Exam 22: Accounting for Changes and Errors

The mandatory adoption of a new accounting principle as a result of a new FASB statement requires

What is the GAAP requirement of accounting for a change in estimates?

All of the following are considered to be changes in accounting entities that require retrospective restatement of past financial statements except

If a company adopts a new accounting principle, it must justify the change on the grounds that the new principle

The Laura Company has the following errors on its books as of December 31, 2017. The books for 2017 have not yet been closed. a. In 2017, fully depreciated equipment with no residual value) that originally cost $8,000 was sold for $700 as scrap. The company credited the $700 proceeds to Equipment. b. On January 1, 2016, the company recorded the purchase of equipment in exchange for a three-year, noninterest-bearing note payable in the amount of $10,000. Interest rates were then 8%, but no recognition was made of this fact. The present value of $1 at 8% for three periods is 0.7938. Ignore depreciation.) Required: Prepare journal entries to correct these errors at December 31, 2017. Ignore income taxes.

Walter Co. made the following errors in 2016: · Ending inventory was overstated by $2,000. · Beginning inventory was understated by $6,000. · Purchases were overstated by $3,000. Reported net income was $20,000. What is the correct amount of 2016 net income?

The 2016 and 2017 financial statements for Angelica Company had the following errors: · Ending inventory was overstated by $8,000 on December 31, 2016, and overstated by $5,000 on December 31, 2017. · A five-year insurance policy costing $20,000 was charged to expense when paid in advance on January 1, 2016. · Depreciation expense of $12,000 on new equipment was omitted from the 2016 financial statements. · Major improvements to Angelica's manufacturing plant costing $25,000 were charged to expense in 2016 and should have been capitalized. Consequently, annual depreciation expense of $2,500 was omitted from the 2016 and 2017 financial statements. · Wages of $7,000 earned in 2016 but not paid until 2017 were recorded as an expense in 2017 instead of 2016. Angelica Company had reported net income of $90,000 in 2016 and $95,000 in 2017. Required: Prepare a schedule to determine the correct net income for 2016 and 2017. Begin the schedule with reported net income for 2016 and 2017 and work to a corrected figure. Ignore income taxes.

On December 31, 2016, the Maggie Company recognized $15,000 in revenue from rent of $5,000 due in 2017 and $10,000 due in 2018, all collected in advance from another company. Ignoring income taxes, if this error is not detected

Exhibit 22-6 North Company has a fiscal year ending on December 31. Its financial statements for the years ended December 31, 2016 and 2017 contained the following errors: 2016 2017 Ending inventory \ 19,000 understated \ 15,000 overstated Bad debt expense 2,000 overstated 1,000 understate Assume no correcting entries have been made. -Refer to Exhibit 22-6. By how much was North's 2017 net income overstated or understated?

On January 1, 2016, the Master 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 in the seventh year should be accounted for by

Current GAAP requires a company to account for a change in accounting estimate that impacts multiple periods during

Correction of an error involves corrections to reported financial statements similar to changes in estimates.

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

Shelley Construction began operations in 2016 and appropriately used the completed-contract method in accounting for its long-term construction contracts. The prepared the following information: Completed-Contract Method Construction Revenue \ 1,775,000 \ 1,977,500 \ 2,274,125 Expenses Income before income taxes \ 800,000 \ 975,000 1,121,250 Effective January 1, 2018, Shelley changed to the percentage-of-completion method tax reporting and can justify the change? the company's tax rate is 35%. It determines the construction and revenue expense amounts under the percentage of completion method to be: Percentage-of-Completion Construction Revenue \ 2,200,000 \ 2,530,000 \ 2,909,500 Expenses Income before income taxes \ 1,100,000 \ 1,298,000 \ 1,431,100 Required: 1) How would the company account for the change? 2) Prepare the journal entries to reflect the changes.

A company accounts for a change in reporting entity as a prospective adjustment so that all the financial statements are presented for the same entity.

Refer to Exhibit 22-2. what is the amount of the adjusting entry that should be made on January 1, 2019?

If consolidated statements are presented for the first time instead of statements of several individual companies, this change should be accounted for

On January 1, 2016, Dawn Company bought a machine for $60,000. It was then estimated that the useful life of the machine would be eight years with a salvage value of $8,000. On January 1, 2020, it was decided that the machine's total life from acquisition date should have been only six years with a salvage value of only $2,000. The company used straight-line depreciation. Required: a. If an adjusting entry is necessary on January 1, 2020, prepare it. b. Compute depreciation expense for 2020.

A change to GAAP from a principle that is not generally accepted

A company accounts for the correction of a material error of a past period that it discovers in the current period as