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Exam 9: Accounting Changes and Error Analysis

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Question 1

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As part of its disclosure initiative, why is the IASB looking at the definitions of accounting policies and accounting estimates?

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The IASB is looking at the definitions o...

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Question 2

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A publicly accountable enterprise changes from straight-line depreciation to double declining balance. Management feels that this will result in equally reliable and more relevant information; thus it will be treated as a change in accounting policy. The entry to record this change should include a

A) debit to Accumulated Depreciation.
B) credit to Other Comprehensive Income.
C) credit to Deferred Tax Asset.
D) debit to Deferred Tax Liability.

E) B) and C)
F) A) and B)

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Question 3

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When an entity is first transitioning to IFRS, any adjustments required to bring GAAP measures in line with IFRS

Non-counterbalancing error correction Turkey Corp. bought a machine on January 3, 2018 for $ 275,000. It had a $ 15,000 estimated residual value and a ten-year life. The corporation uses straight-line depreciation. An expense account was debited in error on the purchase date, but this was not discovered until late 2020. Instructions Prepare the correcting entry or entries related to the machine for 2020. Ignore income tax effects.

Retrospective application is required for all

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -On December 31, 2020, the bookkeeper at Thrush Corp. did not record special insurance costs that had been incurred (but not yet paid), related to a building that Thrush Corp. is constructing. What is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2020 statement of financial position?

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -What is the total effect of the errors on the balance of Cheyenne's retained earnings at December 31, 2020?

Randall Corp. began operations on January 1, 2019, and uses FIFO to cost its inventory. Management is contemplating a change to the average cost method and is interested in determining what effect such a change will have on pre-tax income. Accordingly, the following information has been developed: Based upon the above information, a change to the average cost method in 2020 would result in pre-tax income for 2020 of

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -Counterbalancing errors do NOT include

On January 1, 2017, Wren Corp. purchased a patent for $ 238,000. The patent is being amortized straight-line with no residual value over its remaining legal life of 15 years. At the beginning of 2020, however, Wren determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the 2020 of financial position for the patent, net of accumulated amortization, at December 31, 2020?

Which of the following alternative accounting methods is(are) allowed by ASPE and IFRS for reporting accounting changes?

On January 1, 2020, Bluebird Ltd. changed its inventory valuation method from weighted-average cost to FIFO for financial statement and income tax purposes, to make their reporting as reliable and more relevant. The change resulted in a $ 900,000 increase in the beginning inventory at January 1, 2020. Assume a 25% income tax rate. The cumulative effect of this accounting change reported for the year ended December 31, 2020 is

Change in estimate, voluntary change in accounting policy, correction of errors Give examples and discuss the accounting procedures and disclosure required for the following: 1. Change in estimate 2. Voluntary change in accounting policy 3. Correction of an error

Retrospective application for accounting changes Discuss how retrospective application for accounting changes would be applied.

Use the following information for questions. Fairfax Inc. began operations on January 1, 2019. Financial statements for 2019 and 2020 contained the following errors: In addition, on December 31, 2020 fully depreciated equipment was sold for $ 7,200, but the sale was NOT recorded until 2021. No corrections have been made for any of the errors. Ignore income tax considerations. -The total effect of the errors on Fairfax's retained earnings at December 31, 2020 is that the balance is understated by

Use the following information for questions 25-26. On January 2, 2018, Moose Corp. purchased machinery for $ 270,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $ 18,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2020, and the appropriate corrections were made. Ignore income tax considerations. -Before the corrections were made, retained earnings was understated by

Economic reasons for changing accounting policies Discuss possible economic reasons why companies may choose to change accounting policies.

Explain the circumstances in which an accounting policy can be changed under IFRS versus ASPE.

Use the following information for questions. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $ 3,600 was prepaid in 2019 covering the calendar years 2019, 2020, and 2021. This had been debited to insurance expense. In addition, on December 31, 2020, fully depreciated machinery was sold for $ 1,900 cash, but the sale was not recorded until 2021. There were no other errors during 2020 or 2021 and no corrections have been made for any of the errors. Ignore income tax considerations. -A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was also omitted from the year-end physical count. How will these errors affect assets, liabilities, and shareholders' equity at year end and net income for the year? Assets Liabilities Shareholders' Equity Net Income

Effects of errors on financial statements Show how the following independent errors will affect net income on the income statement and the shareholders' equity section of the statement of financial position (SFP) using the symbol + (plus) for overstated, - (minus) for understated, and 0 (zero) for no effect. 1. Ending 2019 inventory overstated 2. Failure to accrue 2019 interest revenue 3. A capital expenditure for factory equipment (useful life, 5 years) was charged to expense in error in 2019 4. Failure to accrue 2019 wages 5. Ending inventory in 2019 understated 6. Overstated 2019 depreciation expense; 2020 expense correct