F2 - M2 (Acct Changes & Error Corrections)

Question 1

Error correction prospective or retrospective?

Answer 1

Retrospective prior-period adjustment (restatement) of prior years’ financial statements

Question 2

Change of accounting estimate prospective or retrospective?

Answer 2

Prospective go forward basis no restatements needed

Question 3

Cash to accrual basis is what kind of change?

Answer 3

Error correction retrospective adjustment to begining retained earnings.

Question 4

Change in reporting entity retrospecitve or prospective?

Answer 4

Retrospective restate including note disclosures, and application to all prior period financial statements presented.

Question 5

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

Answer 5

As a component of income from continuing operations

Question 6

Which of the following describes the appropriate reporting treatment for a change in accounting estimate?

A.
By reporting pro forma amounts for prior periods.

B.	 By restating amounts reported in financial statements of prior periods.

C.	 In the period of change and future periods if the change affects both.

D.	 In the period of change with no future consideration.

Answer 6

C.
In the period of change and future periods if the change affects both.

Question 7

Goddard has used the FIFO method of inventory valuation since it began operations in Year 1. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of Year 4. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods:

Year 3

FIFO 83,000

Weighted Average 78,000

What amount, before income taxes, should be reported in the Year 4 retained earnings statement as the cumulative effect of the change in accounting principle?

Answer 7

FIFO to Weighted Average change in accounting principle

use last year decrease to find cummulative RE effect

Question 8

Going to LIFO not from is what kind of change?

Answer 8

Change of accounting principle with Prospective change in estimate since it is hard to calculate LIFO when going to.

Question 9

Depreciation expense is what kind of change?

Answer 9

Change of estimate prospective

Question 10

Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of cost and net realizable value to FIFO inventories. The cumulative effect of this change should be reported in Brighton’s financial statements as a:

Answer 10

Retrospective adjustment to beg retained earnings with separate disclosure change in accounting principle

Question 11

During Year 2, Dale Corp. made the following U.S. GAAP accounting changes:

Method used in Year 1
Method used in Year 2
After-tax effect
Sum-of-the-years’ digits
depreciation

Straight-line
depreciation

$30,000

Last-in, first-out
for inventory valuation

First-in, first-out
for inventory valuation

98,000

What amount should be shown in the Year 2 retained earnings statement as an adjustment to the beginning balance?

Answer 11

98,000 change in accounting principle

Question 12

FIFO To LIFO is a?

Answer 12

Change in accounting principle

Question 13

On January 1, Year 1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, Year 6, Pell changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, Year 5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, Year 5, would have been $420,000. Pell’s enacted income tax rate for Year 6 and thereafter is 30%. The amount shown in the Year 6 income statement for the cumulative effect of changing to the straight-line method should be:

A.
$140,000 credit.

B.	 $0.

C.	 $98,000 debit.

D.	 $98,000 credit.

Answer 13

B. 0 since this is a change in accounting estimate which is prospective.

Question 14

The cumulative effect of a change in accounting estimate should be shown separately:

A.	 On the retained earnings statement as an adjustment to the beginning balance.

B.	 On the income statement above income from continuing operations.

C.	 On the income statement after income from continuing operations and before discontinued operations.

D.	 It should not be recorded separately on any financial statement.

Answer 14

It should not be recorded separately on any financial statement.

Question 15

In which of the following situations should a company report a prior-period adjustment?

A.	 The scrapping of an asset prior to the end of its expected useful life.

B.	 The correction of a mathematical error in the calculation of prior years' depreciation.

C.	 A change in the estimated useful lives of fixed assets purchased in prior years.

D.	 A switch from the straight-line to double-declining balance method of depreciation.

Answer 15

The correction of a mathematical error in the calculation of prior years’ depreciation.

Question 16

Change in estimate affecting future periods should be disclosed in? Should changes in ordinary accounting estimate be disclosed?

Answer 16

NTFs = change in estimate affecting future payments

Ordinary changes should only be disclosed if material

Question 17

Change in accounting principle inseparable from a change of accounting estimate is treated how?

Answer 17

Change of accounting estimate

Question 18

In accounting for its merchandise inventory, Ingewald International, a company that uses U.S. GAAP, changed from LIFO to FIFO. Assuming the change in beginning inventory was $400,000 and that the change at the end of the year was $300,000 and that the tax rate was 30 percent, what was the amount of the cumulative effect of an accounting change that should have been displayed in Ingewald’s retained earnings statement?

Answer 18

This is accounting principle that is retrospective application therefore beginning retained earnings

400,000 X 0.7 = 280,000

Question 19

Salvage value on a piece of equipment is changed from $1,000 to $3,000 in Year 3. Also, the useful life was changed from 10 years to 5 years. The equipment cost $20,000 and is depreciated straight-line.

What kind of change/dollar amount?

Answer 19

Change in accounting estimate - current earnings only

20,000 - 1,000 = 19,000 / 10 = 1,900

1,900 X 2 = 3,800

20,000 - 3,800 = 16,200

16,200 - 3,000 = 13,200

13,200 / 3 = 4,400

4,400 - 1,900 = 2,500

Question 20

The depreciation method on a piece of equipment which cost $50,000 (with a 10-year life and $5,000 salvage value) was changed from accelerated to straight-line in Year 4. The old method was double declining balance.

What kind of change/dollar amount?

Answer 20

Change in account principle inseperable from accounting estimate (changing dep method)

50,000 X (2/10) = 10,000

50,000 - 10,000 = 40,000

40,000 X (2/10) = 8,000

40,000 - 8,000 = 32,000

32,000 X (2/10) = 6,400

32,000 - 6,400 = 25,600

25,600 X (2/10) = 5,120

25,600 - 5,000 = 20,600

20,600 / 6 = 2,942.86

5,120 - 2,942.86 = 2,177

Question 21

Inventory which was previously accounted for using specific identification is now accounted for using average cost. Pretax income was $375,000 and will now be $400,000. The effective tax rate is 35%.

What kind of change/dollar amount?

Answer 21

Change in accounting principle - Beg RE

25,000 X 0.65 = 16,250

Question 22

On January 1, Year 2, we decided to switch our inventory valuation method from LIFO to FIFO. If we had used FIFO in Year 1, cost of sales would have decreased by $100,000. What kind of change/retrospective or prospective?

Answer 22

Change in accounting principle retrospective (since it is going from LIFO to FIFO).

Question 23

After using FIFO in Years 1 and 2, Jones changes its inventory method to LIFO beginning in Year 3.

Type of Change
Y2 Impact

Answer 23

Change in accounting principle Prospective change so none

Question 24

A new FASB Standard is implemented in Year 3, which requires Jones to change how it accounts for probable future charges.

Type of Change
Y2 Impact

Answer 24

Change in accounting principle
Retrospective
Beg retained earning and current earnings Y2

Question 25

The company calculates depreciation of $250,000 in Year 2, but realizes after the books are closed that it should have been $225,000. Type of Change Y2 Impact

Answer 25

Error correction = Current earnings only Y2

Question 26

LIFO to FIFO Type of change/prospective or retrospective? FIFO To LIFO Type of change/prospective or retrospective? Deprecation expense Type of change/prospective or retrospective??

Answer 26

LIFO To FIFO: Changes in accounting principle retrospective application FIFO to LIFO: Changes in accounting principle Prospective application (since it is hard to account for change when going TO LIFO) Deprecation: Change in accounting principle Prospective

Question 27

At December 31, Year 2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, Year 1, $300,000 of which were to be written off in Year 2 and the remainder in Year 3. Off-Line's income tax rate is 30%. In its Year 3 financial statements, what amount should Off-Line report as cumulative effect of change in accounting principle?

Answer 27

0 since it is inseperable from a change of accounting principle making it an accounting estimate