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Exam 22: Accounting for Changes and Errors

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Question 21

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Changes in accounting entities that require retrospective restatement of past financial statements occur when

A) there is a change in the specific subsidiaries that make up the group of companies that are consolidated when financial statements are presented
B) consolidated or combined statements are presented in place of the statements of individual companies
C) the companies included in the combined financial statements change
D) all of these

E) B) and D)
F) A) and B)

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Question 22

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Which of the following errors normally would not be automatically corrected over two accounting periods?

A) failure to record prepaid revenue
B) failure to record accrued payroll liabilities
C) failure to record depreciation expense
D) failure to count inventory in transit at year-end

E) A) and C)
F) None of the above

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Question 23

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During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2014, the following was discovered: Inventory on January 1, 2014, was understated by $6,000. Inventory on December 31, 2014, was understated by $18,000. Rent of $20,000 collected in advance on December 29, 2014, was included in income for 2014. A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2014. Net income for 2014 (before any of the above items) was $250,000. The corrected net income, ignoring income taxes, for 2014 should be

In situations where the change in accounting principle has both direct and indirect effects on prior years' income, GAAP states that a company recognize

Exhibit 22-1 On January 1, 2014, the Chrissy Company purchased a machine for $450,000 with an estimate useful life of six years and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and MACRS depreciation for income tax reporting. Effective January 1, 2016, Chrissy switched to the double-declining-balance depreciation method for financial statement reporting but not for income tax purposes. Chrissy can justify the change. -Refer to Exhibit 22-1. Assuming an income tax rate of 35%, depreciation expense related to the equipment reported in Chrissy's 2016 income statement would be

When a company has a counterbalancing error, the company should

Which of the following is the proper time period in which to record a change in accounting estimate?

What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?

A change in accounting entity is limited to presenting consolidated or combined financial statements in place of individual statements or a change in the subsidiaries that make up a group of companies in which one would report either as consolidated financial statements or changing the mix of companies included in the financial statements.

If a company adopts a new accounting principle, it must justify the change on the grounds that the new principle

Most changes in accounting principles are accounted for retrospectively. Discuss how a change in accounting principle that causes a retrospective adjustment impacts the comparative financial statements issued for the current year.

Current GAAP requires a company to account for a change in accounting estimate that impacts multiple periods during

The Laura Company has the following errors on its books as of December 31, 2015. The books for 2015 have not yet been closed. a.In 2015, fully depreciated equipment (with no residual value) that originally cost $8,000 was sold for $700 as scrap. The company credited the $700 proceeds to Equipment. b.On January 1, 2014, the company recorded the purchase of equipment in exchange for a three-year, noninterest-bearing note payable in the amount of $10,000. Interest rates were then 8%, but no recognition was made of this fact. The present value of $1 at 8% for three periods is 0.7938. (Ignore depreciation.) Required: Prepare journal entries to correct these errors at December 31, 2015. Ignore income taxes.

Exhibit 22-4 Barbara Company's year-end December 31, 2014, financial statements contained the following errors: Ending inventory on December 31, 2014, was overstated by $75,000. Depreciation expense was understated by $7,000. A two-year insurance policy for 2014 and 2015 in the amount of $14,000 was entirely expensed in 2014. Investments in common stock of other companies were sold in 2014 at a gain of $10,000, but the sale was not recorded until 2015. -Refer to Exhibit 22-4. What is the effect of the above errors on 2014 net income?

An item that would not be accounted for under current GAAP as a change in estimate would be

The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current

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 eight years, Katrina should report in its 2015 income statement depreciation expense of

Exhibit 22-6 North Company has a fiscal year ending on December 31. Its financial statements for the years ended December 31, 2014 and 2015 contained the following errors: Assume no correcting entries have been made. -Refer to Exhibit 22-6. By how much was North's 2014 net income overstated or understated?

Betty Company began operations in 2014 and uses the average cost method in costing its inventory. In 2015, Betty is investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect such a change will have on net income. Betty has compiled the following information: Assume a 40% tax rate. If Betty adopted LIFO in 2015, net income would be

Which of the following accounting changes is always accounted for prospectively?