Question 1

Many errors are due to misapplication of accounting policies.

Accepted Answer

A) True 
 B)False

Question 2

Material income statement errors that occur in the current year and do not affect the balance sheet ________.

Accepted Answer

A)  require adjustment to retained earnings 
B)  affect future years retained earnings 
C)  must be corrected 
D)  affect the statement of cash flows in prior years 
A)  require adjustment to retained earnings 
B)  affect future years retained earnings 
C)  must be corrected 
D)  affect the statement of cash flows in prior years

Question 3

Retrospective changes require all but which of the following?

Accepted Answer

A)  restatement of financial statements to reflect the effects of the change for each period presented 
B)  adjustments to assets and liabilities to reflect the cumulative effect of the change on periods prior to those presented 
C)  detailed numerical comparisons of all prior periods to restated statements 
D)  retained earnings restated for the cumulative effect of the change on income for periods prior to those presented 
A)  restatement of financial statements to reflect the effects of the change for each period presented 
B)  adjustments to assets and liabilities to reflect the cumulative effect of the change on periods prior to those presented 
C)  detailed numerical comparisons of all prior periods to restated statements 
D)  retained earnings restated for the cumulative effect of the change on income for periods prior to those presented

Question 4

Prior years' financial statements are restated for changes in material accounting estimates.

Accepted Answer

A) True 
 B)False

Question 5

Accounting changes detract from which one of the following enhancing qualitative characteristics of accounting information?

Accepted Answer

A)  comparability 
B)  relevance 
C)  representational faithfulness 
D)  materiality 
A)  comparability 
B)  relevance 
C)  representational faithfulness 
D)  materiality

Question 6

A change in the specific subsidiaries that make up the group of entities for which consolidated financial statements are presented is a change in a reporting entity.

Accepted Answer

A) True 
 B)False

Question 7

Jett Company purchased an umbrella liability policy in January, 2017 and paid a five-year premium for $400,000. 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 error at December 31, 2017? (Ignore income taxes.)

Accepted Answer

A)  No entry required because it will self-correct in two more years. 
B)  $$\begin{array} { | c | r | r | } 
\hline \text { Prepaid Insurance } & 160,000 & \
\hline \text { Insurance Expense (2017) } & 80,000 \
\hline \text { Retained Earnings } & & 240,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Prepaid Insurance } & 320,000 & \
\hline \text { Insurance Expense } & & 320,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | r | r | } 
\hline \text { Prepaid Insurance } & 240,000 & \
\hline \text { Insurance Expense (2017) } & 80,000 & \
\hline \text { Retained Earnings } & & 320,000 \
\hline
\end{array}$$ 
A)  No entry required because it will self-correct in two more years. 
B)  $$\begin{array} { | c | r | r | } 
\hline \text { Prepaid Insurance } & 160,000 & \
\hline \text { Insurance Expense (2017) } & 80,000 \
\hline \text { Retained Earnings } & & 240,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Prepaid Insurance } & 320,000 & \
\hline \text { Insurance Expense } & & 320,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | r | r | } 
\hline \text { Prepaid Insurance } & 240,000 & \
\hline \text { Insurance Expense (2017) } & 80,000 & \
\hline \text { Retained Earnings } & & 320,000 \
\hline
\end{array}$$

Question 8

A firm may choose to apply indirect effects of an accounting principle change either prospectively or retrospectively.

Accepted Answer

A) True 
 B)False

Question 9

A change in reporting entity must be treated retrospectively for all years presented in the financial statements.

Accepted Answer

A) True 
 B)False

Question 10

Changes in depreciation methods are changes in accounting principle that are accounted for retrospectively.

Accepted Answer

A) True 
 B)False

Question 11

Highland Corporation has always used double-declining balance depreciation for its equipment. Beginning in 2018, the company has decided to use straight-line depreciation for all new equipment purchases. How should the company report this decision? Describe any journal entries and disclosures that need to be made for this change.

Accepted Answer

A change in depreciation methods is a ch

Question 12

When the purchase of a material seven-year depreciable asset is recorded by debiting an expense account, which one of the following statements is correct?

Accepted Answer

A)  It is a self-correcting error and no adjustment is necessary. 
B)  The error will eventually self-correct, but the financial statements will be in error for seven years. 
C)  If the company uses a rapid depreciation method, the error will self-correct quickly so no adjustment is necessary. 
D)  Since it affects only the income statement, no adjustment is required. 
A)  It is a self-correcting error and no adjustment is necessary. 
B)  The error will eventually self-correct, but the financial statements will be in error for seven years. 
C)  If the company uses a rapid depreciation method, the error will self-correct quickly so no adjustment is necessary. 
D)  Since it affects only the income statement, no adjustment is required.

Question 13

Describe the two methods for reporting accounting changes and how they differ.

Accepted Answer

The two methods of reporting accounting

Question 14

Which one of the following changes is not an accounting change?

Accepted Answer

A)  principle 
B)  estimate 
C)  error 
D)  entity 
A)  principle 
B)  estimate 
C)  error 
D)  entity

Question 15

In reconciling information to complete its financial statements, Flying High Corporation discovered the following situations:
 $$\begin{array} { | l | r| } 
\hline \text { Income before taxes and the changes } & \$ 400,000 \
\hline \text { Income tax rate } & 35 \% \
\hline \text { Bad debt expense increased } & 1 \% \text { of sales } \
\hline \text { Sales } & \$ 900,000 \
\hline \text { Equipment original cost } & \$ 500,000 \
\hline \text { Equipment accumulated depreciation } & \$ 200,000 \
\hline \text { Method of depreciation unchanged } & \text { DDB } \
\hline \text { Remaining life changed from 5 years to } & 3 \text { years } \
\hline
\end{array}$$ 
Required: Assuming that no depreciation had been recorded, recompute depreciation expense, bad debt expense, income before taxes, income tax expense, and net income.

Accepted Answer

Depreciation Expense:
 \[\begin{array} {

Question 16

Which one of the following might be affected by a change in revenue recognition requiring a prospective change?

Accepted Answer

A)  retained earnings 
B)  management compensation 
C)  unearned revenue 
D)  deferred taxes 
A)  retained earnings 
B)  management compensation 
C)  unearned revenue 
D)  deferred taxes

Question 17

Accounting estimate changes are handled prospectively.

Accepted Answer

A) True 
 B)False

Question 18

Changes in amortization, depletion, and depreciation methods effected by a change in accounting principle are accounted for prospectively.

Accepted Answer

A) True 
 B)False

Question 19

A self-correcting error, discovered after the books are closed in the second year, still requires a journal entry.

Accepted Answer

A) True 
 B)False

Question 20

Balance sheet errors are typically the result of misclassification of accounts in the process of recording a transaction and require correction upon discovery.

Accepted Answer

A) True 
 B)False

Exam 21: Accounting Corrections and Error Analysis

Many errors are due to misapplication of accounting policies.

Material income statement errors that occur in the current year and do not affect the balance sheet ________.

Retrospective changes require all but which of the following?

Prior years' financial statements are restated for changes in material accounting estimates.

Accounting changes detract from which one of the following enhancing qualitative characteristics of accounting information?

A change in the specific subsidiaries that make up the group of entities for which consolidated financial statements are presented is a change in a reporting entity.

A firm may choose to apply indirect effects of an accounting principle change either prospectively or retrospectively.

A change in reporting entity must be treated retrospectively for all years presented in the financial statements.

Changes in depreciation methods are changes in accounting principle that are accounted for retrospectively.

When the purchase of a material seven-year depreciable asset is recorded by debiting an expense account, which one of the following statements is correct?

Describe the two methods for reporting accounting changes and how they differ.

Which one of the following changes is not an accounting change?

Which one of the following might be affected by a change in revenue recognition requiring a prospective change?

Accounting estimate changes are handled prospectively.

Changes in amortization, depletion, and depreciation methods effected by a change in accounting principle are accounted for prospectively.

A self-correcting error, discovered after the books are closed in the second year, still requires a journal entry.

Balance sheet errors are typically the result of misclassification of accounts in the process of recording a transaction and require correction upon discovery.

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

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