Chapter 20 Accounting Changes
b. A patent balance of $102 million.
c. Patent amortization expense of $15 million.
d. Patent amortization expense of $7.5 million.
61. Prior to 2016, Trapper John Inc. used sum-of-the-years’-digits depreciation on its store
equipment. Beginning in 2016, Trapper John decided to use straight-line depreciation for these
assets. The equipment cost $3 million when it was purchased at the beginning of 2014, had an
estimated useful life of five years and no estimated residual value. To account for the change
in 2016, Trapper John:
a. Would retrospectively report $600,000 in depreciation expense annually for 2014 and
2015, and report $600,000 in depreciation expense for 2016.
b. Would adjust accumulated depreciation and retained earnings for the excess charges made
in 2014 and 2015.
c. Would report depreciation expense of $400,000 in its 2016 income statement.
d. None of these answer choices is correct.
62. Hepburn Company bought a copyright for $90,000 on January 1, 2013, at which time the
copyright had an estimated useful life of 15 years. On January 5, 2016, the company
determined that the copyright would expire at the end of 2021. How much should Hepburn
record as amortization expense for this copyright for 2016?
a. $14,400.
Chapter 20 Accounting Changes
b. $ 7,200.
c. $ 8,000.
d. $12,000.
63. Goosen Company bought a copyright for $90,000 on January 1, 2013, at which time the
copyright had an estimated useful life of 15 years. On January 5, 2016, the company
determined that the copyright would expire at the end of 2021. How much should Goosen
record retrospectively as the effect of change?
a. $ 0.
b. $12,000.
c. $ 8,000.
d. $14,400.
64. Lundholm Company purchased a machine for $100,000 on January 1, 2014. Lundholm
depreciates machines of this type by the straight-line method over a 10-year period using no
salvage value. Due to a change in sales patterns, on January 1, 2016, management determines
the useful life of the machine to be a total of five years. What amount should Lundholm record
for depreciation expense for 2016? The tax rate is 40%.
a. $20,000.
b. $16,000.
c. $17,778.
d. $26,667.
65. Diversified Systems, Inc., reports consolidated financial statements this year in place of
statements of individual companies reported in previous years. This results in:
a. An accounting change that should be reported prospectively.
b. An accounting change that should be reported by restating the
financial statements of all prior periods presented.
c. A correction of an error.
d. Neither an accounting change nor a correction of an error.
66. Z Company acquired a subsidiary several years ago that was appropriately excluded from
consolidation last year. This year Z has consolidated the subsidiary in its financial statements.
This results in:
a. An accounting change that should be reported prospectively.
b. A correction of an error.
c. An accounting change that should be reported by restating the
financial statements of all prior periods presented.
d. Neither an accounting change nor a correction of an error.
67. Which of the following is a change in reporting entity?
a. A change to the full cost method in the extractive industries.
Chapter 20 Accounting Changes
b. Switching to the completed contract method.
c. A change from the cost to the equity method.
d. Consolidating a subsidiary not previously included in consolidated financial statements.
68. Which of the following is not a change in reporting entity?
a. Reporting using comparative financial statements for the first time.
b. Changing the companies that comprise a consolidated group.
c. Presenting consolidated financial statements for the first time.
d. All are changes in reporting entity.
Chapter 20 Accounting Changes
69. In 2016, internal auditors discovered that Fay, Inc., had debited an expense account for the
$700,000 cost of a machine purchased on January 1, 2013. The machine’s useful life was
expected to be five years with no residual value. Straight-line depreciation is used by Fay. The
journal entry to correct the error will include a credit to accumulated depreciation of:
a. $140,000.
b. $280,000.
c. $420,000.
d. $700,000.
70. An item that should be reported as a prior period adjustment is the:
a. Correction of an error in depreciation from last year.
b. Payment of taxes due to a tax audit of last year’s tax return.
c. Payment of a previously recorded warranty expense.
d. Receipt of the proceeds of a note receivable that was due last year.
71. Cooper Inc. took physical inventory at the end of 2015. Purchases that were acquired FOB
destination were in transit, so they were not included in the physical count.
a. Cooper needs to correct an accounting error.
b. Cooper has made a change in accounting principle, requiring retrospective adjustment.
c. Cooper is required to adjust a change in accounting estimate prospectively.
d. Cooper is not required to make any accounting adjustments.
Chapter 20 Accounting Changes
72. 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. The appropriate accounting
treatment is that:
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.
73. In December 2016, Kojak Insurance Co. received $500,000 in premiums for a two-year
property insurance policy. The company recorded the transaction by debiting cash and
crediting insurance premium revenue for the full amount. An internal audit conducted in early
2017 flagged this transaction. The appropriate accounting treatment is that:
a. Kojak needs to correct an accounting error.
b. Kojak has made a change in accounting principle, requiring retrospective adjustment.
c. Kojak is required to adjust a change in accounting estimate prospectively.
d. Kojak is not required to make any accounting adjustments.
74. During 2016, P Company discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:
2014 $120,000 understated
2015 150,000 overstated
P uses the periodic inventory system to ascertain year-end quantities that are converted to
dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and
ignoring income taxes, P’s retained earnings at January 1, 2016, would be:
a. Correct.
b. $ 30,000 overstated.
c. $150,000 overstated.
d. $270,000 overstated.
75. C Co. reported a retained earnings balance of $200,000 at December 31, 2015. In September
2016, C determined that insurance premiums of $30,000 for the three-year period beginning
January 1, 2015, had been paid and fully expensed in 2015. C has a 30% income tax rate.
What amount should C report as adjusted beginning retained earnings in its 2016 statement of
retained earnings?
a. $210,000.
b. $214,000.
c. $220,000.
d. $221,000.
Chapter 20 Accounting Changes
Use the following to answer questions 76–78:
Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting some
inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a
30% income tax rate and that this was the only error it made.
76. If undetected, what is the effect of this error on Berkshire’s 12/31/2015 balance sheet?
a. Assets understated by $600,000 and shareholders’ equity understated by $600,000.
b. Assets understated by $420,000 and shareholders’ equity understated by $420,000.
c. Assets understated by $600,000, liabilities understated by $180,000, and shareholders’
equity understated by $420,000.
d. None of the above is correct.
77. What is the effect of the error on Berkshire’s 2016 income statement?
a. Net income is understated by $420,000.
b. Cost of goods sold is understated by $420,000.
c. There are no errors in the 2016 income statement.
d. None of these answer choices is correct.
78. What is the effect of the error on Berkshire’s 12/31/2016 balance sheet?
a. There are no errors in the 12/31/2016 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.
79. Moonland Company’s income statement contained the following errors:
Ending inventory, December 31, 2016, understated by $6,000
Depreciation expense for 2016 overstated by $1,000
What is the effect of the errors on 2016 net income before taxes?
a. Overstated by $5,000.
b. Understated by $5,000.
c. Understated by $7,000.
d. Overstated by $7,000.
80. Popeye Company purchased a machine for $300,000 on January 1, 2015. Popeye depreciates
machines of this type by the straight-line method over a five-year period using no salvage
value. Due to an error, no depreciation was taken on this machine in 2015. Popeye discovered
the error in 2016. What amount should Popeye record as depreciation expense for 2016? The
tax rate is 40%.
a. $120,000.
b. $60,000.
c. $36,000.
d. $72,000.
Chapter 20 Accounting Changes
81. Powell Company had the following errors over the last two years:
2014: Ending inventory was overstated by $30,000 while depreciation expense was
overstated by $24,000.
2015: Ending inventory was understated by $5,000 while depreciation expense was
understated by $4,000.
By how much should retained earnings be adjusted on January 1, 2016? (Ignore taxes)
a. Increase by $15,000.
b. Decrease by $25,000.
c. Decrease by $6,000.
d. Increase by $25,000.
82. Due to an error in computing depreciation expense, Prewitt Corporation overstated
accumulated depreciation by $20 million as of December 31, 2016. Prewitt has a tax rate of
30%. Prewitt’s retained earnings as of December 31, 2016, would be:
a. Overstated by $14 million.
b. Understated by $14 million.
c. Overstated by $6 million.
d. Understated by $6 million.
Chapter 20 Accounting Changes
83. Due to an error in computing depreciation expense, Crote Corporation understated
accumulated depreciation by $60 million as of December 31, 2016. Crote has a tax rate of
40%. Crote’s retained earnings as of December 31, 2016, would be:
a. Overstated by $36 million.
b. Understated by $36 million.
c. Overstated by $24 million.
d. Understated by $24 million.
84. In 2016, due to a change in marketing forecasts, Barney Corporation reduced the projected life
of its patent for producing round dice. The cumulative patent amortization prior to 2016 would
have been $10 million higher had the new life been used. Barney’s tax rate is 30%. Barney’s
retained earnings as of December 31, 2016, would be:
a. Overstated by $7 million.
b. Overstated by $3 million.
c. Overstated by $10 million.
d. Unaffected.
85. 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:
a. Understated by $14 million.
b. Understated by $6 million.
c. Understated by $20 million
d. Unaffected.
86. A company failed to record unrealized gains of $20 million on its trading security investments.
Its tax rate is 30%. As a result of this error, total shareholders’ equity would be:
a. Understated by $14 million.
b. Understated by $7 million.
c. Understated by $20 million
d. Unaffected.
87. After issuing its financial statements, a company discovered that its beginning inventory was
overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was:
a. Understated by $70,000.
b. Overstated by $70,000.
c. Understated by $30,000.
d. Overstated by $30,000.
88. 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:
a. Unaffected.
b. Overstated by $600,000.
c. Overstated by $420,000.
d. Overstated by $180,000.
Chapter 20 Accounting Changes
89. A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result
of this error, income tax expense is:
a. Unaffected.
b. Overstated by $60,000.
c. Understated by $60,000.
d. Understated by $140,000.
90. 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:
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.
91. At the end of the current year, a company overstated prepaid insurance by $80,000 and
understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this
error, net income is:
Chapter 20 Accounting Changes
a. Overstated by $108,000.
b. Overstated by $12,000.
c. Understated by $108,000.
d. Understated by $12,000.
92. At the end of the current year, a company failed to accrue interest of $500,000 on its
investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:
a. Unaffected.
b. Understated by $350,000.
c. Understated by $500,000.
d. Understated by $150,000.
93. A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a
violation of FCC rules. Its tax rate is 30%. As a result of this error, net income was:
a. Unaffected.
b. Overstated by $400,000.
c. Overstated by $280,000.
d. Overstated by $120,000.
94. 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:
a. Understated by $7,000.
b. Overstated by $7,000.
c. Understated by $33,000.
d. Overstated by $33,000.
95. Which of the following statements is not true regarding the correction of an error?
a. The correction is reported prospectively and previous financial statements are not
revised.
b. A journal entry is needed to correct any account balances that are incorrect as a result
of the error.
c. Prior years’ financial statements are restated to reflect the correction of the error (if the
error affected those statements).
d. A disclosure note should describe the nature of the error and the impact of its
correction on net income, income before extraordinary items, and earnings per share.
96. In 2016, management discovered that Dual Production had debited expense for the full
cost of an asset purchased on January 1, 2013, at a cost of $36 million with no expected
residual value. Its useful life was 5 years. Dual uses straight-line depreciation. The
correcting entry, assuming the error was discovered in 2016 before preparation of the
adjusting and closing entries, includes:
a. A debit to accumulated depreciation of $14.4 million
b. A credit to accumulated depreciation of $21.6 million.
Chapter 20 Accounting Changes
c. A credit to an asset of $36 million.
d. A debit to retained earnings of $14.4 million.
97. Early in 2016, Benton Well Supplies discovered that a five-year insurance premium
payment of $50,000 at the beginning of 2013 was debited to insurance expense. The
correcting entry would include:
a. A credit to retained earnings of $20,000.
b. A debit to insurance expense of $20,000.
c. A debit to prepaid insurance of $30,000.
d. A debit to prepaid insurance of $50,000.
98. Green Company overstated its inventory by $50 million at the end of 2016. The discovery
of this error during 2017, before adjusting or closing entries, would require:
a. An increase in retained earnings.
b. A prospective adjustment in the 2017 income statement.
c. A debit to inventory of $50 million.
d. None of these answer choices above.
99. Which of the following statements is true regarding correcting errors in previously issued
financial statements prepared in accordance with International Financial Reporting Standards
(IFRS)?
a. The error can be reported in the current period if it’s not considered practicable to report it
retrospectively.
b. The error can be reported in the current period if it’s not considered practicable to report it
prospectively.
c. The error can be reported prospectively if it’s not considered practicable to report it
retrospectively.
d. Retrospective application is required with no exception.
100. Using International Financial Reporting Standards (IFRS), which of the following
statements is true regarding correcting errors in previously issued financial statements?
a. Retrospective application is required with no exception.
b. The error can be reported in the current period if it’s not considered practicable to
report it prospectively.
c. The error can be reported prospectively if it’s not considered practicable to report it
retrospectively.
d. The error can be reported in the current period if it’s not considered practicable to
report it retrospectively.
Chapter 20 Accounting Changes
Matching Pair Questions
101. 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 market 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.
102. 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 the equity method for investments to the cost method.
____ Change in the residual value of machinery.
Chapter 20 Accounting Changes