before adjusting or closing entries, would require:

A) An increase in retained earnings.

B) A prospective adjustment in the 2022 income statement.

C) A debit to inventory of $50 million.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

81) Cooper Inc. took physical inventory at the end of 2020. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.

A) Cooper needs to correct an accounting error.

B) Cooper has made a change in accounting principle, requiring retrospective adjustment.

C) Cooper is required to adjust a change in accounting estimate prospectively.

D) Cooper is not required to make any accounting adjustments.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) After issuing its financial statements, a company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 25%. As a result of this error, net income was:

A) Understated by $75,000.

B) Overstated by $75,000.

C) Understated by $25,000.

D) Overstated by $25,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

83) Berkshire Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 25% income tax rate and that this was the only error it made.

If undetected, what is the effect of this error on Berkshire's December 31, 2020 balance sheet?

A) Assets understated by $600,000 and shareholders' equity understated by $600,000.

B) Assets understated by $450,000 and shareholders' equity understated by $450,000.

C) Assets understated by $600,000, liabilities understated by $150,000, and shareholders' equity understated by $450,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

84) Berkshire Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 25% income tax rate and that this was the only error it made.

What is the effect of the error on Berkshire's 2021 income statement?

A) Net income is understated by $450,000.

B) Cost of goods sold is understated by $450,000.

C) There are no errors in the 2021 income statement.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

85) Berkshire Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 25% income tax rate and that this was the only error it made.

What is the effect of the error on Berkshire's December 31, 2021 balance sheet?

A) There are no errors in the December 31, 2021 balance sheet.

B) Assets understated by $600,000 and shareholders' equity understated by $600,000.

C) Assets understated by $450,000 and shareholders' equity understated by $450,000.

D) Liabilities understated by $150,000 and shareholders' equity overstated by $450,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

86) C. Goode Eyeglasses overstated its inventory by $30,000 at the end of 2021.

In 2022, the discovery of this error, before adjusting or closing entries, would require:

A) An increase in retained earnings.

B) A debit to inventory of $30,000.

C) A prospective adjustment in the 2022 income statement.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

87) C. Goode Eyeglasses overstated its inventory by $30,000 at the end of 2021.

If the error is not discovered until 2023, before adjusting or closing entries, C. Goode would need:

A) An increase in 2023 retained earnings.

B) A debit to inventory of $30,000 in 2023.

C) A prospective adjustment in the 2022 income statement.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

88) During 2021, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 

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, 2021, would be:

A) Correct.

B) $30,000 overstated.

C) $150,000 overstated.

D) $270,000 overstated.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) Powell Company had the following errors over the last two years:

2019: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.

2020: 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, 2021? (Ignore taxes)

A) Increase by $15,000.

B) Decrease by $25,000.

C) Decrease by $6,000.

D) Increase by $25,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) Early in 2021, Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2018 was debited to insurance expense. The correcting entry would include (ignore taxes):

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.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) Early in 2021, Ashland Granite discovered that a five-year insurance premium payment of $750,000 at the beginning of 2018 was debited to insurance expense. The correcting entry would include:

A) A debit to prepaid insurance of $750,000.

B) A debit to insurance expense of $300,000.

C) A debit to prepaid insurance of $450,000.

D) A credit to retained earnings of $300,000.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

92) In December 2021, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2022 flagged this transaction. The appropriate accounting treatment is that:

A) Kojak needs to correct an accounting error.

B) Kojak has made a change in accounting principle, requiring retrospective adjustment.

C) Kojak is required to adjust a change in accounting estimate prospectively.

D) Kojak is not required to make any accounting adjustments.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Evaluate

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

93) C Co. reported a retained earnings balance of $200,000 at December 31, 2020. In September 2021, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2020, had been paid and fully expensed in 2020. C has a 25% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2021 statement of retained earnings?

A) $210,000.

B) $215,000.

C) $220,000.

D) $222,500.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

94) A company overstated its liability for warranties by $200,000. Its tax rate is 25%. As a result of this error, income tax expense is:

A) Unaffected.

B) Overstated by $50,000.

C) Understated by $50,000.

D) Understated by $150,000.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

95) 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 25%. 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 $500,000.

B) Report a prior period adjustment decreasing retained earnings by $1,500,000.

C) Report a current period charge decreasing net income by $500,000.

D) Report a current period charge decreasing net income by $1,500,000.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze; Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

96) 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 25%. As a result of this error, net income is:

A) Unaffected.

B) Understated by $375,000.

C) Understated by $500,000.

D) Understated by $125,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

97) 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 25%. As a result of this error, net income was:

A) Unaffected.

B) Overstated by $400,000.

C) Overstated by $300,000.

D) Overstated by $100,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

98) Moonland Company's income statement contained the following errors:

Ending inventory, December 31, 2021, understated by $6,000

Depreciation expense for 2021 overstated by $1,000

What is the effect of the errors on 2021 net income before taxes?

A) Overstated by $5,000.

B) Understated by $5,000.

C) Understated by $7,000.

D) Overstated by $7,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

99) 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 25%. As a result of this error, net income is:

A) Overstated by $135,000.

B) Overstated by $15,000.

C) Understated by $135,000.

D) Understated by $15,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

100) In 2021, 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 2021 would have been $10 million higher had the new life been used. Barney's tax rate is 25%. Barney's retained earnings as of December 31, 2021, would be:

A) Overstated by $7.5 million.

B) Overstated by $2.5 million.

C) Overstated by $10 million.

D) Unaffected.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

101) A company failed to record unrealized gains of $20 million on its available for sale debt security investments. Its tax rate is 25%. As a result of this error, comprehensive income would be:

A) Understated by $15 million.

B) Understated by $5 million.

C) Understated by $20 million.

D) Unaffected.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

102) A company failed to record unrealized gains of $20 million on its debt investments classified as trading securities. Its tax rate is 25%. As a result of this error, total shareholders' equity would be:

A) Understated by $15 million.

B) Understated by $5 million.

C) Understated by $20 million.

D) Unaffected.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) Patterson Company failed to adjust for a $60,000 actual loss on pension plan assets in 2021, resulting in an underfunded pension plan. Patterson's tax rate is 25%. As result of this error, retained earnings would be:

A) Unaffected.

B) Overstated by $60,000.

C) Overstated by $45,000.

D) Overstated by $15,000.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) 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.

Difficulty: 2 Medium

Topic: IFRS‒Accounting changes and error correction

Learning Objective: 20-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement; BB Global / Keyboard Navigation

105) 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 estimated useful life of depreciable assets.

B) Change from the FIFO method of costing inventories to the LIFO method.

C) Change in depreciation method.

D) Change in reporting entity.

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective; IFRS-Accounting changes and error correction

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.; 20-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) 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.

Difficulty: 2 Medium

Topic: IFRS‒Accounting changes and error correction

Learning Objective: 20-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement; BB Global / Keyboard Navigation

107) 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.

Difficulty: 2 Medium

Topic: IFRS‒Accounting changes and error correction

Learning Objective: 20-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

108) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective; Change in accounting principle-Retrospective; Change in reporting entity; Error correction

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.;

20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-05 Describe the situations that constitute a change in reporting entity.; 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

109) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

Difficulty: 2 Medium

Topic: Change in accounting estimate; Change in accounting principle-Prospective; Change in accounting principle-Retrospective; Change in reporting entity; Distinguish retrospective and prospective; Error correction

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.; 20-05 Describe the situations that constitute a change in reporting entity.; 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

110) Indicate the nature of each of the situations described below using the following three-letter code

CODE DESCRIPTION

Difficulty: 3 Hard

Topic: Change in accounting estimate; Change in accounting principle-Prospective; Change in accounting principle-Retrospective; Change in depreciation method; Change in reporting entity; Error correction

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.; 20-05 Describe the situations that constitute a change in reporting entity.; 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

111) Indicate the nature of each of the situations described below using the following three-letter code

CODE DESCRIPTION

Difficulty: 2 Medium

Topic: Change in accounting estimate; Change in accounting principle-Prospective; Change in accounting principle-Retrospective; Change in depreciation method; Change in reporting entity; Error correction

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.; 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.; 20-05 Describe the situations that constitute a change in reporting entity.; 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

112) Babcock Company purchased a piece of machinery for $30,000 on January 1, 2019, and has been depreciating the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no salvage value. On January 1, 2021, Babcock decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life is changed to a total of six years from the date of purchase. Ignore income taxes.

Required:

(1.) Prepare the appropriate journal entry, if any, to record the accounting change.

(2.) Prepare the journal entry to record depreciation for 2021.

Difficulty: 3 Hard

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

113) Albatross Company purchased a piece of machinery for $60,000 on January 1, 2019, and has been depreciating the machine using the double-declining-balance method based on a five-year estimated useful life and no salvage value. On January 1, 2021, Albatross decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life did not change. Ignore income taxes.

Required:

(1) Prepare the appropriate journal entry, if any, to record the accounting change.

(2) Prepare the journal entry to record depreciation for 2021.

Difficulty: 3 Hard

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

114) Colorado Consulting Company has been using the sum-of-the-years'-digits depreciation method to depreciate some office equipment that was acquired at the beginning of 2019. At the beginning of 2021, Colorado Consulting decided to change to the straight-line method. The equipment cost $120,000 and is expected to have no salvage value. The estimated useful life of the equipment is five years. Ignore income taxes.

Required:

1. Prepare the appropriate journal entry, if any, to record the accounting change.

2. Prepare the journal entry to record depreciation for 2021.

Difficulty: 3 Hard

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

115) Universal Semiconductors switched from the double-declining-balance depreciation method to straight-line depreciation in 2021.

• The change affects its precision equipment that was purchased at the beginning of 2019 at a cost of $50 million.

• The machinery has an expected useful life of ten years and an estimated residual value of $8 million.

Required:

Prepare the appropriate entry to record depreciation in 2021.

Difficulty: 3 Hard

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

116) Pinnacle Corporation has been using the straight-line depreciation method to depreciate some office equipment that was acquired at the beginning of 2018. At the beginning of 2021, Pinnacle decided to change to the double-declining-balance method. The equipment cost $120,000 and is expected to have no salvage value. The estimated useful life of the equipment is five years. The tax rate is 25%.

Required:

Prepare the journal entry, if any, to record the accounting change at the beginning of 2021.

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

117) Annual depreciation expense on a building purchased a few years ago (using the straight-line method) is $5,000. The cost of the building was $100,000. The current book value of the equipment (January 1, 2021) is $85,000. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2021, the company decided to reduce the original useful life by 25% and to establish a salvage value of $5,000. The firm also decided double-declining-balance depreciation was more appropriate. Ignore tax effects.

Required:

(1) Record the journal entry, if any, to report the accounting change.

(2) Record the annual depreciation for 2021.

Difficulty: 3 Hard

Topic: Change in accounting estimate; Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

118) Green Co. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. 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 2021, Green decided to change to the straight-line method.

Required:

1. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2021?

2. Suppose Green has been using the straight-line method and switches to the sum-of-the-years'-digits method. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2021?

Difficulty: 3 Hard

Topic: Change in accounting principle-Prospective; Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

119) Macintosh Inc. changed from LIFO to the FIFO inventory costing method on January 1, 2021. Inventory values at the end of each year since the inception of the company are as follows:

Required:

Ignoring income tax considerations, prepare the entry to report this accounting change.

Difficulty: 3 Hard

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

120) B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2020, related to a temporary difference of $60 million. The tax rate was 25%. The temporary difference is expected to reverse in 2022 at which time the deferred tax liability will become payable. There are no other temporary differences in 2020-2022. Assume a new tax law is enacted in 2021 that causes the tax rate to change from 25% to 20% beginning in 2022. (The rate remains 25% for 2021 taxes.) Taxable income in 2021 is $100 million.

Required:

Determine the effect of the change and prepare the appropriate journal entry to record B's income tax expense in 2021. What adjustment, if any, is needed to revise retained earnings as a result of the change?

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

121) Buckeye Company purchased a machine on January 1, 2019. The machine had a cost of $260,000 with a $10,000 residual value. The estimated useful life of the machine was eight years. On January 1, 2021, due to technological innovations, the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%. The company uses straight-line depreciation.

Required:

Prepare the journal entry to record the annual depreciation on December 31, 2021.

Difficulty: 3 Hard

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

122) Johnson Company receives royalties on a patent it developed several years ago. Royalties are 5% of net sales, to be received on September 30 for sales from January through June and receivable on March 31 for sales from July through December. The patent rights were distributed on July 1, 2020, and Johnson accrued royalty revenue of $50,000 on December 31, 2020, as follows:

Johnson received royalties of $65,000 on March 31, 2021, and $90,000 on September 30, 2021. In December, 2021, the patent user indicated to Johnson that sales subject to royalties for the second half of 2021 should be $600,000.

Required:

Prepare any journal entries Johnson should record during 2021 related to the royalty revenue.

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

123) Mattson Company receives royalties on a patent it developed several years ago. Royalties are 5% of net sales, to be received on September 30 for sales from January through June and receivable on March 31 for sales from July through December. The patent rights were distributed on July 1, 2020, and Mattson accrued royalty revenue of $60,000 on December 31, 2020, as follows:

Mattson received royalties of $65,000 on March 31, 2021, and $80,000 on September 30, 2021. In December, 2021, the patent user indicated to Mattson that sales subject to royalties for the second half of 2021 should be $800,000.

Required:

(1.) Prepare any journal entries Mattson should record during 2021 related to the royalty revenue.

(2.) What changes should be made to retained earnings relative to these royalties?

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

124) Nash Industries changed its method of accounting for warranties from the cash basis to the accrual basis on January 1, 2021. 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.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

125) Cherokee Company's auditor discovered some errors. No errors were corrected during 2020. The errors are described as follows:

(1.) Beginning inventory on January 1, 2020, was understated by $5,000.

(2.) A two-year insurance policy purchased on April 30, 2020, in the amount of $24,000 was debited to Prepaid Insurance. No adjustment was made on December 31, 2020, or on December 31, 2021.

Required:

Prepare appropriate journal entries (assume the 2021 books have not been closed). Ignore income taxes.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

126) Lindy Company's auditor discovered two errors. No errors were corrected during 2020. The errors are described as follows:

(1.) Merchandise costing $4,000 was sold to a customer for $9,000 on December 31, 2020, but it was recorded as a sale on January 2, 2021. The merchandise was properly excluded from the 2020 ending inventory. Assume the periodic inventory system is used.

(2.) A machine with a five-year life was purchased on January 1, 2020. The machine cost $20,000 and has no expected salvage value. No depreciation was taken in 2020 or 2021. Assume the straight-line method for depreciation.

Required:

Prepare appropriate journal entries (assume the 2021 books have not been closed). Ignore income taxes.

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

127) Name and briefly describe the three categories of accounting changes.

Difficulty: 1 Easy

Topic: Distinguish change—Principle-Error-Entity

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

128) Describe briefly the approaches of reporting changes in accounting principles.

Difficulty: 1 Easy

Topic: Distinguish retrospective and prospective

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

129) 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?

Difficulty: 1 Easy

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

130) How may accounting changes detract from accounting information?

Difficulty: 2 Medium

Topic: Distinguish Principle-Estimate-Entity-Error

Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.

Bloom's: Evaluate

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

131) How are accounting errors treated?

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Understand

AACSB: Communication; Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

134) On December 1, 2021, LCD Distributing Company ("LCD or "Company") issued a press release announcing its financial results for the fiscal year ended November 30, 2021. Included was the following information regarding a change in inventory method (in part):

In the fourth quarter of fiscal 2021, the Company changed its inventory valuation method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO) method. The change is preferable as it provides a more meaningful presentation of the Company's financial position as it values inventory in a manner which more closely approximates current cost; better represents the underlying commercial substance of selling the oldest products first; and more accurately reflects the Company's realized periodic income. As required by U.S. generally accepted accounting principles, this change in accounting principle has been reflected in the consolidated statements of financial position, consolidated statements of operations, and consolidated statements of cash flows through retroactive application of the FIFO method. Previously reported net income (loss) available to common shareholders' for the fiscal years 2021 and 2020 were increased by $0.4 million and $2 million after income taxes, respectively.

Required:

1. Why does GAAP require LCD to retrospectively adjust prior years' financial statements for this type of accounting change?

2. Assuming that the quantity of inventory remained stable during 2020, did the cost of LCD's inventory move up or down during that period?

Difficulty: 3 Hard

Topic: Change in accounting principle-Retrospective

Learning Objective: 20-02 Describe how changes in accounting principle typically are reported.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

135) 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.

Difficulty: 2 Medium

Topic: Change in depreciation method

Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

136) 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.

Difficulty: 3 Hard

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Communication; Reflective Thinking

AICPA/Accessibility: FN Measurement

137) 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?

Difficulty: 1 Easy

Topic: Change in accounting estimate

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.; 20-04 Explain how and why changes in estimates are reported prospectively.

Bloom's: Understand

AACSB: Communication; Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Change in reporting entity

Learning Objective: 20-05 Describe the situations that constitute a change in reporting entity.

Bloom's: Remember

AACSB: Communication; Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 1 Easy

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Change in accounting principle-Prospective

Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

141) L Company discovered that a three-year insurance premium payment of $240,000 one year ago was debited to insurance expense.

Required:

1. What action is required? Ignore taxes.

2. What action is required if the error is not discovered until four years after it occurred?

Difficulty: 2 Medium

Topic: Change in accounting estimate

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

142) 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.

Difficulty: 2 Medium

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

143) If inventory is understated at the end of 2020 and the error is not discovered, how will net income be affected in 2021?

Difficulty: 3 Hard

Topic: Error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Error correction; IFRS-Accounting changes and error correction

Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.; 20-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections.

Bloom's: Remember

AACSB: Diversity; Reflective Thinking

AICPA/Accessibility: BB Global; FN Measurement