Exam 22: Accounting for Changes and Errors

An understatement of reported net income for the current year may result from

Which of the following errors will normally result in overstatement of 2015 net income?

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

What must be disclosed when making a retrospective adjustment?

According to GAAP how should items be reported in order that information is reported in a relevant manner?

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

Eliza Company discovered the following errors in 2014: Eliza reported net income of $45,000 for the year 2013. The corrected net income (ignoring income taxes) for 2013 should be

Retrospective adjustments are expected to

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

Disclosure of a retrospective adjustment should include

Exhibit 22-3 Katrina Company acquired a truck on January 1, 2014, for $140,000. The truck had an estimated useful life of five years with no salvage value. Katrina used straight-line depreciation for the truck. On January 1, 2015, Katrina revises the estimated useful life of the truck. Katrina made the accounting change in 2015 to reflect the extended useful life. -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%, Katrina should report in its 2015 income statement an effect on prior years of changing the useful life of the truck of

On December 31, 2014, the Maggie Company recognized $15,000 in revenue from rent of $5,000 due in 2015 and $10,000 due in 2016, all collected in advance from another company. Ignoring income taxes, if this error is not detected

Several errors are listed below. Required: Indicate the effect each error would have on 2014 net income by placing a plus sign (+), minus sign (-) or NI (no impact) in the space provided. Part (a) has been completed as an example.

In cases where it is not practicable to determine the effect of applying a change in accounting principle to a prior period, GAAP requires

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.

Arguments in favor of the retrospective application method include

Exhibit 22-5 Daniel Company, having a fiscal year ending on December 31, discovered the following errors in 2014: A collection of $12,000 from a customer for rent related to January, 2015, was recorded as revenue in 2014. Depreciation was understated by $600 in 2014. The January 1, 2013, inventory was overstated by $10,000. The January 1, 2014, inventory was understated by $6,000. Exhibit 22-5 Daniel Company, having a fiscal year ending on December 31, discovered the following errors in 2014: Insurance premiums of $2,000 that relate to 2015 were expensed in 2014 when paid. Assume no other errors have occurred and ignore income taxes. -Refer to Exhibit 22-5. Net income for 2014 was

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

Lavender Company purchased a machine on January 1, 2014, 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, 2017, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years (for a total of 7 1/2 years) and have no salvage value at the end of its useful life. Depreciation expense for the year ended December 31, 2017, related to this machine would be