Exam 22: Accounting for Changes and Errors

Refer to Exhibit 22-3. If the revised estimated useful life of the truck is a total of seven years, and assuming an income tax rate of 35%, what is the amount of the prior-years effect that Katrina should report in its 2017 income statement as a result of changing the useful life of the truck?

The FASB requires the use of the retrospective adjustment method because it provides financial statement users with more useful information when accounting for a change in accounting principles.

Bethany Corp. reported $80,000 of net income for 2016. The following errors were then discovered: · Ending 2016 accrued expense was overstated by $2,000. · 2016 earned revenue was overstated by $3,000. · Ending 2016 prepaid expense was overstated by $500. Ignoring income taxes, what is the correct amount of 2016 net income?

Exhibit 22-5 Daniel Company, having a fiscal year ending on December 31, discovered the following errors in 2016: · A collection of $12,000 from a customer for rent related to January, 2017, was recorded as revenue in 2016. · Depreciation was understated by $600 in 2016. · The January 1, 2015, inventory was overstated by $10,000. · The January 1, 2016, inventory was understated by $6,000. · Insurance premiums of $2,000 that relate to 2017 were expensed in 2016 when paid. Assume no other errors have occurred and ignore income taxes. -Refer to Exhibit 22-5. Total assets at December 31, 2016, were

The effect of a prior period adjustment made to correct an error is similar to a retrospective adjustment required for a change in accounting principle.

Explain the direct and indirect effects of a change in accounting principles.

Mark Company overstated the beginning inventory on January 1, 2016, 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? { \text { Net Income } } \\ \begin{array} { l l l l } \hline &2015&2016&2017\\\hline \text { I. } & \text { understated } & \text { overstated } & \text { correct } \\ \text { II. } & \text { overstated } & \text { understated } & \text { correct } \\ \text { III. } & \text { correct } & \text { understated } & \text { overstated } \\ \text { IV. } & \text { overstated } & \text { understated } & \text { overstated } \end{array}

A change in accounting principle from one that is not generally accepted to one that is generally accepted should be treated as

In 2018, Bevins Company decided to change from LIFO to FIFO due to better representation of the flow of inventory and costs. Bevins started the business in 2016. Bevin's tax rate is 35%. The following analysis was provided by management: Ending Inventory LIFO FIFO Net Income 12/31/2016 \ 375,650 \ 405,900 975,000 12/31/2017 \ 360,450 \ 410,750 1,350,000 12/31/2018 \ 365,975 \ 445,775 1,389,500 Required: 1) Prepare the journal entry necessary to record the change. 2) What amount of net income would Bevins report in 2016, 2017, and 2018?

An advantage of retrospective adjustment method is that it achieves comparability and consistency between accounting periods.

On January 1, 2016, Margo Company acquired machinery at a cost of $160,000. 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 2018, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. What is the amount of depreciation expense to be included in 2018 net income?

During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2016, the following was discovered: · Inventory on January 1, 2016, was understated by $6,000. · Inventory on December 31, 2016, was understated by $18,000. · Rent of $20,000 collected in advance on December 29, 2016, was included in income for 2016. · A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2016. Net income for 2016 before any of the above items) was $250,000. What is the corrected amount of net income for 2016? Ignore income taxes.)

If a prior-period error only affects the balance sheet, the company should

When applying retrospective adjustments, current GAAP requires the change to be applied so that it includes

Disclosure of a retrospective adjustment should include

When is a retrospective adjustment considered impractical to make?

Which statement concerning accounting for accounting changes and errors is false?

Eliza Company discovered the following errors in 2016: · Ending inventory at December 31, 2015, was understated by $2,000. · Accrued expenses of $3,000 were not recorded at December 31, 2015. Eliza reported net income of $45,000 for the year 2015. What is the amount of the corrected net income ignoring income taxes) for 2015?

Betty Company began operations in 2016 and uses the average cost method in costing its inventory. In 2017, Betty is investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect such a change will have on net income. Betty has compiled the following information: 2016 2017 Ending Inventory using: Average cost \ 180,000 \ 200,000 LIFO \ 180,000 110,000 Net income (computed using the average- cost method) 120,000 170,000 Assume a 40% tax rate. If Betty adopted LIFO in 2017, net income would be