Exam 20: Accounting Changes and Error Corrections

A company failed to record unrealized gains of $20 million on its available for sale debt security investments. Its tax rate is 30%. As a result of this error, comprehensive income would be:

C. Good Eyeglasses overstated its inventory by $30,000 at the end of 2018. In 2019, the discovery of this error, before adjusting or closing entries, would require:

Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards (IFRS)?

What are the changes in accounting principle that require the prospective approach?

The cumulative effect of most changes in accounting principle is reported:

Name and briefly describe the three categories of accounting changes.

An item that should be reported as a prior period adjustment is the:

When an accounting change is reported under the retrospective approach, account balances in the general ledger:

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Prospective approach

Retrospective restatement usually is appropriate for a change in:

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

Indicate the nature of each of the situations described below using the following three-letter code. CODE DESCRIPTION CPR: Change in principle reported retrospectively CPP: Change in principle reported prospectively CES: Change in estimate CRE: Change in reporting entity PPA: Prior period adjustment required _____ Technological advance that renders worthless a patent with an unamortized cost of $45,000. _____ Change from LIFO inventory costing to average inventory costing. _____ Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years. _____ Change from FIFO inventory method to LIFO. _____ Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated. _____ Change from the pay-as-you-go method to estimating warranty expense in the period the related product is sold. _____ Change from declining balance depreciation to straight-line. _____ Change from determining lower of cost or net realizable value for inventories by the individual item approach to the aggregate approach. _____ Settling a lawsuit for less than the amount accrued previously as a loss contingency. _____ Change in the estimated useful life of office equipment.

Which of the following accounting changes should not be accounted for prospectively?

Macintosh Inc. changed from LIFO to the FIFO inventory costing method on January 1, 2018. Inventory values at the end of each year since the inception of the company are as follows: Required: Ignoring income tax considerations, prepare the entry to report this accounting change.

National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2018. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2018, would be:

There is not always a clear-cut distinction between a change in estimate and a change in principle or a simultaneous change in estimate and change in principle. How are such situations accounted for?

Which of the following is not an example of a change in accounting principle?

Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements that the change is made.

All changes in estimate are accounted for retrospectively.