Chapter 23—Accounting for Changes and Errors Key
1. The accounting changes identified by current GAAP include all of the following except
2. Generally accepted methods of accounting for a change in accounting principle include
3. Which of the following statements does not properly state a basic principle for reporting an accounting
change?
4. Which statement concerning accounting for accounting changes and errors is not true?
5. A change in accounting principle from one that is not generally accepted to one that is generally accepted
should be treated as
6. On January 1, 2010, Chester Company acquired machinery at a cost of $60,000. This machinery was being
depreciated by the double-declining-balance method over an estimated life of five years with no salvage value.
At the beginning of 2012, Chester changed to and could justify straight-line depreciation. Chester’s tax rate is 30
percent. The depreciation expense to be included in 2012 net income was
7. A change from LIFO to FIFO should be accounted for
8. Disclosure of a retrospective adjustment should include
9. When making a retrospective adjustment, all of the following steps are included except
10. A retrospective adjustment requires a change in the
11. The mandatory adoption of a new accounting principle as a result of a new FASB statement requires
12. The Zack Company began its operations on January 1, 2010, and used an accelerated method of
depreciation for its machinery and equipment. On January 1, 2012, Zack adopted the straight-line method of
depreciation. The following information is available regarding depreciation expense for each method:
Accelerated
Straight-line
Year
Depreciation
Depreciation
2010
$ 75,000
$ 50,000
2011
100,000
80,000
2012
145,000
130,000
What is the before-tax cumulative effect on prior years’ income that would be reported as of January 1, 2012, due to changing to a different
depreciation method?
13. The Lawrence Company began its operations on January 1, 2010, and used the LIFO method of accounting
for its inventory. On January 1, 2012, Lawrence Company adopted FIFO in accounting for its inventory. The
following information is available regarding cost of goods sold for each method:
LIFO Cost of
FIFO Cost of
Year
Goods Sold
Goods Sold
2010
$470,000
$350,000
2011
690,000
450,000
2012
700,000
540,000
Assuming a tax rate of 30% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in
opening retained earnings on the 2012 financial statements?
14. When disclosing the impact of a retrospective adjustment for the change from LIFO to FIFO in 2011, which
of the following impacts is not expected to be reported in the comparative financial statements when two-year
comparative statements are presented?
15. When changing from LIFO to FIFO, the least likely result would be
16. The Brown Company changed its method of determining inventories from LIFO to FIFO. This change
represents a
17. Wilma Company began operations in 2010 and uses the average cost method in costing its inventory. In
2011, Wilma is investigating a change to the LIFO method. Before making that determination, Wilma desires to
determine what effect such a change will have on net income. Wilma has compiled the following information:
2010
2011
Ending
Invento
ry
using:
Average cost
$180,000
$200,000
LIFO
—
110,000
Net
income
(compu
ted
using
the
average
–
cost
method
)
120,000
170,000
Assume a 40% tax rate.
If Wilma adopted LIFO in 2011, net income would be
18. On January 1, 2010, Willis Company acquired equipment at a cost of $400,000. Willis used the
double-declining-balance method to depreciate the equipment with a ten-year life and no salvage value. On
January 1, 2012, Willis changed to straight-line depreciation for this equipment, and the IRS accepted this
change as being eligible as a change in accounting estimate with prospective treatment. Assuming an income
tax rate of 30%, the restatement of January 1, 2012 retained earnings is
D. $72,100
19. Exhibit 23-1
On January 1, 2010, the Carol Company purchased a machine for $450,000 with an estimate useful life of six
years and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and
MACRS depreciation for income tax reporting. Effective January 1, 2012, Carol switched to the
double-declining-balance depreciation method for financial statement reporting but not for income tax purposes.
Carol can justify the change.
Refer to Exhibit 23-1. Assuming an income tax rate of 30%, the cumulative effect change reported in Carol’s
2012 income statement would be
20. Exhibit 23-1
On January 1, 2010, the Carol Company purchased a machine for $450,000 with an estimate useful life of six
years and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and
MACRS depreciation for income tax reporting. Effective January 1, 2012, Carol switched to the
double-declining-balance depreciation method for financial statement reporting but not for income tax purposes.
Carol can justify the change.
Refer to Exhibit 23-1. Assuming an income tax rate of 30%, depreciation expense related to the equipment
reported in Carol’s 2012 income statement would be
21. Brockway, Inc. purchased some equipment on January 1, 2010, for $300,000 that had a five-year useful life
and no salvage value. Brockway used double-declining-balance depreciation for both financial reporting and
income tax purposes. On January 1, 2012, Brockway changed to the straight-line depreciation method for this
equipment and can justify the change. Brockway will continue to use double-declining balance depreciation for
income tax reporting. Brockway’s income tax rate is 30%. Assuming Brockway’s 2012 income before
depreciation and tax is $800,000, Brockway’s net income for 2012 would be
22. Shelley Construction began operations in 2010 and appropriately used the completed-contract method in
accounting for its long-term construction contracts. Effective January 1, 2012, Shelley changed to the
percentage-of-completion method for both financial and tax reporting and can justify the change. Although
cumulative pretax income up to January 1, 2012, was $800,000 using the completed-contract method,
cumulative pretax income would have totaled $1,100,000 had the percentage-of-completion method been used.
Assuming an income tax rate of 30%, Shelley’s 2012 financial statements should report a marginal change in its
January 1, 2012 balance in Retained Earnings to restate it for the effect of the accounting change in the amount
of
23. On January 1, 2010, the MMA Company purchased a machine for $36,000 that had a ten-year estimated
useful life and no estimated salvage value. At the start of the seventh year of use, a new energy saving device
was added to the machine that extended its original useful life an additional two years. This change should be
accounted for in the seventh year by
24. Current GAAP requires a company to account for a change in accounting estimate that impacts multiple
periods during
25. An item that would not be accounted for under current GAAP as a change in estimate would be
26. A change in accounting estimate is always accounted for
27. A change in accounting estimate effected by a change in accounting principle should be reported as
28. Exhibit 23-2
On January 1, 2010, Michelle, Inc. purchased a machine for $48,000. Eight-year, straight-line depreciation with
no salvage value was used through December 31, 2013. On January 1, 2014, it was estimated that the total
useful life of the machine from acquisition date was ten years.
29. Exhibit 23-2
On January 1, 2010, Michelle, Inc. purchased a machine for $48,000. Eight-year, straight-line depreciation with
no salvage value was used through December 31, 2013. On January 1, 2014, it was estimated that the total
useful life of the machine from acquisition date was ten years.
Refer to Exhibit 23-2. Accordingly, the appropriate accounting change was made in 2014. How much
depreciation expense for this machine should Michelle record for the year ended December 31, 2014?
30. On January 1, 2010, Patti Company purchased a machine for $140,000. Patti depreciated the machine over
ten years with a $40,000 salvage value. On January 1, 2014, Patti determined that the total useful life of the
machine should be eight years with a salvage value of $18,000. What is the depreciation expense on the
machine for 2014?
31. Linda Company has been depreciating equipment for 10 years with an estimated total useful life of 25 years.
Linda has revised the estimated life to be only 17 years, with 7 years remaining in the asset’s useful life. Linda
should
32. Which of the following accounting changes is always accounted for prospectively?
33. Exhibit 23-3
Kathy Company acquired a truck on January 1, 2010, for $140,000. The truck had an estimated useful life of
five years with no salvage value. Kathy used straight-line depreciation for the truck. On January 1, 2011, Kathy
revises the estimated useful life of the truck. Kathy made the accounting change in 2011 to reflect the extended
useful life.
Refer to Exhibit 23-3. If the revised estimated useful life of the truck is a total of seven years, and assuming an
income tax rate of 30%, Kathy should report in its 2011 income statement an effect on prior years of changing
34. Exhibit 23-3
Kathy Company acquired a truck on January 1, 2010, for $140,000. The truck had an estimated useful life of
five years with no salvage value. Kathy used straight-line depreciation for the truck. On January 1, 2011, Kathy
revises the estimated useful life of the truck. Kathy made the accounting change in 2011 to reflect the extended
useful life.
Refer to Exhibit 23-3. If the revised estimated useful life of the truck is a total of eight years, Kathy should
report in its 2011 income statement depreciation expense of
35. Lavonne Company purchased a machine on July 1, 2010, for $80,000. The machine has an estimated useful
life of 5 years with a salvage value of $10,000. It is being depreciated using the straight-line method. On
January 1, 2012, Lavonne reevaluated the machine’s useful life and now believes it will continue for another 6
years (for a total of 7 1/2 years) and have no salvage value at the end of its useful life. Depreciation expense for
the year ended December 31, 2012, related to this machine would be
36. During 2012, Kramer Company determined, based on new information, that equipment previously
depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and
a salvage value of $50,000. The equipment was acquired on January 1, 2010, and was depreciated using the
straight-line method. Kramer made an accounting change in 2012 to reflect this additional information, and the
change was approved by the IRS. Kramer has an income tax rate of 30%. Assuming Kramer’s income before
depreciation, before income taxes, and before any retroactive effect of the accounting change (if any) for the
year ended December 31, 2012, was $180,000, Kramer’s net income for 2012 should be
37. Mary Company purchased equipment on January 1, 2008, for $400,000. At the date of acquisition, the
equipment had an estimated useful life of eight years with a $40,000 salvage value, and it was depreciated using
the straight-line method. On January 1, 2013, based on updated information, Mary decided that the equipment
had a total estimated life of ten years and no salvage value. Depreciation expense on the equipment in 2013
should be
38. A company changes from capitalizing and amortizing preproduction costs to recording them as an expense
when incurred, because future benefits associated with those costs have become doubtful. This accounting
change should be recognized as a
39. Changes in accounting entities that require retrospective restatement of past financial statements occur
when
40. When applying retrospective adjustments, current GAAP requires the change to be applied so that it
includes
41. Arguments in favor of the retrospective application method include
42. Disadvantages of using the retrospective application method do not include which of the following?
43. On January 1, 2006, the Rita Company purchased for $80,000 a building that was expected to have a
20-year useful life with no residual value at the end of its useful life. The straight-line method of depreciation
was used. On January 1, 2012, Rita Company determined that the remaining life of the building was four years,
and there was no change in residual value. What is the balance in Accumulated Depreciation: Building at
December 31, 2012, assuming that Rita properly accounted for the change?
44. If consolidated statements are presented for the first time instead of statements of several individual
companies, this change should be accounted for
45. The Tricia Co. presented financial statements for 2010 and 2011 that contained the following errors:
2011
2010
Ending merchandise inventory
$700 understated
$400 overstated
Supplies expense
500 understated
100 overstated
Assuming that no correcting entries were made, by how much would retained earnings be understated at January 1, 2012?
46. On December 31, 2010, the Molly Company recognized $12,000 in revenue from rent of $5,000 due in
2011 and $7,000 due in 2012, all collected in advance from another company. Ignoring income taxes, if this
error is not detected
47. Which of the following errors will normally result in overstatement of 2011 net income?
48. Which of the following changes would normally require some footnote disclosure?
49. Which of the following errors normally would not be automatically corrected over two accounting periods?
50. Elizabeth Company discovered the following errors in 2010:
·
Ending inventory at December 31, 2009, was understated by $2,000.
·
Accrued expenses of $3,000 were not recorded at December 31, 2009.
Elizabeth reported net income of $35,000 for the year 2009. The corrected net income (ignoring income taxes) for 2009 should be
51. The correct 2010 net income for Margie Company, after error corrections, was $56,000. Two errors were
found after net income was first reported. The January 1, 2010 inventory and the December 31, 2010, inventory
were overstated by $4,000 and $9,000, respectively. The net income that must have been originally reported
was
52. On January 1, 2010, Teresa loaned $12,000 to another company on a three-year, 4% note. No interest was
accrued in 2010. Cash will not be received for the interest until the end of the three-year period. The error was
discovered before adjusting and closing entries were posted on December 31, 2011. Ignoring income taxes, the
correct entry on December 31, 2011, should be
53. Wendy Co. made the following errors in 2010:
·
Ending inventory was overstated by $2,000.
·
Beginning inventory was understated by $6,000.
·
Purchases were overstated by $3,000.
Reported net income was $15,000. The correct 2010 net income was
54. Belinda Corp. reported $80,000 of net income for 2010. The following errors were then discovered:
·
Ending 2010 accrued expense was overstated by $2,000.
·
2010 earned revenue was overstated by $3,000.
·
Ending 2010 prepaid expense was overstated by $500.
Ignoring income taxes, the correct 2010 net income is
55. Leigh Co. reported $7,000 of net income for 2010. The following errors were then discovered:
·
Ending 2008 accrued expense was understated by $800.
·
Ending 2009 unearned revenue was overstated by $75.
·
Ending 2008 unearned revenue was overstated by $380.
Ignoring income taxes, compute correct 2010 net income.
56. An overstatement of reported net income for the current year may result from
57. An understatement of reported net income for the current year may result from
58. All of the following would be reported retrospectively by restating prior period’s financial results except for
a
59. Which of the following statements is not an example of a correction of an error in previously issued
financial statements?
60. Laura Company received merchandise on December 31, 2010. Laura failed to record the purchase on
account because the invoice was inadvertently destroyed. The merchandise was, however, included in ending
inventory. The effect of this event on the financial statements as of December 31, 2010, would be
61. Myrna Company overstated the beginning inventory on January 1, 2010, by $20,000. No other errors were
identified. If the error is not discovered, which of the following net income effects related to the inventory error
are true?
Net Income
2009
2010
2011
I.
understated
overstated
correct
II.
overstated
understated
correct
III.
correct
understated
overstated
IV.
overstated
understated
overstated
62. During a year-end evaluation of the financial records of the Gretchen Company for the year ended
December 31, 2010, the following was discovered:
·
Inventory on January 1, 2010, was understated by $6,000.
·
Inventory on December 31, 2010, was understated by $18,000.
·
Rent of $20,000 collected in advance on December 29, 2010, was included in income for 2010.
·
A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2010.
Net income for 2010 (before any of the above items) was $100,000. The corrected net income, ignoring income taxes, for 2010 should be
63. The December 31, 2010, ending inventory failed to include $10,000 of inventory that was received on
December 27, 2010. The purchase on account was, however, properly recorded on the date of delivery. What
effect will this error have on the December 31, 2010, assets, liabilities, and net income for the year then ended?
Assets
Liabilities
Net Income
I.
overstated
overstated
no effect
II.
understated
understated
no effect
III.
understated
no effect
understated
IV.
understated
understated
understated
64. Exhibit 23-4
Bonnie Company’s year-end December 31, 2010, financial statements contained the following errors:
·
Ending inventory on December 31, 2010, was overstated by $60,000.
·
Depreciation expense was understated by $6,000.
·
A two-year insurance policy for 2010 and 2011 in the amount of $12,000 was entirely expensed in 2010.
·
Investments in common stock of other companies were sold in 2010 at a gain of $8,000, but the sale was not recorded until 2011.
Refer to Exhibit 23-4. What is the effect of the above errors on 2010 net income?
65. Exhibit 23-4
Bonnie Company’s year-end December 31, 2010, financial statements contained the following errors:
·
Ending inventory on December 31, 2010, was overstated by $60,000.
·
Depreciation expense was understated by $6,000.
·
A two-year insurance policy for 2010 and 2011 in the amount of $12,000 was entirely expensed in 2010.
·
Investments in common stock of other companies were sold in 2010 at a gain of $8,000, but the sale was not recorded until 2011.
Refer to Exhibit 23-4. The effect of the above errors on the December 31, 2010, reported assets of Bonnie is that assets are
66. Exhibit 23-5
Nan Company, having a fiscal year ending on December 31, discovered the following errors in 2010:
·
A collection of $12,000 from a customer for rent related to January, 2011, was recorded as revenue in 2010.
·
Depreciation was understated by $600 in 2010.
·
The January 1, 2009, inventory was overstated by $10,000.
·
The January 1, 2010, inventory was understated by $6,000.
·
Insurance premiums of $2,000 that relate to 2011 were expensed in 2010 when paid.
Assume no other errors have occurred and ignore income taxes.
Refer to Exhibit 23-5. Net income for 2010 was
67. Exhibit 23-5
Nan Company, having a fiscal year ending on December 31, discovered the following errors in 2010:
·
A collection of $12,000 from a customer for rent related to January, 2011, was recorded as revenue in 2010.
·
Depreciation was understated by $600 in 2010.
·
The January 1, 2009, inventory was overstated by $10,000.
·
The January 1, 2010, inventory was understated by $6,000.
·
Insurance premiums of $2,000 that relate to 2011 were expensed in 2010 when paid.
Assume no other errors have occurred and ignore income taxes.
Refer to Exhibit 23-5. Total assets at December 31, 2010, were