Exam 9: Accounting Changes and Error Analysis

Accounting for accounting changes and error corrections Parrot Corp. reported net incomes for the last three years as follows: During the 2020 year-end audit, the following items come to your attention: 1. Parrot bought a truck on January 1, 2017 for $ 98,000 cash, with an $ 8,000 estimated residual value and a six-year life. The company debited an expense account for the entire cost of the asset. Parrot uses straight-line depreciation for all trucks. 2. During 2020, Parrot changed from straight-line depreciation for its cement plant to double declining balance. The following calculations present depreciation on both bases: The net income for 2020 was calculated using the double declining balance method. 3. In reviewing its provision for uncollectible accounts during 2020, the corporation has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2019 and 2018 when the expense had been $ 9,000 and $ 6,000, respectively. Parrot recorded bad debt expense using the new rate for 2020. If they had used the old rate, they would have recorded $ 3,000 less bad debt expense on December 31, 2020. Instructions (Ignore all income tax effects) a) Prepare the general journal entry required to correct the books for the item 1 situation (only) of this problem, assuming that the books have not been closed for 2020. b) Present comparative income statement data for the years 2018 to 2020, starting with income before the cumulative effect of any accounting changes. c) Assume that the beginning retained earnings balance (unadjusted) for 2018 was $ 630,000. At what adjusted amount should the beginning retained earnings balance for 2018 be shown, assuming that comparative financial statements were prepared? d) Assume that the beginning retained earnings balance (unadjusted) for 2020 is $ 900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be shown?

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -MissTake Corp. is a small private corporation that does not prepare comparative statements. At the end of their 2020 fiscal year, it was discovered that the 2019 depreciation expense on their computer equipment had been incorrectly debited to maintenance expense. How should MissTake deal with this situation?

Eagle Corp. is a calendar-year corporation whose financial statements for 2019 and 2020 included errors as follows: Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2019 or December 31, 2020. Ignoring income taxes, by how much should Eagle's retained earnings be retrospectively adjusted at January 1, 2021?

When a company decides to switch from deferring development costs to expensing them immediately, this change should probably be treated as a

On January 1, 2017, Casino Inc. purchased a machine for $ 300,000. The machine has an estimated five year life, and no residual value. Double declining balance depreciation has been used for financial statement reporting and CCA for income tax reporting. Effective January 1, 2020, Casino decided to change to straight-line depreciation for this machine, and treated the change as a change in accounting policy. For calendar 2020, Casino's pre-tax income before depreciation on this asset is $ 250,000. Their income tax rate has been 30% for many years. What net income should Casino report for calendar 2020?

Use the following information for questions 30-31. Major Corp. purchased a machine on January 1, 2017, for $ 900,000. The machine is being depreciated on a straight-line basis, using an estimated useful life of six years and no residual value. On January 1, 2020, Major 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 2020 to reflect this additional information. -Assuming that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate for all years since the machine was purchased was 30%, what should be reported in the income statement for calendar 2020 as the cumulative effect on prior years of changing the estimated useful life of the machine?

Which of the following is NOT considered to be a change in accounting policy?

On January 1, 2017, Missoula Corporation bought machinery for $ 800,000. They used double declining balance depreciation for this asset, with an estimated life of eight years, and an estimated $ 200,000 residual value. At the beginning of 2020, Missoula decided to change to the straight-line method of depreciation for this equipment, and treated the change as a change in estimate. For calendar 2020, the depreciation expense for this machinery is

Which of the following statements is correct?

Use the following information for questions. Fairfax Inc. began operations on January 1, 2019. Financial statements for 2019 and 2020 contained the following errors: In addition, on December 31, 2020 fully depreciated equipment was sold for $ 7,200, but the sale was NOT recorded until 2021. No corrections have been made for any of the errors. Ignore income tax considerations. -The total effect of the errors on Fairfax's working capital at December 31, 2020 is that working capital is understated by

For accounting changes, which of the following is NOT allowed?

Explain economic consequences arguments relative to management changing accounting methods.

Accounting for a retrospective change requires

Use the following information for questions. Fairfax Inc. began operations on January 1, 2019. Financial statements for 2019 and 2020 contained the following errors: In addition, on December 31, 2020 fully depreciated equipment was sold for $ 7,200, but the sale was NOT recorded until 2021. No corrections have been made for any of the errors. Ignore income tax considerations. -The total effect of the errors on Fairfax's 2020 net income is

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 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 Cheyenne's working capital at December 31, 2020?

Error corrections and adjustments The controller for Stork Corp. is concerned about certain business transactions that the company experienced during 2020. The controller, after discussing these matters with various individuals, has come to you for advice. The transactions at issue are presented below: 1. The company has decided to switch from the direct write-off method for accounting for bad debts to the percentage-of-sales approach. Assume that Stork has recognized bad debt expense as the receivables have actually become uncollectible in the following way: The controller estimates that an additional $ 21,800 in bad debts will be written off in 2021: $ 3,800 applicable to 2019 sales and $ 18,000 to 2020 sales. 2. Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such (on account). At December 31, 2020, inventory billed and in the hands of consignees amounted to $ 160,000. The percentage markup on selling price is 20%. Assume that the consigned inventory is sold the following year. The company uses the perpetual inventory system. 3. During 2020, Stork sold $ 300,000 worth of goods on the instalment basis. The cost of sales associated with these instalment sales is $ 225,000. The company inadvertently handled these sales and related costs as part of their regular sales transactions. Cash of $ 86,000, including a down payment of $ 30,000, was collected on these instalment sales during 2020. Due to questionable collectability, the instalment method was considered appropriate. Instructions a) Assume that Stork Corp. reported pre-tax income of $ 500,000 for 2020. Present a schedule showing the corrected pre-tax income after the above transactions are taken into account. Ignore income tax effects. b) Prepare the correcting journal entries required at December 31, 2020, assuming that the books have been closed.

Which type of accounting change may be accounted for in current and future periods only?

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

Use the following information for questions 25-26. On January 2, 2018, Moose Corp. purchased machinery for $ 270,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $ 18,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2020, and the appropriate corrections were made. Ignore income tax considerations. -Moose's income statement for the year ended December 31, 2020 would show the cumulative effect of this error in the amount of:

On January 1, 2016, Manchester Ltd. purchased a machine for $ 495,000 and depreciated it using the straight-line method with an estimated useful life of eight years with no residual value. On January 1, 2019, Plover determined that the machine had a useful life of only six years from the date of acquisition, but will have a residual value of $ 45,000. An accounting change was made in 2019 to reflect these additional facts. At December 31, 2020, the accumulated depreciation account for this machine should have a balance of