Exam 22: Accounting Changes and Error Analysis

Ben, Inc. follows IFRS for its external financial reporting. Ben, Inc. owns 25% of the outstanding stock of Black, Inc. and accordingly uses the equity method to account for its investment. Which of the following is true regarding Ben, Inc.'s policies related to Black, Inc.?

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

On December 31, 2015 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2015 beginning inventory to increase by $840,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/15, assuming a 40% tax rate, is

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?

Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2015 for $880,000. During the year ended December 31, 2015, Hallmark, Inc. reported the following:Dividends declared and paid $ 400,000Net income 2,400,000Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2015. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.'s balance sheet at December 31, 2015 assuming Haystack, Inc. follows IFRS for its external financial reporting?

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

Use the following information for questions 64 and 65. Link Co. purchased machinery that cost $1,800,000 on January 4, 2013. The entire cost was recorded as an expense. The machinery has a nine-year life and a $120,000 residual value. The error was discovered on December 20, 2015. Ignore income tax considerations. -Link's income statement for the year ended December 31, 2015, should show the cumulative effect of this error in the amount of

Counterbalancing errors are those errors that take longer than two periods to correct themselves.

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?

Heinz Company began operations on January 1, 2014, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Based on the above information, a change to the LIFO method in 2015 would result in net income for 2015 of

Which of the following statements is correct?

When companies make changes that result in different reporting entities, the change is reported prospectively.

Mars, Inc. follows IFRS for its external financial reporting. On January 1, 2015, Mars, Inc. purchased 25% of the outstanding stock of Jerome Company (which uses U.S. GAAP for its external financial reporting) for $790,000, and appropriately uses the equity method to account for its investment. Jerome Company reports the following activity for the year ended December 31, 2015:Net loss $60,000Dividends declared and paid 20,000Jerome Company uses the completed-contract method for revenue recognition related to its long-term construction contracts, while Mars, Inc. uses the percentage-of-completion method. Mars, Inc. determines that if Jerome Company had used the percentage-of-completion method, its income would have been $100,000 higher during 2015. What is the balance in the Investment in Jerome Company that will be reported on Mars, Inc.'s balance sheet at December 31, 2015?

A change in accounting principle is a change that occurs as the result of new information or additional experience.

Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements-as if the new principle had always been used.

Equipment was purchased at the beginning of 2012 for $680,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $80,000. The equipment was depreciated using the straight-line method of depreciation through 2014. At the beginning of 2015, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $50,000. The amount to be recorded for depreciation for 2015, reflecting these changes in estimates, is

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.