Exam 22: Accounting for Changes and Errors

Most changes in accounting principles are accounted for retrospectively. Discuss how a change in accounting principle that causes a retrospective adjustment impacts the comparative financial statements issued for the current year.

Which of the following is an example of a change in accounting principle that is accounted for retrospectively?

The Jack Company began its operations on January 1, 2016, and used the LIFO method of accounting for its inventory. On January 1, 2018, Jack 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 2016 $470,000 $350,000 2017 690,000 450,000 2018 700,000 540,000 Assuming a tax rate of 35% 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 2018 financial statements?

Which of the following items would not be accounted for under current GAAP as a change in estimate?

Lavender Company purchased a machine on January 1, 2016, 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, 2018, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years for a total of 7 years) and have no salvage value at the end of its useful life. What is the amount of depreciation expense related to this machine for the year ended December 31, 2018?

When a company makes a change in accounting estimate, the company must disclose in the notes the effect of the change in its income from continuing operations.

The Jessica Co. has the following errors on its books as of December 31, 2018. The books for 2018 have not yet been closed. a. On January 1, 2016, a machine had been purchased for $6,500. The machine had an estimated life of five years, but it was expensed in error. Straight-line depreciation with no salvage value should have been used. b. On January 1, 2017, the company bought a four-year insurance policy for $800 and immediately charged the full premium to expense. Required: Prepare journal entries to correct these errors on December 31, 2018. Ignore income taxes.

A change in accounting estimate affected by a change in accounting principle should be reported as

Which of the following errors normally would not be automatically corrected over two accounting periods?

Current GAAP defines three types of changes: a. Changes in accounting principle a. A change in accounting principle occurs when a company adopts a generally accepted accounting principle that is different from the one previously used. This can occur when the FASB issues a new standard. This type of change should be b. Changes in accounting estimate c. Changes in reporting entity Define each item, give an example, and describe how it should be accounted for.

When changing from LIFO to FIFO, the least likely result would be

Change in an accounting principle is accounted for

A counterbalancing error will automatically correct itself in the next accounting period even if it is never discovered.

In situations where the change in accounting principle has both direct and indirect effects on prior years' income, GAAP states that a company recognize

On January 1, 2016 Kefauver Company purchased a piece of equipment for $375,000. The equipment had a useful life of 10 years and a residual value of $10,000. The company initially starts recording depreciation on a straight-line method. The following independent situations occur at the beginning of 2018: a. The life of the equipment was originally estimated to be 10 years but due to the wear and tear on the machine they changed it to a remaining life of 7 years. b. It was discovered that when initially recorded on the books the residual value had been ignored. Required: Prepare all journal entries related to the equipment for 2018 for each of the independent situations, ignoring income taxes.

A retrospective adjustment requires a change in the

Exceptions exist in the retrospective restatement requirements when accounting for errors under GAAP IFRS I. No No II. No Yes III. Yes Yes IV. Yes No

Meagan Co. has the following errors on its books as of December 31, 2018. The books for 2018 have not yet been closed. a.On January 1, 2016, a truck had been purchased for $28,000. The truck had an estimated life of eight years, but it was expensed in error. Straight-line depreciation with $2,000 salvage value should have been used. b.On January 1, 2017, the company recorded the purchase of a machine in exchange for a four-year, noninterest-bearing note in the amount of $20,000. Interest rates were then 10%, but no recognition was made of that fact. The present value of $1 at 10% for four periods is 0.683013. Ignore depreciation.) Required: Prepare journal entries to correct these errors at December 31, 2018. Ignore income taxes.

Sometimes a change in estimate and a change in accounting principle are undistinguishable therefore a company should account for the change as a change in accounting principle.

What differences exist between U.S. GAAP and IFRS in their handling of accounting changes?