Question 1

Describe the way we account for a change in estimate. What is the appropriate accounting if we are unable to determine whether a change is a change in estimate or a change in principle?

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Question 2

Buckeye Company purchased a machine on January 1, 2011. The machine had a cost of $260,000 with a $10,000 residual value. The estimated useful life of the machine was eight years. On January 1, 2013, due to technological innovations, the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%. The company uses straight-line depreciation.
Required:
Prepare the journal entry to record the annual depreciation on December 31, 2013.

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Question 3

Describe in detail the way companies report most voluntary changes in accounting principle.

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Question 4

Washburn Co. spent $10 million to purchase a new patented technology, debiting an intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets and plans to amortize the intangible asset on a straight-line basis.

Accepted Answer

A) Washburn is not required to make any accounting adjustments. 
B) Washburn is required to adjust a change in accounting estimate prospectively. 
C) Washburn has made a change in accounting principle, requiring retrospective adjustment. 
D) Washburn needs to correct an accounting error.

Question 5

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

Accepted Answer

A) Understated by $14 million. 
B) Understated by $6 million. 
C) Understated by $20 million 
D) UnaffecteD.Unrealized gains on securities available for sale are reported net of tax in other comprehensive income.

Question 6

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

Accepted Answer

A) Report a prior period adjustment decreasing retained earnings by $600,000. 
B) Report a prior period adjustment decreasing retained earnings by $1,400,000. 
C) Report a current period charge decreasing net income by $600,000. 
D) Report a current period charge decreasing net income by $1,400,000.

Question 7

JFS Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes:

Accepted Answer

A) A credit to accumulated depreciation. 
B) A debit to accumulated depreciation. 
C) A debit to a depreciable asset. 
D) The change does not require a journal entry.

Question 8

Which of the following is a change in estimate?

Accepted Answer

A) A change from the full costing method in the extractive industries. 
B) A change from percentage-of-completion to the completed contract method. 
C) Consolidating a subsidiary for the first time. 
D) A change in the termination rate of employees under a pension plan.

Question 9

Johnson Company receives royalties on a patent it developed several years ago. Royalties are 5% of net sales, receivable on September 30 for sales from January through June and receivable on March 31 for sales from July through December. The patent rights were distributed on July 1, 2012, and Johnson accrued royalty revenue of $50,000 on December 31, 2012, as follows:  Johnson received royalties of $65,000 on March 31, 2013, and $90,000 on September 30, 2013. The patent user indicated to Johnson that sales subject to royalties for the second half of 2013 should be $600,000.
Required:
Prepare any journal entries Johnson should record during 2013 related to the royalty revenue.

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Question 10

If inventory is understated at the end of 2012 and the error is not discovered, how will net income be affected in 2013?

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Question 11

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
____ Change from FIFO inventory costing to LIFO inventory costing.
____ Change from LIFO inventory costing to FIFO inventory costing.
____ Change in the composition of a group of firms reporting on a consolidated basis.
____ Change to the installment method of accounting for receivables.
____ Change in actuarial assumptions for a defined benefit pension plan.
____ Change from sum-of-the-years' digits depreciation to straight-line.
____ Change from expensing extraordinary repairs erroneously recorded as an expense to capitalizing the expenditures.
____ Change in the percentage used to determine warranty expense.
____ Change from reporting postretirement benefits according to the provisions of U.S. GAAP.
____ Change in the residual value of machinery.

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Question 12

Which of the following would not be accounted for using the retrospective approach?

Accepted Answer

A) A change from LIFO to FIFO inventory costing. 
B) A change from the completed contract method to the percent-of-completion method for long-term construction contracts. 
C) A change in depreciation methods. 
D) A change from the full cost method in the oil industry.

Question 13

Mobic Inc. acquired some manufacturing equipment in January 2010 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2013, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2016. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2013, Mobic should:

Accepted Answer

A) Charge $280,000 in depreciation expense. 
B) Report the book value of the equipment in its12/31/2013 balance sheet at $210,000. 
C) Make an adjustment to retained earnings for the error in measuring depreciation during 2010-2012. 
D) None of the above is correct.

Question 14

Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2009, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2013 (before adjusting and closing entries). What is the appropriate patent amortization expense in 2013?

Accepted Answer

A) $4 million. 
B) $5 million. 
C) $10 million. 
D) $20 million.

Question 15

If a change is made from straight-line to SYD depreciation, one should record the effects by a journal entry including:

Accepted Answer

A) A credit to deferred tax liability. 
B) A credit to accumulated depreciation. 
C) A debit to depreciation expense. 
D) No journal entry is required.

Question 16

A company changes depreciation methods. Briefly describe the steps the company should take to report this accounting change in its current comparative financial statements.

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Question 17

What is the effect of the error on Berkshire's 12/31/2013 balance sheet?

Accepted Answer

A) There are no errors in the 12/31/2013 balance sheet. 
B) Assets understated by $600,000 and shareholders' equity understated by $600,000. 
C) Assets understated by $420,000 and shareholders' equity understated by $420,000. 
D) Liabilities understated by $180,000 and shareholders' equity overstated by $420,000.

Question 18

Moonland Company's income statement contained the following errors: Ending inventory, December 31, 2013, understated by $6,000
Depreciation expense for 2013 overstated by $1,000
What is the effect of the errors on 2013 net income before taxes?

Accepted Answer

A) Overstated by $5,000. 
B) Understated by $5,000. 
C) Understated by $7,000. 
D) Overstated by $7,000.

Question 19

A company failed to report the $600,000 additional liability for its underfunded pension plan. Its tax rate is 30%. As result of this error, retained earnings would be:

Accepted Answer

A) Unaffected. 
B) Overstated by $600,000. 
C) Overstated by $420,000. 
D) Overstated by $180,000.

Question 20

During 2013, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.

Accepted Answer

A) Hoffman is not required to make any accounting adjustments. 
B) Hoffman has made a change in accounting principle requiring retrospective adjustment. 
C) Hoffman has made a change in accounting principle requiring prospective application. 
D) Hoffman needs to correct an accounting error.

Exam 20: Accounting Changes and Error Corrections