Question 1

On December 27,2014,Admission Company ordered merchandise for resale from Eviction,Inc.,that cost $7,000 (terms cash within 10 days).Eviction shipped the merchandise F.o.b. shipping point on December 28, 2014, and the goods arrived on January 2, 2015. The invoice was received on December 30, 2014. Admission Company did not record the purchase in 2014 and did not include the goods in ending inventory. The effects on Admission Company's 2014 financial statements were

Accepted Answer

A) income and owners' equity were correct; liabilities were incorrect, assets were correct. 
B) income and owners' equity were correct; assets and liabilities were incorrect. 
C) income, assets, liabilities, and owners' equity were correct. 
D) income, assets, liabilities, and owners' equity were incorrect.

Question 2

Which of the following is the proper time period in which to record a change in accounting estimate?

Accepted Answer

A) Current period and future periods 
B) Current period and retroactively 
C) Retroactively only 
D) Current period only

Question 3

Which of the following is characteristic of a change in accounting principle?

Accepted Answer

A) Requires the reporting of pro forma amounts for prior periods 
B) Does not affect the financial statements of prior periods 
C) Never needs to be disclosed 
D) Should be reported by retrospectively adjusting the financial statements for all years reported, and reporting the cumulative effect of the change in income for all preceding years as an adjustment to the beginning balance of retained earnings for the earliest year reported

Question 4

When a company acquires an asset that will provide benefits for several years,the cost of the asset is allocated over the asset's useful life.The allocation process is operationalized through the choice of one of the generally accepted depreciation methods.In choosing a depreciation method to apply,company management is required to make several estimates as part of this allocation process such as the following:
1.Over what period of time will benefits from using the asset accrue?
2.What will be the value of the asset when its use is discontinued?
3.Will the benefits be realized evenly of the life of the asset or will they be higher in some years than in others?
Required:
1.What factors should management consider in making a change in depreciation methods?
2.Explain how a change in depreciation methods is reported in the financial statements and why the Financial Accounting Standards Board chose this approach.

Accepted Answer

The answer of When a company acquires an asset that...

Question 5

Ending inventory for 2012 is overstated by $5,500 due to a faulty count and costing.The tax rate is 39%.Assume the same accounting methods for both financial reporting and taxes.The error is discovered late in 2014.The 2014 annual report shows the financial statements for 2012,2013,2014 on a comparative basis.
Which of the following is correct regarding the reporting of this error in the 2014 annual report?

Accepted Answer

A) A journal entry is made to report the prior period adjustment, and the 2012 and 2013 statements are shown corrected. 
B) No journal entry is needed, and the 2012 and 2013 statements are shown as they were in the 2013 annual report. 
C) No journal entry is needed, and the 2012 and 2013 statements are shown corrected. 
D) A journal entry is made to report the prior period adjustment, and the 2012 and 2013 statements are shown as they were in the 2013 annual report.

Question 6

Effective January 2,2014,Moldaur Co.adopted the accounting principle of expensing advertising and promotion costs as they are incurred.Previously,advertising and promotion costs applicable to future periods were recorded in prepaid expenses.Moldaur can justify the change,which was made for both financial statement and income tax reporting purposes.Moldaur's prepaid advertising and promotion costs totaled $250,000 at December 31,2013.Assume that the income tax rate is 40 percent for 2013 and 2014.The adjustment for the effect of the change in accounting principle should result in a net charge against income in the income statement for 2014 of

Accepted Answer

A) $0. 
B) $100,000. 
C) $150,000. 
D) $250,000.

Question 7

Which of the following should NOT be reported retroactively?

Accepted Answer

A) Use of an unacceptable accounting principle, then changing to an acceptable accounting principle 
B) Correction of an overstatement of ending inventory made two years ago 
C) Use of an unrealistic accounting estimate, then changing to a realistic estimate 
D) Change from a good faith but erroneous estimate to a new estimate

Question 8

Washburn Enterprises acquired Ibarra Company for $850,000 December 31,2014.This amount exceeded the recorded value of Ibarra Company's net assets by $250,000 on the acquisition date.The entire excess of cost over the book value of the net assets related to a piece of equipment owned by Ibarra that had a remaining life of five years as of the acquisition date.The companies reported the following amounts for the 2013 and 2014:
  
Prepare the pro forma information for this acquisition required by ASC Topic 850.

Accepted Answer

The answer of Washburn Enterprises acquired Ibarra Company for $850,000...

Question 9

On December 31,2014,Ohio Corporation appropriately changed its inventory valuation method to FIFO cost from LIFO cost for both financial statement and income tax purposes.The change will result in a $140,000 increase in the beginning inventory at January 1,2014.Assume a 30 percent income tax rate.The cumulative effect of this accounting change Ohio for the year ended December 31,2014,is

Accepted Answer

A) $0. 
B) $42,000. 
C) $98,000. 
D) $140,000.

Question 10

On January 1,2011,Always There Services Inc.purchased a new machine for $900,000.The machine had an estimated useful life of 10 years and a salvage value of $250,000.Always There elected to depreciate the machine using the double-declining-balance method.On January 1,2014,the company decided to change to straight-line depreciation.
Ignoring income tax considerations,prepare the entries to record
(1)Always There's 2013 depreciation expense.
(2)Always There's 2014 depreciation expense.

Accepted Answer

The answer of On January 1,2011,Always There Services Inc.purchased a...

Question 11

At the time Hollywood Corporation became a subsidiary of Vine Corporation,Hollywood switched depreciation of its plant assets from the straight-line method to the sum-of-the-years'-digits method used by Vine.With respect to Hollywood,this change was a

Accepted Answer

A) change in an accounting estimate. 
B) correction of an error. 
C) change in the reporting entity. 
D) change in accounting principle.

Question 12

Cornwall Co.made the following errors in counting its year-end physical inventories:

The entry to correct the accounts at the end of 2014 is

Accepted Answer

The answer of Cornwall Co.made the following errors in counting...

Question 13

Basilia Corporation purchased a machine for $180,000 on January 1,2013.Basilia will depreciate the machine using the straight-line method using a five-year period with no residual value.As a result of an error in its purchasing records,Basilia did not recognize any depreciation for the machine in its 2013 financial statements.Basilia discovered the problem during the preparation of its 2014 financial statements.What amount should Basilia record for depreciation expense on this machine for 2014?

Accepted Answer

A) $0 
B) $36,000 
C) $44,000 
D) $72,000

Question 14

Which of the following is characteristic of a change in accounting estimate?

Accepted Answer

A) Requires the reporting of pro forma amounts for prior periods 
B) Does not affect the financial statements of prior periods 
C) Never needs to be disclosed 
D) Should be reported by retrospectively adjusting the financial statements for all years reported, and reporting the cumulative effect of the change in income for all preceding years as an adjustment to the beginning balance of retained earnings for the earliest year reported

Question 15

A change in the estimated useful life of a building

Accepted Answer

A) is not allowed by generally accepted accounting principles. 
B) affects the depreciation on the building beginning with the year of the change. 
C) must be handled as a retroactive adjustment to all accounts affected, back to the year of the acquisition of the building. 
D) creates a new account to be recognized on the income statement reflecting the difference in net income up to the beginning of the year of the change.

Question 16

An example of an item that should be reported as a prior period adjustment is the

Accepted Answer

A) collection of previously written off accounts receivable. 
B) payment of taxes resulting from examination of prior years' income tax returns. 
C) correction of an error in financial statements of a prior year. 
D) receipt of insurance proceeds for damage to a building sustained in a prior year.

Question 17

On January 2,2012,Lynch Company acquired machinery at a cost of $800,000.This machinery was being depreciated by the double-declining-balance method over an estimated useful life of eight years,with no residual value.At the beginning of 2014,Lynch decided to change to the straight-line method of depreciation.Ignoring income tax considerations,the cumulative effect of this accounting change is

Accepted Answer

A) $0. 
B) $100,000. 
C) $155,556 
D) $177,778

Question 18

Diamond Company changed from the completed-contract method of accounting for long-term contracts to the percentage-of-completion method,during 2014.Reported earnings in 2013 were $50,000,and the beginning 2013 retained earnings balance was $150,000.Net income for 2014 under the competed-contract method would have been $140,000.No dividends were declared during 2013 and 2014.
  
Required:
Prepare the 2013 and 2014 comparative retained earnings statements.

Accepted Answer

The answer of Diamond Company changed from the completed-contract method...

Question 19

Which of the following should be reported as a change in accounting estimate?

Accepted Answer

A) Change in the reported beginning inventory amount due to a discovery of a bookkeeping error 
B) Change from the completed-contract method to the percentage-of- completion method for revenue recognition on long-term construction contracts 
C) Increase in the rate applied to net credit sales from 1 percent to 1-1/2 percent in determining losses from uncollectible receivables 
D) Change made to comply with a new FASB pronouncement

Question 20

In reviewing the books of Unger Retailers Inc.,the auditor discovered certain errors that had occurred during 2013 and 2014.No errors were corrected during 2013.The errors are summarized below:
(a)Beginning merchandise inventory (January 1,2013)was understated by $8,640.
(b)Merchandise costing $2,400 was sold for $4,000 to B.J.Taylor on December 29,2013,but the sale was recorded in 2014.The merchandise was shipped F.O.B.shipping point and was not included in ending inventory.Unger uses a periodic inventory system.
(c)A two-year fire insurance policy was purchased on May 1,2013,for $5,760.The entire amount was debited to Prepaid Insurance.No adjusting entry was made in 2013 or 2014.
(d)A one-year note receivable of $9,600 was held by Unger beginning October 1,2013.Payment of the 10 percent note and accrued interest was received upon maturity.No adjusting entry was made on December 31,2013.
(e)Equipment with a ten-year life was purchased on January 1,2013,for $39,200.No depreciation expense was recorded during 2013 or 2014.Assume that the equipment has no salvage value and that Unger uses the straight-line method for recording depreciation.
Prepare journal entries to correct each of these independent situations.Assume that the nominal accounts for 2014 have not yet been closed into the income summary account.

Accepted Answer

The answer of In reviewing the books of Unger Retailers...

Exam 20: Accounting Changes and Error Corrections