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Exam 20: Accounting Changes and Error Corrections

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Question 1

Multiple Choice

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Doug Smith Industries purchased warehouses for $55 million (no residual value) at the beginning of 2015. The warehouses were being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2018, 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.

Correct Answer

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A

Question 2

Multiple Choice

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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.

Correct Answer

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B

Question 3

Multiple Choice

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

FIFA Footballs acquired a patent in 2015 at a cost of $150 million and amortizes the patent on a straight-line basis. During 2018 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 2018 financial statements should include:

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

Buckeye Company purchased a machine on January 1, 2016. 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, 2018, 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, 2018.

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

Orange Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. 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 2018, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2018?

A company failed to record unrealized gains of $20 million on its debt investments classified as trading securities. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:

Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2018. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2018, would be:

Lugar Company purchased a piece of machinery for $30,000 on January 1, 2016, 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, 2018, Lugar 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 2018.

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

In 2018, management discovered that Dual Production had debited expense for the full cost of an asset purchased on January 1, 2015, 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 2018 before preparation of the adjusting and closing entries, includes:

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. -Disclosure note

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

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 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

SkiPark Company purchased a gondola for $440,000 (no residual value) at the beginning of 2015. The gondola was being depreciated over a 10-year life using the double-declining method. At the beginning of 2018, it was decided to change to straight-line. An accompanying disclosure note would include each of the following except:

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. -Changes in accounting principle

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

How are accounting errors treated?