Exam 10: Depreciation, Amortization, and Impairment

An example of a special change in accounting principle that should be reported by restating the financial statements of prior periods is the change from the:

An increase in assets relating to a retrospective change in accounting policy will result in a credit to the related future tax accounts.

AME did not account properly for the deferrals and accruals given below: Items omitted at year-end: (a)The correct income for 20x1 was $__________________. (b)The correct income for 20x2 was $_________________.

A change in the salvage value of an asset depreciated on a straight-line basis and arising because additional information has been obtained is:

Reported income during the early years of the estimated life of a depreciable asset usually would be understated by the most as a result of:

When an error is discovered,it should be corrected as of the end of the year in which the error was made.

If a corporation changes from reporting investments on the cost basis to reporting on the equity basis,the prospective approach of reporting must be used.

Listed below are a number of errors.Indicate the effect of each error on the reported net income for 20x1 and 20x2; use an "X" to respond.

MGC Inc.reported $50,000 of net income for 20x2.The following deferrals and accruals were not recorded in the 20x1 and 20x2 adjusting entries: MGC's correct 20x2 income was:

On January 1,20x3; a company purchased an operational asset for $44,000.At the date of purchase,the full amount was debited to expense.At the end of 20x6,the audit discovered this error.The asset had no residual value and should be depreciated over 10 years,using the sum-of-years'-digits method.Give the entry at the end of 20x6 to correct the accounts.Assume the accounts for 20x6 have not been closed.

On January 1,20x1,MBC purchased a pattern-making machine for $400,000 cash.The machine had an estimated useful life of 25 years and a residual value of $10,000.At the beginning of 20x6,the machine was given a major overhaul,which cost $28,000.The overhaul cost was properly debited to the asset account.The overhaul did not change the estimated residual value but did change the total estimated life to 30 years.The accounting period ends December 31.MBC should recognize 20x6 depreciation of:

Which type of accounting change should always be accounted for in current and future periods?

In 20x1,an asset was purchased for $45,000 and has been depreciated using sum-of-the-years'-digits based on an estimated useful life of five years and no residual value.In 20x3 (before the adjusting and closing entries),the company decided to change to straight-line depreciation.The estimated useful life was not to be changed. (a)Give the entry required when the decision was made. (b)Give the entry for depreciation expense for 20x3.

The failure to expense a prepaid asset is an example of a counterbalancing error.

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 by $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).

The following errors were made in 20x3: an understatement of purchases of $500 and an understatement of ending inventory of $500.The net effect on the 20x3 ending amount of retained earnings is:

Failure to record depreciation expense in one-year results in what is usually called a counterbalancing error.

When an accounting change is recorded and reported using the retrospective approach,the cumulative effect on Retained Earnings is recorded in that account.

Which of the following types of errors will not self-correcting the next year?

A change in the useful life of an asset requires an accounting estimate change,which affects only periods after the change,is made.