Exam 21: Accounting Changes

Accounting policy changes are only justifiable when there is a change to a primary source of GAAP.

A change in accounting principle occurs when a company adopts a principle different from an inappropriate procedure that was used previously.

In reporting the effect of an accounting change on comparative financial statements, recommended accounting procedure requires that the following be used for correcting an accounting error:

XYZ decided to change its depreciation policy by (1)discontinuing to record depreciation on land, and (2)changing the estimated useful life on all autos used in the business from five years to four years.Choose the correct statement concerning these two changes:

The following accounting errors occurred in 20x3, but were not discovered until 20x4: Purchases for 20x3 overstated by = $400 Ending 20x3 inventory overstated by = $400 Depreciation expense for 20x3 overstated by = $400 The combined effect of these three errors caused 20x3 pre-tax income to be:

Which of the following should not be reported retrospectively?

The 20x4 net income of MXC Inc.was understated by $3,000.This was due to three separate errors.One error was the overstatement of purchases by $2,000; the second error was the understatement of depreciation expense by $1,000.Which of the following errors, in combination with the other two, would cause the $3,000 understatement of income?

The following errors were discovered in the financial statements of CBK. (a)Ending inventories at December 31 were incorrect as follows: December 31, 20x1, Understated b $4,000; December 31, 20x2 Overstated $3,600. (b)Depreciation expense (straight-line)for 20x1 was Overstated $800. (c)Insurance premium of $3,000 covering for 20x1, 20x2 and 20x3 was prepaid on January, 20x1 and expensed in full at the time. (d)On December 31, 20x2, fully depreciated machinery was sold for $6,400 on credit, but the sale was not recorded until January 1, 20x3. The accounting year ends December 31, and none of the above errors were corrected with journal entries prior to January 2, 20x3. Give the journal entry to correct the accounts on January 1, 20x3 (after the 20x2 closing entries and before any reversing entries).

A voluntary change in accounting policy is only justifiable when it results information that is both more reliable and more relevant.

Which of the following is not an example of a change in accounting estimate?

Which of the following is characteristic of a change in accounting estimate?

Super-Mineral began operations last year (year 1)on a mineral tract and expected a yield of 2,000,000 tons of a valuable ore used in the semiconductor industry.The total balance in the Depletion Base account (or "Natural Resources" account)was $2,000,000 before any depletion was recognized.During year 1, 400,000 tons of the ore were removed.Then, early in year 2, a new vein of ore was discovered holding an estimated additional 1,600,000 tons of ore.800,000 tons were removed in year 2.What is depletion in year 2?

Accounting errors require the restatement of previous years' financial statements.

In 20x4, a firm discovered that $10,000 of equipment purchased on 1/1/x1 was expensed in full.The equipment has a ten-year life, has no residual value, and should have been depreciated on the straight-line basis.The error is corrected.As a result, the comparative 20x3 and 20x4 financial statements will show what amounts as adjustments to the beginning balances of retained earnings dated:

At the end of Year 1, ABC Inc.'s inventories were overstated by $10,000.At the end of Year 2 its inventories were overstated by $20,000.Assuming that ABC Inc.is subject to a 20% tax rate, the effect of these overstatements on the company's Year 2 ending Inventories would be an:

Failure to record accrued wages at year-end (an adjusting entry)results in what usually is called a counterbalancing error.

GXC Inc.committed the following errors during 20x1, its first year of operations: Recorded $800 of interest expense as a debit to prepaid expense and a credit to cash.GXC recorded $2,000 of unearned revenue as a debit to revenue receivable and a credit to revenues. No adjusting entries were made related to these transaction entries.The effect of these errors is as follows: 20x1:

Some changes in accounting principle must be reported by using the retrospective approach.

The only errors BGC made were in the valuation of ending inventory amounts.As a result, in 20x3, cost of goods sold was overstated by $1,000.In 20x4, cost of goods sold was understated by $500.What ending inventory error was made at the end of 20x4?

Complete the following tabulation by inserting in each square the appropriate code as follows: "O" f Overstated; "U" for Understated by; and "N" for no effect Complete all squares.Each transaction (bu not years)is a separate situation independent of the others. (d)Deferred income 37