CHAPTER 22
ACCOUNTING CHANGES AND ERROR ANALYSIS
CHAPTER LEARNING OBJECTIVES
1. Discuss the types of accounting changes, and the accounting for changes in accounting
policies.
2. Describe the accounting and reporting for changes in estimates.
3. Describe the accounting for correction of errors.
4. Analyze the effect of errors.
TRUE-FALSE—Conceptual
1. A change in accounting policy is a change that occurs as the result of new information or
additional experience.
2. Errors in financial statements result from mathematical mistakes or oversight or misuse of
facts that existed when preparing the financial statements.
3. Adoption of a new policy in recognition of events that have occurred for the first time or
that were previously immaterial is treated as an accounting change.
4. Retrospective application refers to the application of a different accounting policy to recast
previously issued financial statements—as if the new policy had always been used.
5. When a company changes an accounting policy, it should report the change by reporting
the cumulative effect of the change in the current year’s income statement.
6. One of the disclosure requirements for a change in accounting policy is to show the
cumulative effect of the change on retained earnings as of the beginning of the earliest
period presented.
7. An indirect effect of an accounting change is any change to current or future cash flows of
a company that result from making a change in accounting policy that is applied
retrospectively.
8. The IASB is silent on the application of the direct effects of a change in accounting policy.
9. The new IFRS on financial instruments will be subject to the proper accounting for
changes in accounting policy.
10. The requirements for disclosure are the same whether a change is voluntary or is
mandated by the issuance of a new IFRS.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 2
11. Under U.S. GAAP, the impracticality exception applies both to changes in accounting
policies and to the correction of errors.
12. Retrospective application is considered impracticable if a company cannot determine the
prior period effects using every reasonable effort to do so.
13. Companies report changes in accounting estimates retrospectively.
14. When it is impossible to determine whether a change in policy or change in estimate has
occurred, the change is considered a change in estimate.
15. Companies account for a change in depreciation methods as a change in accounting
policy.
16. Accounting errors include changes in estimates that occur because a company acquires
more experience, or as it obtains additional information.
17. Companies record corrections of errors from prior periods as an adjustment to the
beginning balance of retained earnings in the current period.
18. If an IASB standard creates a new policy, expresses preference for, or rejects a specific
accounting policy, the change is considered clearly acceptable.
19. Statement of financial position errors affect only the presentation of an asset or liability
account.
20. Counterbalancing errors are those that will be offset and that take longer than two periods
to correct themselves.
21. For counterbalancing errors, restatement of comparative financial statements is necessary
even if a correcting entry is not required.
22. Companies must make correcting entries for non-counterbalancing errors, even if they
have closed the prior year’s books.
23. An income statement classification error has no effect on the statement of financial
position and no effect on net income.
24. The accounting for change in estimates differs between U.S.GAAP and IFRS.
25. Non-counterbalancing errors are those that longer than two periods to correct themselves.
True-False Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Accounting Changes and Error Analysis
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 4
MULTIPLE CHOICE—Conceptual
26. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of
a. materiality.
b. consistency.
c. prudence.
d. objectivity.
27. Which of the following is not classified as an accounting change by IASB?
a. Change in the accounting policy
b. Change in accounting estimate
c. Errors in the financial statements
d. All of these are classified as an accounting change
28 Which of the following is the best explanation for why IASB has classified accounting
changes into different categories?
a. IASB established categories based on the materiality of the changes involved.
b. IASB classifies changes in the categories because each category involves different
method of recognizing changes in the financial statements.
c. IASB established categories based on the fact that some treatment are consider
GAAP and some are not.
d. IASB established the categories based on a survey of managers and their need to
provide a favorable profit picture.
29. IASB requires companies to use which method for reporting changes in accounting
policies?
a. cumulative effect approach
b. retrospective approach
c. prospective approach
d. averaging approach
30. Which of the following is not treated as a change in accounting policy?
a. A change from average cost to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full-cost to successful efforts in the extractive industry
d. A change from cost-recovery to percentage-of-completion
31. Which of the following is not a retrospective-type accounting change?
a. Cost-recovery method to the percentage-of-completion method for long-term contracts
b. Cost-recovery method to the FIFO method for inventory valuation
c. Sum–of–the-years’-digits method to the straight-line method
d. “Full cost” method to another method in the extractive industry
32. Which of the following is accounted for as a change in accounting policy?
a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing them as
they become material.
d. A change in inventory valuation from average cost to FIFO.
Accounting Changes and Error Analysis
33. A company changes from straight-line to an accelerated method of calculating
depreciation, which will be similar to the method used for tax purposes. The entry to
record this change should include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.
34. Which of the following disclosures is required for a change from sum-of–the-years-digits to
straight-line?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. Restatement of prior years’ income statements
c. Recalculation of current and future years’ depreciation
d. All of these answer choices are required.
35. Which of the following would be a reason where IASB would permit companies to change
accounting policy?
a. The change would allow the company to present a more favorable profit picture.
b. The change would result in the financial statements providing more reliable and
relevant information about a company`s financial position, financial performance, and
cash flows.
c. The change is made by the internal auditor.
d. The change will be long-term.
36. If a particular transaction is not specifically addressed by IFRS, where should an
accountant turn to find a hierarchy of guidance to be considered in the selection of an
accounting policy?
a. accounting standards from other countries
b. IAS 8
c. the company’s board of directors
d. the company’s external auditors
37. A company changes from percentage–of-completion to cost-recovery, which is the method
used for tax purposes. The entry to record this change should include a
a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior years,
net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d. credit to Deferred Tax Liability.
38. Which of the following disclosures is not required for a change from average cost to
FIFO?
a. Basic and diluted earnings per share for the current period and each prior period
presented
b. The nature of the change in accounting policy
c. The amount of the adjustment relating to periods before those presented
d. All of these answer choices are required.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 6
39. Stone Company changed its method of pricing inventories from average cost to FIFO.
What type of accounting change does this represent?
a. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
b. A change in accounting policy for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
c. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be restated.
d. A change in accounting policy for which the financial statements for prior periods
included for comparative purposes should be restated.
40. Which type of accounting change should always be accounted for in current and future
periods?
a. Change in accounting policy
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error
41. Which of the following is (are) the proper time period(s) to record the effects of a change
in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only
42. When a company decides to switch from the double-declining balance method to the
straight-line method, this change should be handled as a
a. change in accounting policy.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.
43. The estimated life of a building that has been depreciated 30 years of an originally
estimated life of 50 years has been revised to a remaining life of 10 years. Based on this
information, the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based
on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
44. Which of the following statements is correct?
a. Changes in accounting policy are always handled in the current or prospective period.
b. Prior statements should be restated for changes in accounting estimates.
c. A change from expensing certain costs to capitalizing these costs due to a change in
the period benefited, should be handled as a change in accounting estimate.
d. Correction of an error related to a prior period should be considered as an adjustment
to current year net income.
Accounting Changes and Error Analysis
45. Why does IASB prohibit retrospective treatment of changes in accounting estimates?
a. The IASB view changes in estimates as normal recurring corrections and adjustments,
which are the natural result of the accounting process.
b. The IASB does not allow the retrospective treatment for any type of presentation.
c. The IASB prohibits retrospective treatment of changes in accounting estimates
because IFRS requires it.
d. IASB does not prohibit retrospective treatment of changes in accounting estimates,
but is silent on this issue
46. All of the following statements are true regarding IASB’s guideline that companies must
demonstrate change in accounting policy as preferable or as an improvement, except
a. Diversity in situations and characteristics of the items encountered in practice require
the use of professional judgment.
b. Changes in accounting policy are appropriate only when a company demonstrates
that the newly adopted generally accepted accounting policy is more relevant and
reliable than the existing one.
c. Changes in accounting policy are appropriate only when a company demonstrates an
improved income tax effect alone.
d. All of these statements are true.
47. Each of the following errors will overstate 2019 net income except
a. Equipment purchased in 2018 was expensed.
b. Wages payable were not recorded at 12/31/19.
c. Equipment purchased in 2019 was expensed.
d. 2019 ending inventory was overstated
48. Yee Construction Co. had followed the practice of expensing all materials assigned to a
construction job without recognizing any residual inventory. On December 31, 2019, it was
determined that residual inventory should be valued at ¥56,000. Of this amount, ¥23,000
arose during the current year. Based on this information, all of the following statements
are true regarding the effect on the financial statements to be prepared at the end of 2019
except
a. ¥23,000 should be reported in the 2019 statements as a reduction of materials cost.
b. ¥33,000 should be reported as an adjustment to the beginning balance of retained
earnings in the 2019 financial statements.
c. This change should be handled as a correction of an error.
d. This change should be handled as a change in accounting estimate.
49. An example of a correction of an error in previously issued financial statements is a
change
a. from the FIFO method of inventory valuation to the average cost method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.
50. The IASB has declared, as part of its conceptual framework, that it will assess the merits
of proposed standards
a. from a position of neutrality.
b. from a position of materiality.
c. based on the possible impact on behavior.
d. based on lobbyist arguments.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 8
51. Which of the following is true regarding whether IFRS specifically addresses the
accounting and reporting for effects of changes in accounting policies?
Direct effects Indirect effects
a. YES YES
b. NO NO
c. NO YES
d. YES NO
52. Under IFRS, when a company prepares financial statements on a new basis, how many
years of comparative data are reported?
a. One
b. Two
c. Three
d. Five
53. Counterbalancing errors do not include
a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.
54. A company using a perpetual inventory system neglected to record a purchase of
merchandise on account at year end. This merchandise was omitted from the year-end
physical count. How will these errors affect assets, liabilities, and equity at year end and
net income for the year?
Assets Liabilities Equity Net Income
a. No effect Understate Overstate Overstate.
b. No effect Overstate Understate Understate.
c. Understate Understate No effect No effect.
d. Understate No effect Understate Understate.
55. If, at the end of a period, a company erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its
accounting records, these errors would cause
a. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated.
Multiple Choice Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Accounting Changes and Error Analysis
MULTIPLE CHOICE—Computational
56. On January 1, 2016, Neal Corporation acquired equipment at a cost of $540,000. Neal
adopted the sum-of–the–years’-digits method of depreciation for this equipment and had
been recording depreciation over an estimated life of eight years, with no residual value.
At the beginning of 2019, a decision was made to change to the straight-line method of
depreciation for this equipment. The depreciation expense for 2019 would be
a. $28,125.
b. $45,000.
c. $67,500.
d. $108,000.
57. On January 1, 2016, Knapp Corporation acquired machinery at a cost of $250,000. Knapp
adopted the double-declining balance method of depreciation for this machinery and had
been recording depreciation over an estimated useful life of ten years, with no residual
value. At the beginning of 2019, a decision was made to change to the straight-line
method of depreciation for the machinery. The depreciation expense for 2019 would be
a. $12,800.
b. $18,286.
c. $25,000.
d. $35,714.
58. On January 1, 2016, Piper Co., purchased a machine (its only depreciable asset) for
$300,000. The machine has a five-year life, and no salvage value. Sum-of–the-years’-
digits depreciation has been used for financial statement reporting and the elective
straight-line method for income tax reporting. Effective January 1, 2019, for financial
statement reporting, Piper decided to change to the straight-line method for depreciation
of the machine. Assume that Piper can justify the change.
Piper’s income before depreciation, before income taxes, and before the cumulative effect
of the accounting change (if any), for the year ended December 31, 2019, is $250,000.
The income tax rate for 2019, as well as for the years 2016-2018, is 30%. What amount
should Piper report as net income for the year ended December 31, 2019?
a. $60,000
b. $91,000
c. $154,000
d. $175,000
Use the following information for questions 59 and 60.
Ventura Corporation purchased machinery on January 1, 2018 for $630,000. The company used
the sum-of–the–years’-digits method and no salvage value to depreciate the asset for the first two
years of its estimated six-year life. In 2020, Ventura changed to the straight-line depreciation
method for this asset. The following facts pertain:
2018 2019
Straight-line $105,000 $105,000
Sum-of–the–years’-digits 180,000 150,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 10
59. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on
beginning retained earnings is
a. $135,000.
b. $120,000.
c. $72,000.
d. $0.
60. The amount that Ventura should report for depreciation expense on its 2019 income
statement is
a. $120,000.
b. $105,000.
c. $75,000.
d. none of the above.
61. During 2019, a construction company changed from the cost-recovery method to the
percentage-of-completion method for accounting purposes but not for tax purposes. Gross
profit figures under both methods for the past three years appear below:
Cost-Recovery Percentage–of-Completion
2017 $ 475,000 $ 800,000
2018 625,000 950,000
2019 700,000 1,050,000
$1,800,000 $2,800,000
Assuming an income tax rate of 40% for all years, the effect of this accounting change on
prior periods should be reported by a credit of
a. $600,000 on the 2019 income statement.
b. $390,000 on the 2019 income statement.
c. $600,000 on the 2019 retained earnings statement.
d. $390,000 on the 2019 retained earnings statement.
Use the following information for questions 62 and 63.
On January 1, 2016, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted
the straight-line method of depreciation for this machine and had been recording depreciation
over an estimated life of ten years, with no residual value. At the beginning of 2019, a decision
was made to change to the double-declining balance method of depreciation for this machine.
62. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning
retained earnings, is
a. $67,200.
b. $0.
c. $78,960.
d. $112,800.
63. The amount that Nobel should record as depreciation expense for 2019 is
a. $60,000.
b. $84,000.
c. $120,000.
d. none of the above.
Accounting Changes and Error Analysis
64. On December 31, 2019 Dean Company changed its method of accounting for inventory
from the average cost method to the FIFO method. This change caused the 2019
beginning inventory to increase by $420,000. The cumulative effect of this accounting
change to be reported for the year ended 12/31/19, assuming a 40% tax rate, is
a. $420,000.
b. $252,000.
c. $168,000.
d. $0.
65. Sun Construction Company decided at the beginning of 2019 to change from the cost–
recovery method to the percentage–of-completion method for financial reporting purposes.
The company will continue to use the cost-recovery method for tax purposes. For years
prior to 2019, pretax income under the two methods was as follows: percentage-of–
completion £120,000, and cost-recovery £80,000. The tax rate is 35%. Sun’s 2019 journal
entry to record the change in accounting policy will include:
a. a debit to Retained Earnings for £40,000.
b. a credit to Construction in Process for £40,000.
c. a debit to Deferred Tax Asset for £14,000.
d. a credit to Deferred Tax Liability for £14,000
66. Jacob, Inc., changed from the average cost to the FIFO cost flow assumption in 2019. The
increase in the prior year`s income before taxes is €1,100,000. The tax rate is 35%.
Jacob’s 2019 journal entry to record the change in accounting policy will include.
a. a debit to Retained Earnings for €1,100,000.
b. a credit to Retained Earnings for €1,100,000.
c. a debit to Inventory for €715,000.
d. a credit to Deferred Tax Liability for €385,000
67. Detmer Construction Company decided at the beginning of 2019 to change from the cost–
recovery method to the percentage–of-completion method for financial reporting purposes.
The company will continue to use the cost-recovery method for tax purposes. For years
prior to 2019, pretax income under the two methods was as follows: percentage-of–
completion £144,000, and cost-recovery £114,000. The tax rate is 35%. Detmer has a
profit-sharing plan, which pays all employees a bonus at year-end based on 1.5% of
pretax income. What is the amount of the indirect effect of Detmer’s change in accounting
policy that will be reported in the 2019 income statement, assuming that the profit-sharing
contract explicitly requires adjustment for changes in income numbers?
a. £2,160
b. £1,710
c. £ 450
d. £ 954
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 12
68. Heinz Company began operations on January 1, 2018, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the average
cost method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory 2018 2019
FIFO $640,000 $ 712,000
Average cost 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,080,000
Based on the above information, a change to the average cost method in 2019 would
result in net income for 2019 of
a. $1,120,000.
b. $1,080,000.
c. $1,004,000.
d. $1,000,000.
69. Lanier Company began operations on January 1, 2018, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the average
cost method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory 2018 2019
FIFO $320,000 $360,000
Average cost 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the average cost method in 2019 would
result in net income for 2019 of
a. $540,000.
b. $600,000.
c. $620,000.
d. $660,000.
70. Equipment was purchased at the beginning of 2016 for $204,000. At the time of its
purchase, the equipment was estimated to have a useful life of six years and a residual
value of $24,000. The equipment was depreciated using the straight-line method of
depreciation through 2018. At the beginning of 2019, the estimate of useful life was
revised to a total life of eight years and the expected residual value was changed to
$15,000. The amount to be recorded for depreciation for 2019, reflecting these changes in
estimates, is
a. $12,375.
b. $19,800.
c. $22,800.
d. $23,625.
Use the following information for questions 71 and 72.
Swift Company purchased a machine on January 1, 2016, for $300,000. At the date of
acquisition, the machine had an estimated useful life of six years with no residual value. The
machine is being depreciated on a straight-line basis. On January 1, 2019, Swift determined, as a
result of additional information, that the machine had an estimated useful life of eight years from
the date of acquisition with no residual value. An accounting change was made in 2019 to reflect
this additional information.
Accounting Changes and Error Analysis
71. Assume that the direct effects of this change are limited to the effect on depreciation and
the related tax provision, and that the income tax rate was 30% in 2016, 2017, 2018, and
2019. What should be reported in Swift’s income statement for the year ended December
31, 2019, as the cumulative effect on prior years of changing the estimated useful life of
the machine?
a. $0
b. $20,000
c. $30,000
d. $105,000
72. What is the amount of depreciation expense on this machine that should be charged in
Swift’s income statement for the year ended December 31, 2019?
a. $30,000
b. $37,500
c. $60,000
d. $75,000
73. Brittany Company purchased a computer system for £94,250 on January 1, 2017. It was
depreciated on a straight-line basis based on a 7-year life and an £19,000 residual value.
On January 1, 2019, Brittany revised these estimates to a total useful life of 4 years and a
residual value of £10,000. Brittany’s entry to record 2019 depreciation expense will
include a debit to Depreciation Expense for:
a. £75,250
b. £72,750
c. £19,000
d. £31,375
Use the following information for questions 74 and 75.
In January 2018, Marcus Ltd. has installation costs of £9,000 on new machinery that were
charged to Repair Expense. Other costs of this machinery of £30,000 were correctly recorded
and have been depreciated using the straight-line method with an estimated life of 10 years and
no residual value. At December 31, 2016, Marcus decides that the machinery has remaining
useful life of 15 years, starting with January 1, 2019
74. If the book have not been closed for 2019 and depreciation expense has not yet been
recorded for 2019, the entry that Marcus makes in 2019 to correct for the error of
expensing installation costs on the machinery acquired in January, 2018, will include:
a. a debit to Retained Earnings for £9,000
b. a credit to Retained Earnings for £9,000.
c. a debit to Retained Earnings for £8,100.
d. a credit to Retained Earnings for £8,100.
75. If the book have not been closed for 2019 and depreciation expense has not yet been
recorded for 2019, the entry that Marcus makes in 2019 to record depreciation on the
machinery acquired in January, 2018, will include:
a. a debit to Depreciation Expense for £2,600
b. a credit to Accumulated Depreciation for £900.
c. a debit to Depreciation Expense for £3,900
d. a credit to Accumulated Depreciation for £2,340
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 14
76. In 2019, Krasny Corporation discovered that equipment purchased on January 1,2017, for
€52,500 was expensed at that time. The equipment should have been depreciated over
5 years, with no residual value. The effective tax rate is 30%. Krasny’s 2019 journal entry
to correct the error would include
a. a credit to Equipment for €52,500
b. a debit to Retained Earnings for €52,500.
c. a credit to Retained Earnings for €22,050.
d. a credit to Deferred Tax Liability for €15,750.
Use the following information for questions 77 and 78.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended
12/31/18 and 12/31/19 contained the following errors:
2018 2019
Ending inventory $15,000 overstatement $24,000 understatement
Depreciation expense 6,000 understatement 12,000 overstatement
77. Assume that the 2018 errors were not corrected and that no errors occurred in 2017. By
what amount will 2018 income before income taxes be overstated or understated?
a. $21,000 overstatement
b. $9,000 overstatement
c. $21,000 understatement
d. $9,000 understatement
78. Assume that no correcting entries were made at 12/31/18, or 12/31/19. Ignoring income
taxes, by how much will retained earnings at 12/31/19 be overstated or understated?
a. $24,000 overstatement
b. $21,000 overstatement
c. $30,000 understatement
d. $9,000 understatement
Use the following information for questions 79 through 81.
Langley Company’s December 31 year–end financial statements contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $7,500 understated $11,000 overstated
Depreciation expense 2,000 understated
An insurance premium of $18,000 was prepaid in 2017 covering the years 2017, 2018, and 2019.
The prepayment was recorded with a debit to insurance expense. In addition, on December 31,
2018, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until
2019. There were no other errors during 2018 or 2019 and no corrections have been made for
any of the errors. Ignore income tax considerations.
79. What is the total net effect of the errors on Langley’s 2018 net income?
a. Net income understated by $14,500.
b. Net income overstated by $7,500.
c. Net income overstated by $13,000.
d. Net income overstated by $15,000.
Accounting Changes and Error Analysis
80. What is the total net effect of the errors on the amount of Langley‘s working capital at
December 31, 2018?
a. Working capital overstated by $5,000
b. Working capital overstated by $1,500
c. Working capital understated by $4,500
d. Working capital understated by $12,000
81. What is the total effect of the errors on the balance of Langley’s retained earnings at
December 31, 2018?
a. Retained earnings understated by $10,000
b. Retained earnings understated by $4,500
c. Retained earnings understated by $2,500
d. Retained earnings overstated by $3,500
82. Accrued salaries payable of $51,000 were not recorded at December 31, 2018. Office
supplies on hand of $24,000 at December 31, 2019 were erroneously treated as expense
instead of supplies inventory. Neither of these errors was discovered nor corrected. The
effect of these two errors would cause
a. 2019 net income to be understated $75,000 and December 31, 2019 retained
earnings to be understated $24,000.
b. 2018 net income and December 31, 2018 retained earnings to be understated
$51,000 each.
c. 2018 net income to be overstated $27,000 and 2019 net income to be understated
$24,000.
d. 2019 net income and December 31, 2019 retained earnings to be understated
$24,000 each.
Use the following information for questions 83 through 85.
Bishop Co. began operations on January 1, 2018. Financial statements for 2018 and 2019 con-
tained the following errors:
Dec. 31, 2018 Dec. 31, 2019
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2019 fully depreciated equipment was sold for $28,800, but the sale
was not recorded until 2017. No corrections have been made for any of the errors. Ignore income
tax considerations.
83. The total effect of the errors on Bishop’s 2019 net income is
a. understated by $376,800.
b. understated by $244,800.
c. overstated by $115,200.
d. overstated by $199,200.
84. The total effect of the errors on the balance of Bishop‘s retained earnings at December
31, 2019 is understated by
a. $328,800.
b. $268,800.
c. $184,800.
d. $136,800.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 16
Accounting Changes and Error Analysis
85. The total effect of the errors on the amount of Bishop’s working capital at December 31,
2019 is understated by
a. $400,800.
b. $316,800.
c. $184,800.
d. $124,800.
Use the following information for questions 86 and 87.
Link Co. purchased machinery that cost $810,000 on January 4, 2017. The entire cost was
recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The
error was discovered on December 20, 2019. Ignore income tax considerations.
86. Link‘s income statement for the year ended December 31, 2019, should show the
cumulative effect of this error in the amount of
a. $726,000.
b. $642,000.
c. $558,000.
d. $0.
87. Before the correction was made, and before the books were closed on December 31,
2019, retained earnings was understated by
a. $810,000.
b. $726,000.
c. $642,000.
d. $558,000.
Use the following information for questions 88 and 89.
Ernst Company purchased equipment that cost $750,000 on January 1, 2017. The entire cost
was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value.
Ernst uses the straight-line method to account for depreciation expense. The error was
discovered on December 10, 2019. Ernst is subject to a 40% tax rate.
88. Ernst’s net income for the year ended December 31, 2017, was understated by
a. $402,000.
b. $450,000.
c. $670,000.
d. $750,000.
89. Before the correction was made and before the books were closed on December 31,
2019, retained earnings was understated by
a. $332,000.
b. $336,000.
c. $354,000.
d. $450,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 18
Multiple Choice Answers—Computational
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE—CPA Adapted
90. Which of the following should be reported as a prior period adjustment?
Change in Change from
Estimated Lives Unaccepted Policy
of Depreciable Assets to Accepted Policy
a. Yes Yes
b. No Yes
c. Yes No
d. No No
91. On December 31, 2019, Grantham, Inc. appropriately changed its inventory valuation
method to FIFO cost from average cost for financial statement and income tax purposes.
The change will result in a $1,500,000 increase in the beginning inventory at January 1,
2019. Assume a 30% income tax rate. The cumulative effect of this accounting change on
beginning retained earnings is
a. $0.
b. $450,000.
c. $1,050,000.
d. $1,500,000.
92. On January 1, 2019, Frost Corp. changed its inventory method to FIFO from average cost
for both financial and income tax reporting purposes. The change resulted in an $800,000
increase in the January 1, 2019 inventory. Assume that the income tax rate for all years is
30%. The cumulative effect of the accounting change should be reported by Frost in its
2019
a. retained earnings statement as a $560,000 addition to the beginning balance.
b. income statement as a $560,000 cumulative effect of accounting change.
c. retained earnings statement as an $800,000 addition to the beginning balance.
d. income statement as an $800,000 cumulative effect of accounting change.
93. On January 1, 2016, Lake Co. purchased a machine for $792,000 and depreciated it by
the straight-line method using an estimated useful life of eight years with no residual
value. On January 1, 2019, Lake determined that the machine had a useful life of six
years from the date of acquisition and will have a residual value of $72,000. An
accounting change was made in 2019 to reflect these additional data. The accumulated
depreciation for this machine should have a balance at December 31, 2019 of
a. $438,000.
b. $462,000.
c. $480,000.
Accounting Changes and Error Analysis
d. $528,000.
94. On January 1, 2016, Hess Co. purchased a patent for $595,000. The patent is being
amortized over its remaining legal life of 15 years expiring on January 1, 2031. During
2019, Hess determined that the economic benefits of the patent would not last longer than
ten years from the date of acquisition. What amount should be reported in the statement
of financial position for the patent, net of accumulated amortization, at December 31,
2019?
a. $357,000
b. $408,000
c. $420,000
d. $436,375
95. During 2018, a textbook written by Mercer Co. personnel was sold to Roark Publishing,
Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for
sales in July through December of the prior year, and on September 30, for sales in
January through June of the same year.
• Royalty income of $108,000 was accrued at 12/31/18 for the period July-December
2018.
• Royalty income of $120,000 was received on 3/31/19, and $156,000 on 9/30/19.
• Mercer learned from Roark that sales subject to royalty were estimated at $1,620,000
for the last half of 2019.
In its income statement for 2019, Mercer should report royalty income at
a. $276,000.
b. $288,000.
c. $318,000.
d. $330,000.
96. On January 1, 2018, Janik Corp. acquired a machine at a cost of $500,000. It is to be
depreciated on the straight-line method over a five-year period with no residual value.
Because of a bookkeeping error, no depreciation was recognized in Janik’s 2018 financial
statements. The oversight was discovered during the preparation of Janik’s 2019 financial
statements. Depreciation expense on this machine for 2019 should be
a. $0.
b. $100,000.
c. $125,000.
d. $200,000.
97. On December 31, 2019, special insurance costs, incurred but unpaid, were not recorded.
If these insurance costs were related to work in process, what is the effect of the omission
on accrued liabilities and retained earnings in the December 31, 2019 statement of
financial position?
Accrued Liabilities Retained Earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 20
98. Black, Inc. is a calendar-year corporation whose financial statements for 2015 and 2016
included errors as follows:
Year Ending Inventory Depreciation Expense
2018 $162,000 overstated $135,000 overstated
2019 54,000 understated 45,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made
at December 31, 2018, or at December 31, 2019. Ignoring income taxes, by how much
should Black’s retained earnings be retroactively adjusted at January 1, 2020?
a. $144,000 increase
b. $36,000 increase
c. $18,000 decrease
d. $9,000 increase
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
DERIVATIONS — Computational
No. Answer Derivation
Accounting Changes and Error Analysis
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 22
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Accounting Changes and Error Analysis
DERIVATIONS — CPA Adapted
No. Answer Derivation
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 24
EXERCISES
Ex. 22-99—Matching accounting changes to situations.
The three types of accounting changes, including error correction, are:
Code
a. Change in accounting policy.
b. Change in accounting estimate.
c. Error correction.
Instructions
Following are a series of situations. You are to enter a code letter to the left to indicate the type of
change.
____ 1. Change due to understatement of inventory.
____ 2. Change due to charging a new asset directly to an expense account.
____ 3. Change from expensing to capitalizing certain costs, due to a change in periods
benefited.
____ 4. Change from FIFO to average-cost inventory procedures.
____ 5. Change due to failure to recognize an accrued (uncollected) revenue.
____ 6. Change in amortization period for an intangible asset.
____ 7. Change in expected recovery of an account receivable.
____ 8. Change in the loss rate on warranty costs.
____ 9. Change due to failure to recognize and accrue income.
____ 10. Change in residual value of a depreciable plant asset.
____ 11. Change from an unacceptable to an acceptable accounting policy.
____ 12. Change in both estimate and acceptable accounting policies.
____ 13. Change due to failure to recognize a prepaid asset.
Ex. 22-99 (cont.)
____ 14. Change from straight-line to sum-of–the-years’-digits method of depreciation.
____ 15. Change in life of a depreciable plant asset.
____ 16. Change from one acceptable policy to another acceptable policy.
Solution 22-99
Accounting Changes and Error Analysis
Ex. 22-100—How changes or corrections are recognized.
For each of the following items, indicate the type of accounting change and how each is
recognized in the accounting records in the current year.
(a) Change from straight-line method of depreciation to sum-of–the-years’-digits
(b) Change from the cash basis to accrual basis of accounting
(c) Change from cost-recovery to percentage–of-completion method on construction contracts.
(d) Change due to failure to record depreciation in a previous period
(e) Change in the realizability of certain receivables
(f) Change from average cost to FIFO method for inventory valuation purposes
Solution 22-100
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 26
Ex. 22-101—Matching disclosures to situations.
In the blank to the left of each question, fill in the letter from the following list which best describes
the presentation of the item on the financial statements of Helton Corporation for 2019.
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above
____ 1. In 2019, the company changed its method of recognizing income from the cost-
recovery method to the percentage–of-completion method.
____ 2. At the end of 2019, an audit revealed that the corporation’s allowance for doubtful
accounts was too large and should be reduced to 2%. When the audit was made in
2018, the allowance seemed appropriate.
____ 3. Depreciation on a truck, acquired in 2016, was understated because the useful life
had been overestimated. The understatement had been made in order to show
higher net income in 2017 and 2018.
____ 4. The company switched from an average-cost to a FIFO inventory valuation method
during the current year.
____ 5. In the current year, the company decides to change from expensing certain costs to
capitalizing these costs, due to a change in the period benefited.
____ 6. During 2019, a long-term bond with a carrying value of $3,600,000 was retired at a
cost of $4,100,000.
____ 7. After negotiations with the taxing authority, income taxes for 2017 were established
at $42,900. They were originally estimated to be $28,600.
____ 8. In 2019, the company incurred interest expense of $29,000 on a 20-year bond issue.
____ 9. In computing the depreciation in 2017 for equipment, an error was made which
overstated income in that year $75,000. The error was discovered in 2019.
____ 10. In 2019, the company changed its method of depreciating plant assets from the
double-declining balance method to the straight-line method.
Solution 22-101
Accounting Changes and Error Analysis
Ex. 22-102—Change in accounting policy.
In 2019, Fischer Corporation changed its method of inventory pricing from average cost to FIFO.
Net income computed on an average cost as compared to a FIFO basis for the four years
involved is: (Ignore income taxes.)
AVERAGE FIFO
2016 $78,200 $83,700
2017 84,500 88,100
2018 87,000 91,400
2019 92,500 94,700
Instructions
(a) Indicate the net income that would be shown on comparative financial statements issued at
12/31/19 for each of the four years, assuming that the company changed to the FIFO
method in 2019.
(b) Assuming that the company switched from the FIFO to the average cost method, what
would be the net income reported on comparative financial statements issued at 12/31/19
for 2016, 2017, 2018 and 2019?
Solution 22-102
Ex. 22-103—Change in estimate and correction of errors.
Discuss the accounting procedures for and illustrate the following:
(a) Change in estimate
(b) Correction of an error
Solution 22-103
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 28
Ex. 22-104—Changes in depreciation methods, estimates.
On January 1, 2014, Powell Company purchased a building and machinery that have the
following useful lives, residual value, and costs.
Building, 25-year estimated useful life, $4,000,000 cost, $400,000 residual value
Machinery, 10-year estimated useful life, $500,000 cost, no residual value
The building has been depreciated under the straight-line method through 2018. In 2019, the
company decided to switch to the double-declining balance method of depreciation for the
building. Powell also decided to change the total useful life of the machinery to 8 years, with a
residual value of $25,000 at the end of that time. The machinery is depreciated using the straight–
line method.
Instructions
(a) Prepare the journal entry necessary to record the depreciation expense on the building in
2019.
(b) Compute depreciation expense on the machinery for 2019.
Solution 22-104
Ex. 22-105—Non-counterbalancing error.
Quigley Co. bought a machine on January 1, 2017 for $875,000. It had a $75,000 estimated
residual value and a ten-year life. An expense account was debited on the purchase date.
Quigley uses straight-line depreciation. This was discovered in 2019.
Instructions
Prepare the entry or entries related to the machine for 2019.
Accounting Changes and Error Analysis
Solution 22-105
Ex. 22-106—Effects of errors.
Show how the following independent errors will affect net income on the Income Statement and
the stockholders’ equity section of the Statement of Financial Position (SFP) using the symbol +
(plus) for overstated, – (minus) for understated, and 0 (zero) for no effect.
2018 2019
Income Income
Statement SFP Statement SFP
1. Ending inventory in 2018 overstated.
2. Failed to accrue 2018 interest revenue.
3. A capital expenditure for factory
equipment (useful life, 5 years) was
erroneously charged to maintenance
expense in 2018.
4. Failed to count office supplies on hand
at 12/31/18. Cash expenditures have
been charged to an office supplies
expense account during the year 2018.
5. Failed to accrue 2018 wages.
6. Ending inventory in 2018 understated.
7. Overstated 2018 depreciation
expense; 2019 expense correct.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 30
Solution 22-106
Ex. 22-107—Effects of errors.
Joseph Co. began operations on January 1, 2018. Financial statements for 2018 and 2019
contained the following errors:
Dec. 31, 2018 Dec. 31, 2019
Ending inventory $90,000 too high $114,000 too high
Depreciation expense 48,000 too low —
Accumulated depreciation 48,000 too low 48,000 too low
Insurance expense 42,000 too high 42,000 too low
Prepaid insurance 36,000 too low
In addition, on December 26, 2019 fully depreciated equipment was sold for $58,000, but the sale
was not recorded until 2020. No corrections have been made for any of the errors.
Instructions
Ignoring income taxes, show your calculation of the total effect of the errors on 2019 net income.
Accounting Changes and Error Analysis
Solution 22-107
PROBLEMS
Pr. 22-108—Accounting for changes and error corrections.
Dyke Company’s net incomes for the past three years are presented below:
2019 2018 2017
$480,000 $450,000 $360,000
During the 2019 year-end audit, the following items come to your attention:
1. Dyke bought a truck on January 1, 2016 for $196,000 with a $16,000 estimated residual value
and a six-year life. The company debited an expense account and credited cash on the
purchase date for the entire cost of the asset. (Straight-line method)
2. During 2019, Dyke changed from the straight-line method of depreciating its cement plant to
the double-declining balance method. The following computations present depreciation on
both bases:
2019 2018 2017
Straight-line 36,000 36,000 36,000
Double-declining 46,080 57,600 72,000
The net income for 2019 was computed using the double-declining balance method, on the
January 1, 2019 book value, over the useful life remaining at that time. The depreciation
recorded in 2019 was $72,000.
3. Dyke, in reviewing its provision for uncollectibles during 2019, has determined that 1% is the
appropriate amount of bad debt expense to be charged to operations. The company had used
1/2 of 1% as its rate in 2018 and 2019 when the expense had been $18,000 and $12,000,
respectively. The company recorded bad debt expense under the new rate for 2019. The
company would have recorded $6,000 less of bad debt expense on December 31, 2019
under the old rate.
Instructions
(a) Prepare in general journal form the entry necessary to correct the books for the transaction
in part 1 of this problem, assuming that the books have not been closed for the current year.
(b) Compute the net income to be reported each year 2017 through 2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 32
Pr. 22-108 (cont.)
(c) Assume that the beginning retained earnings balance (unadjusted) for 2017 was
$1,260,000. At what adjusted amount should this beginning retained earnings balance for
2017 be stated, assuming that comparative financial statements were prepared?
(d) Assume that the beginning retained earnings balance (unadjusted) for 2019 is $1,800,000
and that non-comparative financial statements are prepared. At what adjusted amount
should this beginning retained earnings balance be stated?
Solution 22-108
Pr. 22-109—Correction of errors.
Vance Company reported net incomes for a three-year period as follows:
2017, $186,000; 2018, $189,000; 2019, $180,000.
In reviewing the accounts in 2020 after the books for the prior year have been closed, you find
that the following errors have been made in summarizing activities:
2017 2018 2019
Overstatement of ending inventory $42,000 $51,000 $24,000
Understatement of accrued advertising expense 6,600 12,000 7,200
Instructions
(a) Determine corrected net incomes for 2017, 2018, and 2019.
(b) Give the entry to bring the books of the company up to date in 2020, assuming that the
books have been closed for 2019.
Accounting Changes and Error Analysis
Solution 22-109
Pr. 22-110—Error corrections and adjustments.
The controller for Haley Corporation is concerned about certain business transactions that the
company experienced during 2019. The controller, after discussing these matters with various
individuals, has come to you for advice. The transactions at issue are presented below.
1. The company has decided to switch from the direct write-off method in accounting for bad
debt expense to the percentage-of-sales approach. Assume that Haley Corporation has
recognized bad debt expense as the receivables have actually become uncollectible in the
following way:
2018 2019
From 2018 sales 31,800 12,000
From 2019 sales 45,000
The controller estimates that an additional $65,400 will be charged off in 2020: $11,400
applicable to 2018 sales and $54,000 to 2019 sales.
2. Inventory has been shipped on consignment. These transactions have been recorded as
ordinary sales and billed as such on account. At December 31, 2019, inventory billed and in
the hands of consignees amounted to $400,000. The percentage markup on selling price is
20%. Assume that consigned inventory is sold the following year. The company uses the
perpetual inventory system.
Instructions
(a) Assume that Haley Corporation reported net income of $1,000,000 for 2019. Present a
schedule showing the corrected net income after reviewing the above transactions.
(b) Prepare the journal entries necessary at December 31, 2019, assuming that the books have
been closed.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
22 – 34
Solution 22-110