Exam 22: Accounting Changes and Error Analysis

An example of a correction of an error in previously issued financial statements is a change

Use the following information for questions. Ernst Company purchased equipment that cost $750,000 on January 1, 2010.The entire cost was recorded as an expense.The equipment had a nine-year life and a $30,000 residual value.Ernst uses the straight-line method to account for depreciation expense.The error was discovered on December 10, 2012.Ernst is subject to a 40% tax rate. -Before the correction was made and before the books were closed on December 31, 2012, retained earnings was understated by

Use the following information for questions. Link Co.purchased machinery that cost $810,000 on January 4, 2009.The entire cost was recorded as an expense.The machinery has a nine-year life and a $54,000 residual value.The error was discovered on December 20, 2011.Ignore income tax considerations. -Link's income statement for the year ended December 31, 2011, should show the cumulative effect of this error in the amount of

An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting policy that is applied retrospectively.

One of the disclosure requirements for a change in accounting policy is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

All of the following statements are true regarding IASB's guideline that companies must demonstrate change in accounting policy as preferable or as an improvement, except:

Which of the following is accounted for as a change in accounting policy?

Use the following information for questions. Bishop Co.began operations on January 1, 2010.Financial statements for 2010 and 2011 con- tained the following errors: In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012.No corrections have been made for any of the errors.Ignore income tax considerations. -The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by

Use the following information for questions. Swift Company purchased a machine on January 1, 2009, for $300,000.At the date of acquisition, the machine had an estimated useful life of six years with no residual value.The machine is being depreciated on a straight-line basis.On January 1, 2012, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no residual value.An accounting change was made in 2012 to reflect this additional information. -Brittany Company purchased a computer system for £94,250 on January 1, 2011.it was depreciated based on a 7-year life and an £19,000 residual value.On January 1,2013,Brittany revised these estimates to a total useful life of 4 years and a residual value of £10,000.Brittany's entry to record 2013 depreciation expense will inclide debit to Depreciation Expense for:

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

Use the following information for questions. In January 2012, Marcus Ltd.has installation costs of £9,000 on new machinery that were charged to Repair Expense.Other costs of this machinery of £30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no residual value.At December 31,2012, Marcus decides that the machinery ha a remaining useful life of 15 years, starting with January 1,2012 -If the book have not been closed for 2012 and depreciation expense has not yet been recorded for 2012, the entry that marcus makes in 2012 to correct for the error of expensing installation costs on the machinery acquired in January, 2011, will include:

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

Use the following information for questions. In January 2012, Marcus Ltd.has installation costs of £9,000 on new machinery that were charged to Repair Expense.Other costs of this machinery of £30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no residual value.At December 31,2012, Marcus decides that the machinery ha a remaining useful life of 15 years, starting with January 1,2012 -In 2012, Krasny Corporation discovered that equipment purchased on January 1,2010, for €52,500 was expensed at that time.The equipment should have been depreciated over 5 years, with no residual value.The effective tax rate is 30%.Krasny's 2012 journal entry to correct the error would include

Use the following information for questions. Langley Company's December 31 year-end financial statements contained the following errors: An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012.The prepayment was recorded with a debit to insurance expense.In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012.There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors.Ignore income tax considerations. -What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2011?

Sun construction company decided at the beginning of 2012 to change from the cost-recovery method to the percentage-of-completion method for financial reporting purposes.The company will continue to use the cost-recovery method for tax purposes.For years prior to 2012, pretax income under the two methods was as follows: percentage-of-completion £120,000, and cost-recovery £80,000.The tax rate is 35%.sun's 2012 journal entry to record the change in accounting policy will include:

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

Use the following information for questions. Langley Company's December 31 year-end financial statements contained the following errors: An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012.The prepayment was recorded with a debit to insurance expense.In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012.There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors.Ignore income tax considerations. -What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2011?

Use the following information for questions. Armstrong Inc.is a calendar-year corporation.Its financial statements for the years ended 12\31\10 and 12\31\11 contained the following errors: -Assume that the 2010 errors were not corrected and that no errors occurred in 2009.By what amount will 2010 income before income taxes be overstated or understated?

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

On January 1, 2009, Knapp Corporation acquired machinery at a cost of $250,000.Knapp adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value.At the beginning of 2012, a decision was made to change to the straight-line method of depreciation for the machinery.The depreciation expense for 2012 would be