Exam 21: Accounting Corrections and Error Analysis

Complete the following table by selecting the appropriate type of change and the accounting method appropriate for each event. Event Type of Change Accounting Method Change from FIFO to LIFO. Change in the warranty expense provision. Multi-year insurance policy charged to insurance expense. Change from percentage-of- completion to completed- contract to method. Patent not amortized because it is not expected to decline in value. Purchase of a new subsidiary with 60 \% ownership that is three years old. Change from reporting inventory from the aggregate method to the individual item method. Change from writing off bad debts as they become uncollectible to the allowance method. Change in the life and salvage value of a depreciable asset. Failure to record the correct ending inventory balance. Change from straight-line to declining balance depreciation.

Butler Products decided to change inventory methods on January 1, 2020 to more effectively report its results of operations. In the past, management has measured its ending inventories by the average-cost method and they now believe that FIFO is a better representation of its financial position and profitability. Butler's tax rate is 35% for all years. December 31, 2018 \ 264,000 205,000 December 31, 2019 395,000 345,000 December 31,2020 240,000 190,000 Which one of the following journal entries correctly records the change in the accounting principle?

In 2017, Antiques, Inc. incorrectly recorded ending inventory as $1,030,000 instead of $790,000. The controller discovered the error in 2019 when reviewing final entries for 2018 financial statements. The books are not closed in 2018. The 2018 ending inventory amount was correct. The tax rate for all years is 35%. Which one of the following entries is correctly written and dated?

Which one of the following would not be affected by a change in revenue recognition requiring a retrospective change?

A material error is one that, if not corrected, would impact a user's decisions.

Prospective changes require changes be made to the current year and all future years affected.

Langley Corporation replaced an HVAC system in one of its warehouses in July, 2017, at a cost of $410,000. The accountant recording the purchase charged it to repairs and maintenance expense. The error was discovered late in 2018 while reconciling depreciation expense for 2018. The system should last about 7 years with no salvage value. What entry should be made before the 2018 books are closed if the company uses straight-line depreciation? (Round intermediate calculations to the nearest cent and your final answer to the nearest dollar.)

Energy, Inc began operations in 2018 using LIFO inventory methods. In 2019, management decided they should have chosen FIFO. The beginning inventory for 2019 using LIFO was $128,000. Under the FIFO method, the beginning inventory would have been $157,000. The adjustment to inventory for the change in accounting principle for 2019 would be ________.

In reconciling information to complete its financial statements, Biltmore, Inc. discovered the following situations: Income before taxes and the changes \ 1,000,000 Income tax rate 40\% Warranty expense decreased 1\% of sales Sales \ 6,000,000 Equipment original cost \ 800,000 Equipment accumulated depreciation \ 200,000 Method of depreciation unchanged SL Remaining life changed from 5 years to 6 years Required: Assuming that no depreciation had been recorded, recompute depreciation expense, warranty expense change, income before taxes, income tax expense, and net income.

Accounting principle changes are generally handled retrospectively.

For which one of the following changes is it appropriate to use the prospective method?

Presenting consolidated statements instead of individual financial statements is a change in a reporting entity.

Austin Motor Works declared and distributed a 6% stock dividend in 2018 when the stock was selling for $20 per share. There were 4,000,000 shares outstanding at the time of the dividend declaration. The controller recorded the distribution at par value ($1 per share) resulting in a debit to Dividends and a credit to Common Stock for $240,000. Upon review in early 2019 when the 2018 books were still open, the CFO made which of the following correcting entries? (Abbreviations used: APIC = Additional Paid-In Capital)

When a large corporation purchases a new business which is included in the consolidated statements for the year, it is not a change in a reporting entity, and it is accounted for prospectively.

Indirect effects of changes in an accounting principle are those that change current or future cash flows and are applied prospectively.

In completing the adjusting entries for 2017 in early 2018, the internal auditor discovered that a patent, with an estimated eight-year life that was registered in January, 2017 had not been amortized. The patent cost $440,000. The income tax rate is 40%. The books are still open in 2017. What is the journal entry to correct the error?

Mandatory accounting changes require retrospective application of the new accounting standard.

A self-correcting error must self-correct within two years.

When a self-correcting error is discovered after closing the books for the second year ________.

Fraud is a type of accounting error.