Chapter 20 Accounting Changes
True/False Questions
1. Most, but not all, changes in accounting principle are reported using the retrospective
approach.
2. Prior years’ financial statements are restated when the prospective approach is used.
3. A change in accounting estimate and a change in reporting entity are types of changes in
accounting principle.
4. Most changes in accounting principle require a disclosure justifying the change in the first set
of financial statements that the change is made.
5. All changes reported using the retrospective approach require prior period adjustments.
6. All changes in estimate are accounted for retrospectively.
7. A change to the LIFO method of valuing inventory usually requires use of the retrospective
method.
8. A change in reporting entity and a material error correction are both reported prospectively.
9. A change in reporting entity requires note disclosure in all subsequent financial statements
prepared for the new entity.
10. Error corrections require restatement of all the affected prior year financial statements
reported in comparative financial statements.
Multiple Choice Questions
11. How many acceptable approaches are there for changes in accounting principles?
a. One.
b. Two.
c. Three.
d. Four.
12. Which of the following is not one of the approaches for reporting accounting changes?
a. The change approach.
b. The retrospective approach.
c. The prospective approach.
d. All of these answer choices are approaches for reporting accounting changes.
13. Retrospective restatement usually is not used for a:
a. Change in accounting estimate.
b. Change in accounting principle.
c. Change in entity.
d. Correction of error.
Chapter 20 Accounting Changes
14. An accounting change that is reported by the prospective approach is reflected in the financial
statements of:
a. Prior years only.
b. Prior years plus the current year.
c. The current year only.
d. Current and future years.
15. When a change in accounting principle is reported, what is sometimes sacrificed?
a. Relevance.
b. Consistency.
c. Conservatism.
d. Representational faithfulness.
16. When an accounting change is reported under the retrospective approach, prior years’ financial
statements are:
a. Revised to reflect the use of the new principle.
b. Reported as previously prepared.
c. Left unchanged.
d. Adjusted using prior period adjustment procedures.
17. Regardless of the type of accounting change that occurs, the most important responsibility is:
a. To properly determine the tax effect.
b. To communicate that a change has occurred.
c. To compute the correct amount of the change.
d. None of these answer choices is correct.
18. Which of the following changes would not be accounted for using the prospective approach?
a. A change to LIFO from average costing for inventories.
b. A change from the individual application of the LCM rule to aggregate approach.
c. A change from straight-line to double-declining balance depreciation.
d. A change from double-declining balance to straight-line depreciation.
19. Accounting changes occur for which of the following reasons?
a. Management is being fair and consistent in financial reporting.
b. Management compensation is affected.
c. Debt agreements are impacted.
d. All of these answer choices are correct.
20. Which of the following changes is not usually accounted for retrospectively?
a. Change from expensing extraordinary repairs to capitalizing the expenditures.
b. Change from FIFO to LIFO.
c. Change in the composition of firms reporting on a consolidated basis.
Chapter 20 Accounting Changes
d. Change from LIFO to FIFO.
21. 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)?
a. Change in reporting entity.
b. Change to the LIFO method from the FIFO method.
c. Change in accounting estimate.
d. Change in depreciation methods.
22. 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)?
a. Change in estimated useful life of depreciable assets.
b. Change from the FIFO method of costing inventories to the LIFO method.
c. Change in depreciation method.
d. Change in reporting entity.
23. Which of the following changes should be accounted for using the retrospective approach?
a. A change in the estimated life of a depreciable asset.
b. A change from straight-line to declining balance depreciation.
c. A change to the LIFO method of costing inventories.
d. A change from the completed-contract method of accounting for long-term construction
contracts.
24. Companies should report the cumulative effect of an accounting change in the income
statement:
a. In the quarter in which the change is made.
b. In the annual financial statements only.
c. In the first quarter of the fiscal year in which the change is made.
d. Never.
25. Disclosure notes related to a change in accounting principle under the retrospective approach
should include:
a. The effect of the change on executive compensation.
b. The auditor’s approval of the change.
c. The SEC’s permission to change.
d. Justification for the change.
26. Which of the following is an example of a change in accounting principle?
Chapter 20 Accounting Changes
a. A change in inventory costing methods.
b. A change in the estimated useful life of a depreciable asset.
c. A change in the actuarial life expectancies of employees under a pension plan.
d. Consolidating a new subsidiary.
27. Which of the following is not an example of a change in accounting principle?
a. A change in the useful life of a depreciable asset.
b. A change from LIFO to FIFO for inventory costing.
c. A change to the full costing method in the extractive industries.
d. A change from the cost method to the equity method of accounting for investments.
28. When the retrospective approach is used for a change to the FIFO method, which of the
following accounts is usually not adjusted?
a. Deferred Income Taxes.
b. Inventory.
c. Retained Earnings.
d. All of these answer choices are usually are adjusted.
29. JFS Co. changed from straight-line to double-declining-balance depreciation. The journal
entry to record the change includes:
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.
30. National Hoopla Company switches from sum-of-the-years’ digits depreciation to straight-line
depreciation. As a result:
a. Current income tax payable increases.
b. The cumulative effect decreases current period earnings.
c. Prior periods’ financial statements are restated.
d. None of these answer choices is correct.
31. If a change is made from straight-line to SYD depreciation, one should record the effects by a
journal entry including:
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.
32. On January 2, 2016, Tobias Company began using straight-line depreciation for a certain class
of assets. In the past, the company had used double-declining-balance depreciation for these
assets. As of January 2, 2016, the amount of the change in accumulated depreciation is
$40,000. The appropriate tax rate is 40%. The separately reported change in 2016 earnings is:
a. An increase of $40,000.
b. A decrease of $40,000.
c. An increase of $24,000.
d. None of these answer choices is correct.
33. Which of the following accounting changes should not be accounted for prospectively?
a. The correction of an error.
b. A change from declining balance to straight-line depreciation.
c. A change from straight-line to declining balance depreciation.
d. A change in the expected salvage value of a depreciable asset.
34. Prior years’ financial statements are restated under the:
a. Current approach.
b. Prospective approach.
c. Retrospective approach.
d. None of these answer choices is correct.
35. A change that uses the prospective approach is accounted for by:
a. Implementing it in the current year.
b. Reporting pro forma data.
c. Retrospective restatement of all prior financial statements in a comparative annual report.
d. Giving current recognition of the past effect of the change.
36. The cumulative effect of most changes in accounting principle is reported:
a. In the income statement between income from continuing operations and net income.
b. In the income statement after income and before income tax.
c. In the income statement before income from continuing operations. n.
d. In the balance sheet accounts affected.
37. When an accounting change is reported under the retrospective approach, account balances in
the general ledger:
a. Are not adjusted.
b. Are closed out and then updated.
c. Are adjusted net of the tax effect.
d. Are adjusted to what they would have been had the new method been used in previous
years.
38. During 2016, Hoffman Co. decides to use FIFO to account for its inventory transactions.
Previously, it had used LIFO.
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.
20–12 Spiceland/Sepe/Nelson, Intermediate Accounting, Eighth Edition
39. Which of the following would not be accounted for using the retrospective approach?
a. A change from LIFO to FIFO inventory costing.
b. A change from average cost to FIFO inventory costing.
c. A change in depreciation methods.
d. A change from the full cost method in the oil industry.
40. Which of the following would not be accounted for using the prospective approach?
a. A change to LIFO from FIFO for inventory costing.
b. A change in price indexes used under the LIFO method of inventory costing.
c. A change in estimate.
d. A change from the cash basis to accrual accounting.
41. Which of the following changes in inventory costing usually should not be reported by
revising the financial statements of prior periods?
a. The weighted-average method to the LIFO method.
b. The weighted-average method to the FIFO method.
c. FIFO method to the weighted-average method.
d. LIFO method to the weighted-average method.
42. Which of the following changes should be accounted for using the retrospective approach?
a. A change in the estimated useful life of a depreciable asset.
Chapter 20 Accounting Changes
b. A change from straight-line to declining balance depreciation.
c. A change from completed-contract method of accounting for long-term construction
contracts.
d. A change to LIFO method of costing inventories.
43. La Casita Restaurants changed from the FIFO method of inventory costing to the
weighted average method during 2016. When reported in the 2016 comparative financial
statements, the 2015 inventory amount will be:
a. Increased.
b. Decreased.
c. Increased or decreased, depending on how prices changed.
d. Unaffected.
44. B Company switched from the sum-of-the-years-digits depreciation method to straight-
line depreciation in 2016. The change affects machinery purchased at the beginning of
2014 at a cost of $72,000. The machinery has an estimated life of five years and an
estimated residual value of $3,600. What is B’s 2016 depreciation expense?
a. $ 9,120.
b. $13,680.
c. $15,840.
d. $19,200.
20–14 Spiceland/Sepe/Nelson, Intermediate Accounting, Eighth Edition
45. Blue Co. has a patent on a communication process. The company has amortized the patent on
a straight-line basis since 2012, 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 2016 (before adjusting and
closing entries). What is the appropriate patent amortization expense in 2016?
a. $ 4 million.
b. $ 5 million.
c. $10 million.
d. $20 million.
46. Orange Corp. constructed a machine at a total cost of $70 million. Construction was
completed at the end of 2012 and the machine was placed in service at the beginning of 2013.
The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits
method. The residual value is expected to be $4 million. At the beginning of 2016, Orange
decided to change to the straight-line method. Ignoring income taxes, what will be Orange’s
depreciation expense for 2016?
a. $4.8 million.
b. $5.4 million.
c. $6.6 million.
Chapter 20 Accounting Changes
d. $9.4 million.
47. Retrospective restatement usually is appropriate for a change in:
Accounting Estimate Accounting Principle
a. Yes Yes
b. Yes No
c. No Yes
d. No No
20–16 Spiceland/Sepe/Nelson, Intermediate Accounting, Eighth Edition
48. For 2015, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in
2015. Experience during 2016 indicated that the estimate should have been based on $25 per
unit. The effect of this $2 difference from the estimate is reported:
a. In 2016 income from continuing operations.
b. As an accounting change, net of tax, below 2016 income from continuing operations.
c. As an accounting change requiring 2015 financial statements to be restated.
d. As a correction of an error requiring 2015 financial statements to be restated.
49. Which of the following is a change in estimate?
a. A change from the full costing method in the extractive industries.
b. A change from LIFO to FIFO inventory costing.
c. Consolidating a subsidiary for the first time.
d. A change in the termination rate of employees under a pension plan.
50. Which of the following is not a change in estimate?
a. A change in the useful life of a depreciable asset.
b. A change in the mortality rate used for pension computations.
c. A change from the cost to the equity method in accounting for investments.
d. A change in the warranty expense percentage.
51. A change in the residual value of equipment is accounted for:
Chapter 20 Accounting Changes
a. As a prior period adjustment.
b. Prospectively.
c. Retrospectively.
d. None of these answer choices is correct.
52. Gore Inc. recorded a liability in 2016 for probable litigation losses of $2 million. Ultimately,
$5 million in legitimate warranty claims were filed by Gore’s customers.
a. Gore has made a change in accounting principle, requiring retrospective adjustment.
b. Gore needs to correct an accounting error.
c. Gore is required to adjust a change in accounting estimate prospectively.
d. Gore is not required to make any accounting adjustments.
53. Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at
the end of 2012 and the machine was placed in service at the beginning of 2013. The machine
was being depreciated over a 10-year life using the straight-line method. The residual value is
expected to be $4 million. At the beginning of 2016, Red decided to change to the sum-of-the-
years’–digits method. Ignoring income taxes, what will be Red’s depreciation expense for
2016?
a. $ 4.8 million.
b. $ 5.4 million.
c. $ 6.6 million.
d. $11.55 million.
54. Mobic Inc. acquired some manufacturing equipment in January 2013 for $400,000 and
depreciated it $40,000 each year for three years on a straight-line basis. During 2016, the
manufacturer announced a new technology for this type of equipment that will make the old
models obsolete by the end of 2019. 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 2016, Mobic should:
a. Charge $280,000 in depreciation expense.
b. Report the book value of the equipment in its12/31/2016 balance sheet at $210,000.
c. Make an adjustment to retained earnings for the error in measuring depreciation during
2013-2015.
d. None of these answer choices is correct.
Chapter 20 Accounting Changes
55. Which of the following is not a change in accounting principle that usually is accounted
for by retrospectively revising prior financial statements?
a. Change from FIFO to the average method of inventory costing.
b. Change from SYD to DDB depreciation.
c. Change from the average method of inventory costing to FIFO.
d. Change from the LIFO to the FIFO method of inventory costing.
56. Venice Company purchased a gondola for $440,000 (no residual value) at the beginning
of 2013. The gondola was being depreciated over a 10-year life using the sum-of-the-
years’-digits method. At the beginning of 2016, it was decided to change to straight-line.
Ignoring taxes, the 2016 adjusting entry will include a debit to depreciation expense of:
a. $76,000
b. $44,000
c. $32,000
d. $22,000
57. SkiPark Company purchased a gondola for $440,000 (no residual value) at the beginning
of 2013. The gondola was being depreciated over a 10-year life using the sum-of-the-
years’-digits method. At the beginning of 2016, it was decided to change to straight-line.
An accompanying disclosure note would include each of the following except:
a. The effect of a change on any financial statement line items affected for all periods
reported.
b. Justification that the change is preferable.
c. The cumulative effect of the change.
d. The effect of a change on per share amounts affected for all periods reported.
Chapter 20 Accounting Changes
58. Which of the following is accounted for prospectively?
a. Changes from the average method of inventory costing to FIFO.
b. Change in reporting entity.
c. Change in the percentage used to determine warranty expense.
d. Correction of an error.
59. The prospective approach usually is required for:
a. A change in accounting principle.
b. A change in reporting entity.
c. A change in estimate.
d. A correction of an error.
60. FIFA Footballs acquired a patent in 2013 at a cost of $150 million and amortizes the
patent on a straight-line basis. During 2016 management decided that the benefits from
the patent would be received over a total period of 8 years rather than the 20-year legal
life being used to amortize the cost. FIFA’s 2016 financial statements should include:
a. A patent balance of $150 million.