Exam 22: Accounting for Changes and Errors

Lilly Company has been depreciating equipment for 10 years with an estimated total useful life of 25 years. Lilly has revised the estimated life to be only 17 years, with 7 years remaining in the asset's useful life. What is the appropriate action that Lilly should do now?

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Question 1

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According to GAAP how should items be reported in order that information is reported in a relevant manner?

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Question 2

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1) Changes in accounting principle should be accounted for retrospectively.
2) A change in estimate should be reported prospectively.
3) The change in reporting entity is to be reported retrospectively.
4) An error is accounted for as a prior period adjustment/ prior period restatement.

What must be disclosed when making a retrospective adjustment?

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Question 3

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1) Nature and reason for the accounting principle change including the explanation as to why the new principle is preferable over the old method.
2) The prior period information being affected by the retrospective adjustment.
3) Effect of the change on income, earnings per share, and any other financial statement line items being retrospectively adjusted.
4) The cumulative effect of the change on retained earnings at the beginning of the earliest period presented.

On January 1, 2016, Suzanne Company purchased equipment for $48,000. The estimated life was five years and the salvage value was estimated at $5,000. On January 1, 2018, it was determined that the equipment's total useful life should have been estimated at seven years and the salvage value should have been estimated at only $4,000. The company used straight-line depreciation. Required: a. What type of change did Suzanne Company make on January 1, 2018, and how should Suzanne account for the change? b. If an adjusting entry is necessary on January 1, 2018, prepare it. c. Compute the amount of depreciation expense on the equipment for 2018.

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Question 4

A change in a reporting entity is accounted for by a prospective adjustment so that all financial statements are presented for the same entity.

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Question 5

Which of the following accounting changes is always accounted for prospectively?

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Question 6

GAAP states that a change in accounting principle includes

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Question 7

Which of the following accounting treatments is proper for a change in reporting entity?

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Question 8

What is a change in reporting entity and how is an adjustment handled?

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Question 9

A change in accounting entity is limited to presenting consolidated or combined financial statements in place of individual statements or a change in the subsidiaries that make up a group of companies in which one would report either as consolidated financial statements or changing the mix of companies included in the financial statements.

(True/False)

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Question 10

What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?

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Question 11

A change in accounting estimate is always accounted for

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Question 12

In Western reviewed their estimated warranty costs which at that time was 5% of sales. This estimated was based upon the warranty accrual method. In 2016 net sales were $3,250,000 they recorded warranty expense of $162,500. Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop in their warranty claims for 2017. The company decided for 2017 to reduce the estimate to 3% of sales. In 2017 Western reported net sales of $3,500,000. Required: 1) How should the company report the change and why? 2) Prepare any necessary journal entries for 2016 or 2017 to account for the change.

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Question 13

What are the 4 steps involved in the basic framework for the analysis and correction of an error?

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Question 14

What is the difference between counterbalancing errors and noncounterbalancing errors?

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Question 15

Prospective adjustments are expected to

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Question 16

Most errors are discovered automatically through proper use of the double-entry system or by the internal or external auditors. However, some errors escape detection until after they have been included in the published financial statements of a company. Required: Describe three types of errors that occur in financial statements and indicate the appropriate corrective action to take when the errors are discovered.

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Question 17

During 2018, Dragon Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and a salvage value of $50,000. The equipment was acquired on January 1, 2016 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2018 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change if any) for the year ended December 31, 2018, was $180,000. What is the amount of Dragon's net income for 2018?

(Multiple Choice)

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Question 18

Margaret Company purchased equipment on January 1, 2014, for $500,000. At the date of acquisition, the equipment had an estimated useful life of eight years with a $50,000 salvage value, and it was depreciated using the straight-line method. On January 1, 2019, based on updated information, Margaret decided that the equipment had a total estimated life of ten years and no salvage value. What is the amount of depreciation expense on the equipment in 2019?

(Multiple Choice)

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Question 19

The Bronson Company changed its method of determining inventories from LIFO to FIFO. This change represents a

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Question 20

Showing 1 - 20 of 130

Lilly Company has been depreciating equipment for 10 years with an estimated total useful life of 25 years. Lilly has revised the estimated life to be only 17 years, with 7 years remaining in the asset's useful life. What is the appropriate action that Lilly should do now?

According to GAAP how should items be reported in order that information is reported in a relevant manner?

What must be disclosed when making a retrospective adjustment?

A change in a reporting entity is accounted for by a prospective adjustment so that all financial statements are presented for the same entity.

Which of the following accounting changes is always accounted for prospectively?

GAAP states that a change in accounting principle includes

Which of the following accounting treatments is proper for a change in reporting entity?

What is a change in reporting entity and how is an adjustment handled?

What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?

A change in accounting estimate is always accounted for

What are the 4 steps involved in the basic framework for the analysis and correction of an error?

What is the difference between counterbalancing errors and noncounterbalancing errors?

Prospective adjustments are expected to

The Bronson Company changed its method of determining inventories from LIFO to FIFO. This change represents a

The Demand for and Supply of Financial Accounting Information

Financial Reporting: Its Conceptual Framework

Review of a Company S Accounting System

The Balance Sheet and the Statement of Shareholders Equity

The Income Statement and the Statement of Cash Flows Time Value of Money Module

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Inventories: Special Valuation Issues

Current Liabilities and Contingent Obligations

Property, Plant, and Equipment: Acquisition and Subsequent Investments

Depreciation, Depletion, Impairment, and Disposal

Intangibles

Investments and Long-Term Receivables

Financing Liabilities: Bonds and Long-Term Notes Payable

Contributed Capital

Retained Earnings and Earnings Per Share

Advanced Issues in Revenue Recognition

Accounting for Income Taxes

Accounting for Post-Retirement Benefits

Accounting for Leases

The Statement of Cash Flows

Understanding Time Value of Money Formulas and Concepts

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