Question 1

Which one of the following would not be a required disclosure for a change in accounting principle?

Accepted Answer

A)  description of the nature of the change 
B)  management's justification for the change 
C)  the estimated effect on future earnings per share 
D)  cumulative effect of the change on retained earnings for the first year presented 
A)  description of the nature of the change 
B)  management's justification for the change 
C)  the estimated effect on future earnings per share 
D)  cumulative effect of the change on retained earnings for the first year presented

Question 2

A change in depreciation method is a change in estimate effected by a change in accounting principle, and is accounted for prospectively.

Accepted Answer

A) True 
 B)False

Question 3

The IRS is investigating Miller Productions' tax returns for 2017 and 2018. Based on the IRS audit procedures, the company accrued a $46,000 loss for additional tax assessments in 2018 for the 2017 tax year. At the end of 2018, Miller was able to settle with IRS for $68,000. What entry should Miller make when it pays the deficiency in December, 2018?

Accepted Answer

A)  $$\begin{array} { | l | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Retained Earnings } & 22,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | l | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Income Tax Expense } & 22,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Retained Earnings } & & 22,000 \
\hline \text { Cash } & & 24,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Taxes Payable } & 68,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$ 
A)  $$\begin{array} { | l | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Retained Earnings } & 22,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | l | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Income Tax Expense } & 22,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Taxes Payable } & 46,000 & \
\hline \text { Retained Earnings } & & 22,000 \
\hline \text { Cash } & & 24,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Taxes Payable } & 68,000 & \
\hline \text { Cash } & & 68,000 \
\hline
\end{array}$$

Question 4

Which one of the following is a change in estimate effected by a change in an accounting principle?

Accepted Answer

A)  change in salvage value of an asset 
B)  change in estimated life of an asset 
C)  change from declining-balance to straight-line depreciation 
D)  changes in pension plan asset revenues 
A)  change in salvage value of an asset 
B)  change in estimated life of an asset 
C)  change from declining-balance to straight-line depreciation 
D)  changes in pension plan asset revenues

Question 5

When a firm has a change in reporting entity, it must disclose ________.

Accepted Answer

A)  the individual financial statements for each component entity 
B)  the effect of the change on net income and EPS for each year presented 
C)  the reasons that the company chose to purchase a new business unit 
D)  the reasons for the lack of comparability to prior financial statements 
A)  the individual financial statements for each component entity 
B)  the effect of the change on net income and EPS for each year presented 
C)  the reasons that the company chose to purchase a new business unit 
D)  the reasons for the lack of comparability to prior financial statements

Question 6

On January 1, 2020, Hampton's Construction, Inc. decided to change from the completed-contract method of accounting to the percentage-of-completion method. Hampton will continue to use the completed-contract method for income tax purposes. The following information is available for net income. The income tax rate for all years is 35%. Net Income
$\begin{array}{ccc}
\underline{ \text { Year Ended }} & \underline{\text { Percentage of Completion }} & \underline{\text { Completed Contract} } \
 \text { December } 31,2018 & \$ 149,000 & \$ 126,000 \
 \text { December } 31,2019 & 178,000 & 156,000 \
 \text { December } 31,2020 & 281,000 & 181,000 \

\end{array}$

What is the journal entry to record the change in accounting principle on January 1, 2020?

Accepted Answer

A)  No entry needed. 
B)  $\begin{array}{llcc}
  \text {  Construction in Progress} &45,000\
  \text {   Retained Eamings} &&45,000\
\end{array}$ 
C)  $\begin{array}{ll}
\text { Retained Earnings } & 65,000 \
\text { Deferred Tax Asset } & 35,000 \
\text { Construction in Progress } &&100,000
\end{array}$ 
D)  $\begin{array}{l}
\text { Construction in Progress }&45,000 \
\text { Deferred Tax Liability } &&15,750\
\text { Retained Earnings }&&29,250
\end{array}$ 
A)  No entry needed. 
B)  $\begin{array}{llcc}
  \text {  Construction in Progress} &45,000\
  \text {   Retained Eamings} &&45,000\
\end{array}$ 
C)  $\begin{array}{ll}
\text { Retained Earnings } & 65,000 \
\text { Deferred Tax Asset } & 35,000 \
\text { Construction in Progress } &&100,000
\end{array}$ 
D)  $\begin{array}{l}
\text { Construction in Progress }&45,000 \
\text { Deferred Tax Liability } &&15,750\
\text { Retained Earnings }&&29,250
\end{array}$

Question 7

While completing the adjusting entries for 2017 in early 2018, the internal auditor discovered that a trademark, with an estimated eight-year life that was registered on January 1, 2017 had not been amortized. The trademark cost $400,000. (The income tax rate is 40%.) The books are still open in 2017.
Required: Describe the steps to correct the error.

Accepted Answer

Since the error occurred in 2017 and the

Question 8

During 2017, a $50,000 loss on the sale of machinery was incorrectly recorded as a factory equipment repair. The error was not discovered until the books were closed and the financial statements were issued for 2018. What adjustment is necessary?

Accepted Answer

A)  No adjustment is necessary to books or financial statements. 
B)  Record a correction to the books for 2017 and 2018 and recall prior financial statements. 
C)  Since only income statement accounts are affected, make no entry to the books but recall the 2017 income statement. 
D)  Make no entry, but if $50,000 is a material amount, retrospectively adjust the 2017 comparative income statement. 
A)  No adjustment is necessary to books or financial statements. 
B)  Record a correction to the books for 2017 and 2018 and recall prior financial statements. 
C)  Since only income statement accounts are affected, make no entry to the books but recall the 2017 income statement. 
D)  Make no entry, but if $50,000 is a material amount, retrospectively adjust the 2017 comparative income statement.

Question 9

Complete the following table by selecting the appropriate type of change and the accounting method appropriate for each event.
 $$\begin{array} { | l | l | l | } 
\hline { \text { Event } } & \text { Type of Change } & \text { Accounting Method } \
\hline \text { Change from LIFO to FIFO. } & & \
\hline \text { Change in the warranty expense } & & \
\text { provision. } & & \
\hline \begin{array} { l } 
\text { Change from completed- } \
\text { contract to percentage-of- } \
\text { completion method. }
\end{array} & & \
\hline \begin{array} { l } 
\text { Purchase of a new subsidiary } \
\text { with } 60 \% \text { ownership that is five } \
\text { years old. }
\end{array} & & \
\hline \text { Change from reporting } & & \
\text { inventory from the aggregate } & & \
\text { method to the individual item } & & \
\text { method. } & & \
\hline \text { Change in the life and salvage } & & \
\text { value of a depreciable asset. } & & \
\hline \text { Change from straight-line to } & & \
\text { declining balance depreciation. } & & \
\hline
\end{array}$$

Accepted Answer

None

Question 10

Firms account for material error corrections ________.

Accepted Answer

A)  with the retrospective method 
B)  using the prospective method 
C)  only after they self-correct 
D)  only when both the income statement and balance sheet are affected 
A)  with the retrospective method 
B)  using the prospective method 
C)  only after they self-correct 
D)  only when both the income statement and balance sheet are affected

Question 11

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

Accepted Answer

A) True 
 B)False

Question 12

Self-correcting errors do not require any journal entries regardless of the length of time involved.

Accepted Answer

A) True 
 B)False

Question 13

Johnston Controls began operation in 2017 using FIFO inventory methods. In 2018, management decided they should have chosen LIFO to more accurately portray financial position and performance. The beginning 2018 inventory using FIFO was $200,000. Under the LIFO method the beginning inventory would have been $240,000. The adjustment to inventory for the accounting principle change for 2017 would be ________.

Accepted Answer

A)  $0 
B)  $20,000 debit 
C)  $40,000 credit 
D)  $40,000 debit 
A)  $0 
B)  $20,000 debit 
C)  $40,000 credit 
D)  $40,000 debit

Question 14

For each of the following situations, determine the accounting method that should be employed.
 $$\begin{array} { | l | l | } 
\hline \text { Type of Accounting Changes } & \text { Accounting Methods } \
\hline \text { Change in Principle } & \
\hline \text { Change in Estimate } & \
\hline \text { Change in Entities } & \
\hline \text { Change in Accounting Estimate } & \
\text { effected by a Change in } & \
\text { Accounting Principle } & \
\hline
\end{array}$$

Accepted Answer

\[\begin{array} { | l | c | } 
\hline \t

Question 15

A material error in ending inventory requires special analysis because it ________.

Accepted Answer

A)  affects two years of cost of goods sold, income tax expense, net income, and retained earnings 
B)  counter balances over a minimum of three years 
C)  affects the balance sheet as well as the income statement for one year 
D)  reflects poorly on the quality of the company's accounting reliability 
A)  affects two years of cost of goods sold, income tax expense, net income, and retained earnings 
B)  counter balances over a minimum of three years 
C)  affects the balance sheet as well as the income statement for one year 
D)  reflects poorly on the quality of the company's accounting reliability

Question 16

JAT Corp. loaned $480,000 for three years to a major supplier on July 1, 2017. The note stipulated 24% interest to be paid annually each June 30. Since this was an unusual transaction, no one billed the supplier for the interest in 2018 or recorded the accrued interest at the year-end (December). The supplier did not send in any interest in 2018. On March 1, 2019, after the 2018 books were closed, the CFO found the error. Which one of the following is the correct journal entry to correct the errors thru March 1, 2019? (Ignore income taxes.)

Accepted Answer

A)  Since it has not been billed, no entry should be made until June 30, 2019. 
B)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 172,800 & \
\hline \text { Retained Earnings - Prior-Period Adjustment } & & 172,800 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 192,000 \
\hline \text { Interest Revenue } & & 19,200 \
\hline \text { Retained Earnings - Prior-Period Adjustment } & & 172,800 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 172,800 & \
\hline \text { Interest Revenue } & & 172,800 \
\hline
\end{array}$$ 
A)  Since it has not been billed, no entry should be made until June 30, 2019. 
B)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 172,800 & \
\hline \text { Retained Earnings - Prior-Period Adjustment } & & 172,800 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 192,000 \
\hline \text { Interest Revenue } & & 19,200 \
\hline \text { Retained Earnings - Prior-Period Adjustment } & & 172,800 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | r | r | } 
\hline \text { Interest Receivable } & 172,800 & \
\hline \text { Interest Revenue } & & 172,800 \
\hline
\end{array}$$

Question 17

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

Accepted Answer

A)  the nature of the change and the reason for the change 
B)  the effect of the change on income from continuing operations 
C)  the effect of the change on operating expenses 
D)  the effect of the change on other comprehensive income 
A)  the nature of the change and the reason for the change 
B)  the effect of the change on income from continuing operations 
C)  the effect of the change on operating expenses 
D)  the effect of the change on other comprehensive income

Question 18

When accountants discover material errors, they must be corrected.

Accepted Answer

A) True 
 B)False

Question 19

Describe a change in reporting entity and discuss its accounting treatment and its required disclosures.

Accepted Answer

A change in reporting entity occurs when

Question 20

When an income statement error that does not affect the balance sheet is not found until after the books are closed, an entry ________.

Accepted Answer

A)  must be made to correct the error during the next year 
B)  must be made to correct the error by reopening the books 
C)  is not necessary, but financial statements must be recalled immediately 
D)  is not necessary, but the income statement must be corrected before issue 
A)  must be made to correct the error during the next year 
B)  must be made to correct the error by reopening the books 
C)  is not necessary, but financial statements must be recalled immediately 
D)  is not necessary, but the income statement must be corrected before issue

Which one of the following would not be a required disclosure for a change in accounting principle?

A change in depreciation method is a change in estimate effected by a change in accounting principle, and is accounted for prospectively.

Which one of the following is a change in estimate effected by a change in an accounting principle?

When a firm has a change in reporting entity, it must disclose ________.

During 2017, a $50,000 loss on the sale of machinery was incorrectly recorded as a factory equipment repair. The error was not discovered until the books were closed and the financial statements were issued for 2018. What adjustment is necessary?

Firms account for material error corrections ________.

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

Self-correcting errors do not require any journal entries regardless of the length of time involved.

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 Entities Change in Accounting Estimate effected by a Change in Accounting Principle

A material error in ending inventory requires special analysis because it ________.

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

When accountants discover material errors, they must be corrected.

Describe a change in reporting entity and discuss its accounting treatment and its required disclosures.

When an income statement error that does not affect the balance sheet is not found until after the books are closed, an entry ________.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Income Taxes

Accounting for Leases

Extension: Ol Accounting for Leases Current Standard

Accounting for Employee Compensation and Benefits

Earnings Per Share

The Statement of Cash Flows

Filters

Exam 21: Accounting Corrections and Error Analysis

Which one of the following would not be a required disclosure for a change in accounting principle?

A change in depreciation method is a change in estimate effected by a change in accounting principle, and is accounted for prospectively.

Which one of the following is a change in estimate effected by a change in an accounting principle?

When a firm has a change in reporting entity, it must disclose ________.

During 2017, a $50,000 loss on the sale of machinery was incorrectly recorded as a factory equipment repair. The error was not discovered until the books were closed and the financial statements were issued for 2018. What adjustment is necessary?

Firms account for material error corrections ________.

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

Self-correcting errors do not require any journal entries regardless of the length of time involved.

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 Entities Change in Accounting Estimate effected by a Change in Accounting Principle

A material error in ending inventory requires special analysis because it ________.

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

When accountants discover material errors, they must be corrected.

Describe a change in reporting entity and discuss its accounting treatment and its required disclosures.

When an income statement error that does not affect the balance sheet is not found until after the books are closed, an entry ________.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Income Taxes

Accounting for Leases

Extension: Ol Accounting for Leases Current Standard

Accounting for Employee Compensation and Benefits

Earnings Per Share

The Statement of Cash Flows

Filters