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Exam 22: Accounting for Changes and Errors

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Question 1

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In Western reviewed their estimated warranty costs which at that time was 5% of sales. This estimated was based upon the warranty accrual method. In 2016 net sales were $3,250,000 they recorded warranty expense of $162,500. Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop in their warranty claims for 2017. The company decided for 2017 to reduce the estimate to 3% of sales. In 2017 Western reported net sales of $3,500,000. Required: 1) How should the company report the change and why? 2) Prepare any necessary journal entries for 2016 or 2017 to account for the change.

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1) The company should report the change ...

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Question 2

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Lilly Company has been depreciating equipment for 10 years with an estimated total useful life of 25 years. Lilly has revised the estimated life to be only 17 years, with 7 years remaining in the asset's useful life. What is the appropriate action that Lilly should do now?

A) record a change in estimate by recomputing depreciation of prior periods and restating prior period financial results accordingly
B) record a change in estimate by recomputing depreciation of prior periods and presenting the net depreciation adjustment as a cumulative effect change in accounting principle in the current period
C) continue to depreciate the equipment over the original 25-year life
D) depreciate the remaining book value over the remaining 7 years of the asset's useful life

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D

Question 3

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What is a change in reporting entity and how is an adjustment handled?

A change in accounting estimate is always accounted for

Most errors are discovered automatically through proper use of the double-entry system or by the internal or external auditors. However, some errors escape detection until after they have been included in the published financial statements of a company. Required: Describe three types of errors that occur in financial statements and indicate the appropriate corrective action to take when the errors are discovered.

Margaret Company purchased equipment on January 1, 2014, for $500,000. At the date of acquisition, the equipment had an estimated useful life of eight years with a $50,000 salvage value, and it was depreciated using the straight-line method. On January 1, 2019, based on updated information, Margaret decided that the equipment had a total estimated life of ten years and no salvage value. What is the amount of depreciation expense on the equipment in 2019?

GAAP states that a change in accounting principle includes

What is the difference between counterbalancing errors and noncounterbalancing errors?

According to GAAP how should items be reported in order that information is reported in a relevant manner?

What are the 4 steps involved in the basic framework for the analysis and correction of an error?

What must be disclosed when making a retrospective adjustment?

The Bronson Company changed its method of determining inventories from LIFO to FIFO. This change represents a

A change in accounting entity is limited to presenting consolidated or combined financial statements in place of individual statements or a change in the subsidiaries that make up a group of companies in which one would report either as consolidated financial statements or changing the mix of companies included in the financial statements.

A change in a reporting entity is accounted for by a prospective adjustment so that all financial statements are presented for the same entity.

Prospective adjustments are expected to

During 2018, Dragon Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and a salvage value of $50,000. The equipment was acquired on January 1, 2016 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2018 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change if any) for the year ended December 31, 2018, was $180,000. What is the amount of Dragon's net income for 2018?

What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?

Which of the following accounting changes is always accounted for prospectively?

On January 1, 2016, Suzanne Company purchased equipment for $48,000. The estimated life was five years and the salvage value was estimated at $5,000. On January 1, 2018, it was determined that the equipment's total useful life should have been estimated at seven years and the salvage value should have been estimated at only $4,000. The company used straight-line depreciation. Required: a. What type of change did Suzanne Company make on January 1, 2018, and how should Suzanne account for the change? b. If an adjusting entry is necessary on January 1, 2018, prepare it. c. Compute the amount of depreciation expense on the equipment for 2018.

Which of the following accounting treatments is proper for a change in reporting entity?