Exam 22: Accounting for Changes and Errors

The Opal Company was incorporated and began operations on January 1, 2014. Opal used the weighted-average method for costing inventories. Effective January 1, 2015, Opal changed to FIFO for costing inventories and can justify the change. Information related to 2014 and 2015 inventory cost and net income is presented below: Opal's income tax rate is 30% for both 2014 and 2015. Required: Calculate the amount of the cumulative effect of the change on beginning retained earnings on January 1, 2015, that would appear on Opal's statement of retained earnings for the year ended December 31, 2015.

Several items related to accounting changes appear below. Required: Indicate the appropriate method of accounting for each case by placing an "X" in the appropriate column. Part (a) has been completed as an example.

Prospective adjustments are expected to

The Max Company began its operations on January 1, 2014, and used an accelerated method of depreciation for its machinery and equipment. On January 1, 2016, Max adopted the straight-line method of depreciation. The following information is available regarding depreciation expense for each method: What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2016, due to changing to a different depreciation method?

Langley Company received merchandise on December 31, 2014. Langley failed to record the purchase on account because the invoice was inadvertently destroyed. The merchandise was, however, included in ending inventory. The effect of this event on the financial statements as of December 31, 2014, would be

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. Total assets at December 31, 2014, were

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

The following are independent events: For each change or error indicate how it would be accounted for using the following:

The 2014 and 2015 financial statements for Angelica Company had the following errors: •Ending inventory was overstated by $8,000 on December 31, 2014, and overstated by $5,000 on December 31, 2015. •A five-year insurance policy costing $20,000 was charged to expense when paid in advance on January 1, 2014. •Depreciation expense of $12,000 on new equipment was omitted from the 2014 financial statements. •Major improvements to Angelica's manufacturing plant costing $25,000 were charged to expense in 2014 and should have been capitalized. Consequently, annual depreciation expense of $2,500 was omitted from the 2014 and 2015 financial statements. •Wages of $7,000 earned in 2014 but not paid until 2015 were recorded as an expense in 2015 instead of 2014. Angelica Company had reported net income of $90,000 in 2014 and $95,000 in 2015. Required: Prepare a schedule to determine the correct net income for 2014 and 2015. Begin the schedule with reported net income for 2014 and 2015 and work to a corrected figure. Ignore income taxes.

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