Exam 21: Accounting Corrections and Error Analysis

In April, 2018, Norman Industries sold available-for-sale debt securities that cost $470,000 and received a check from its broker for $793,000. When the check was deposited, the accounting clerk debited cash and credited Available-for-Sale Debt Investments for the full amount. The CFO questioned the entry in December, 2018. If this is an error, what is the proper correcting entry? (Tax rate is 40%.)

Which of the following is not an estimate that might be revised as a natural part of the accounting process?

Johnston Controls began operations in 2018 using FIFO inventory methods. On January 1, 2019, management decided they should have chosen to use LIFO, as it more accurately reflects income. The beginning 2019 inventory using FIFO was $100,000. Under the LIFO method the beginning inventory would have been $120,000. Required: Prepare the journal entry to record the change in accounting principle and discuss the required disclosures.

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

If a company has recorded a liability for a lawsuit, and the amount of the settlement is more than the provision in the liability, it must consider this an error and retrospectively correct it.

Bauer Corp. purchased an insurance policy on its plant with liability for harm to its employees in the case of a catastrophe in January, 2017 and paid a five-year premium for $300,000. The whole amount was recorded as Insurance Expense. The error was discovered in early 2020 when the accountants were reconciling 2019 for adjusting entries. The books are still open in 2019. (The tax rate is 40% for all years.) Income before taxes for 2017 is $1,040,000 and 2018 is $1,220,000. Required: Describe the steps to properly accounting for this error correction. Prepare the necessary journal entries on December 31, 2019.

Accounting changes are only permitted when ________.

Woods, Inc. purchased a new engine for a long-distance truck in January, 2017. The engine cost $380,000 and should give the truck an additional 400,000 miles of life. Inadvertently, the engine was charged to truck repairs expense. The error was found in December, 2018. The company records depreciation based on miles driven with no salvage value. Miles driven in 2017 were 85,000 and 70,000 in 2018. Which one of the following entries properly corrects all the errors through December 31, 2018? (Ignore income taxes.) (Round any intermediate calculations and your final answers to the nearest dollar.)

Material error corrections are retrospectively applied but do not require adjustments to retained earnings as prior-period adjustments.

Changes in accounting principles can be mandatory or voluntary.

Fields Construction decides to change from the completed-contract method to the percentage-of-completion method of recording construction projects. It also has a compensation plan for bonuses to supervisors for three percent of net income, which are retroactive for changes in prior years' net income. Discuss the direct and indirect effects of this change.

Miller Manufacturing purchased a packaging machine for $300,000 on January 2, 2015. The seller assumed that the machine would be functional for at least five years with no salvage value. In 2018, Miller decided that the machine would last an additional five years with a salvage value of $25,000. The company uses straight-line depreciation for all assets. What amount of depreciation should Miller record in 2018 and following years?

The bookkeeper for Phillips, Inc. mistakenly recorded a $300,000 one-year trade note receivable as a long-term note receivable in 2017. Interest revenue was correctly recorded. The error was discovered in 2019 by the company's auditors. What is the proper way to correct the error?

For each of the following situations, determine the accounting method that should be employed. Type of Accounting Changes Accounting Methods Change in Principle Change in Estimate Change in Estimate effected by a Principle change Change in Entities Error Correction

Braun Corp. purchased a service vehicle liability policy in July, 2017 and paid a five-year premium for $450,000. It was recorded as Insurance Expense. The error was discovered late in 2017 when the accountants were reconciling 2017 for adjusting entries. What is the proper entry to correct the errors in 2017 if the tax rate for all years is 40%?

When making a voluntary accounting change, a firm must explain the justification for the change on the basis that it more accurately portrays its financial position and performance.

Accounting entity changes are handled prospectively.

When a company makes a change in an accounting principle, IFRS additionally requires a company to report ________.

John Pickens writes mystery novels. His publisher pays him royalties for books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $52,000. On March 31, 2019, he received $59,000. Assuming that he recorded $52,000 at December 31, 2018, which one of the following is the correct journal entry on March 31, 2019? His tax rate is 35%.

If a mandatory accounting change requires too much work for a firm to use the retrospective approach, then the firm can choose to use the prospective approach.