Exam 23: Accounting for Changes and Errors

When disclosing the impact of a retrospective adjustment for the change from LIFO to FIFO in 2011, which of the following impacts is not expected to be reported in the comparative financial statements when two-year comparative statements are presented?

Most changes in accounting principles are accounted for retrospectively.Discuss how a change in accounting principle that causes a retrospective adjustment impacts the comparative financial statements issued for the current year.

Which of the following errors will normally result in overstatement of 2011 net income?

Exhibit 23-1 On January 1, 2010, the Carol Company purchased a machine for $450, 000 with an estimate useful life of six years and a $30, 000 salvage value.Straight-line depreciation was used for financial reporting purposes and MACRS depreciation for income tax reporting.Effective January 1, 2012, Carol switched to the double-declining-balance depreciation method for financial statement reporting but not for income tax purposes.Carol can justify the change. - Refer to Exhibit 23-1.Assuming an income tax rate of 30%, depreciation expense related to the equipment reported in Carol's 2012 income statement would be

A company changes from capitalizing and amortizing preproduction costs to recording them as an expense when incurred, because future benefits associated with those costs have become doubtful.This accounting change should be recognized as a

Mary Company purchased equipment on January 1, 2008, for $400, 000.At the date of acquisition, the equipment had an estimated useful life of eight years with a $40, 000 salvage value, and it was depreciated using the straight-line method.On January 1, 2013, based on updated information, Mary decided that the equipment had a total estimated life of ten years and no salvage value.Depreciation expense on the equipment in 2013 should be

When applying retrospective adjustments, current GAAP requires the change to be applied so that it includes

Exhibit 23-5 Nan Company, having a fiscal year ending on December 31, discovered the following errors in 2010: A collection of $\$ 12,000$ from a customer for rent related to January, 2011 , was recorded as revenue in 2010 Depreciation was under state d by $\$ 600$ in 2010. The January 1, 2009, invento1y was overstated by $\$ 10,000$ . The January 1,2010, inventory was understated by $\$ 6,000$ Insurance premiums of $\$ 2,000$ that relate to 2011 were expensed in 2010 when paid. - Assume no other errors have occurred and ignore income taxes. Refer to Exhibit 23-5.Total assets at December 31, 2010, were

The Zack Company began its operations on January 1, 2010, and used an accelerated method of depreciation for its machinery and equipment.On January 1, 2012, Zack adopted the straight-line method of depreciation.The following information is available regarding depreciation expense for each method: Accelerated Straight-line Year Depreciation Depreciatior 2010 \ 75,000 \ 50,000 2011 100,000 80,000 2012 145,000 130,000 What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2012, due to changing to a different depreciation method?

Disclosure of a retrospective adjustment should include

Wilma Company began operations in 2010 and uses the average cost method in costing its inventory.In 2011, Wilma is investigating a change to the LIFO method.Before making that determination, Wilma desires to determine what effect such a change will have on net income.Wilma has compiled the following information: Assume a 40% tax rate. If Wilma adopted LIFO in 2011, net income would be

On January 1, 2010, Teresa loaned $12, 000 to another company on a three-year, 4% note.No interest was accrued in 2010.Cash will not be received for the interest until the end of the three-year period.The error was discovered before adjusting and closing entries were posted on December 31, 2011.Ignoring income taxes, the correct entry on December 31, 2011, should be

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

An item that would not be accounted for under current GAAP as a change in estimate would be

Several errors are listed below. Required: Indicate the effect each error would have on 2011 net income by placing a plus sign (+), minus sign (-)or NI (no impact)in the space provided.Part (a)has been completed as an example.

Which of the following errors normally would not be automatically corrected over two accounting periods?

Exhibit 23-4 Bonnie Company's year-end December 31, 2010, financial statements contained the following errors: Ending inventory on December 31,2010 , was overstated by $\$ 60,000$ . Depre ciation expense was underst at ed by $\$ \sigma, 000$ . A two-year insurance policy for 2010 and 2011 in the amount of $\$ 12,000$ was entirely expensed in 2010. Investments in common stock of other companieswere sold in 2010 at a gain of $\$ 8,000$ , but the sale was not recorded until 2011 -Refer to Exhibit 23-4.The effect of the above errors on the December 31, 2010, reported assets of Bonnie is that assets are

The Lawrence Company began its operations on January 1, 2010, and used the LIFO method of accounting for its inventory.On January 1, 2012, Lawrence Company adopted FIFO in accounting for its inventory.The following information is available regarding cost of goods sold for each method: LIFO Cost of FIFO Cost of Year Goods Sold Goods Sold 2010 \ 470,000 \ 350,000 2011 690,000 450,000 2012 700,000 540,000 Assuming a tax rate of 30% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in opening retained earnings on the 2012 financial statements?

A change from LIFO to FIFO should be accounted for

Several errors are listed below. Required: Indicate the effect each error would have on 2010 net income by placing a plus sign (+), minus sign (-)or NI (no impact)in the space provided.Part (a)has been completed as an example.