Exam 22: Accounting Corrections and Error Analysis

Anzelmo Corporation invested in Jones Manufacturing by purchasing a 10% interest in the company.Anzelmo had no significant influence in Jones.Over time,Anzelmo acquired more shares in Jones,and in 2016,Anzelmo's president became a member of the board of directors when its ownership interest reached 30% of Jones.The cost basis of its investment is $2,000,000.Under the equity method,the valuation of the investment would be $2,400,000.The fair value of the investment is $2,600,000.What is the amount of the adjustment to the investment account necessary to properly record the change in accounting principal?

The bargain purchase option is not included in the minimum lease payments for either the lessee or the lessor.

Under some circumstances,the lessee does not record the leased asset and lease obligation on the balance sheet.

List each of the four disclosure items for the statement of cash flows required by both U.S.GAAP and IFRS.

The statement of cash flows summarizes a firm's cash inflows and outflows at a point in time.

When preparing the investing activities section of the cash flow statement under both U.S.GAAP and IFRS,firms report acquisitions of fixed assets separate from sales of fixed assets.

A fraud is a type of accounting error.

Swanson Corporation is leasing a machine from Gray,Inc.Swanson's incremental borrowing rate is 13%.The prime rate of interest is currently 7%.Gray's implicit rate in the lease is 9%; Swanson knows this rate.At what interest rate should the minimum lease payments be computed?

Decreases in current assets cause operating cash flows to be higher than accrual-basis income.

Which of the following statements is true? A)Standard setters encourage the use of the direct method over the indirect method. B)The direct method is known as the reconciliation method. C)The indirect method starts with income before income taxes. D)All of these statements are true.

Accounting estimate changes are handled prospectively.

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

By leasing an asset for less than 75% of its economic life or less than 90% of its fair value,a company can avoid classifying the lease as a capital lease.

Hyde Company leased equipment to Pittman Corporation under a six year lease agreement that qualifies as a direct financing lease.The asset cost $160,000.The lease contains a bargain purchase option that is effective at the end of the sixth year.The asset has an expected economic life of 12 years and is expected to have a residual value of $4,000 at the end of the 12th year.Assuming that straight-line depreciation is used,what would be the annual depreciation? A)$26,000 B)$26,667 C)$13,333 D)$13,000

What is the cost basis of an asset acquired under a capital lease?

A self-correcting error,discovered after the books are closed in the second year,still requires a journal entry.

Under IFRS,the terms of a lease imply a finance lease if the lessee may extend the lease with a bargain renewal option.

Prepare the journal entry on January 1,2016 for the change in accounting principle.

Jackson Corporation leases equipment to Andrews Company for a five year period.At the beginning of the lease,Jackson records sales revenue.The lease to Andrews must ________.

The direct method of formatting the statement of cash flow is also referred to as the reconciliation method.