ACCOUNTING CHANGES

Question 1

What accounting approach is applied to corrections of errors affecting prior year net income?

Answer 1

Accounting approach applied is retrospective.

Question 2

How many years should be considered in the journal entry to correct retained earnings?

Answer 2

All years affected by the error through the beginning of the year of change.

Question 3

What financial statement errors will remain if an error counterbalances?

Answer 3

All account balances affected by the error are still erroneous, except for retained earnings.

Question 4

How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?

Answer 4

All years before the earliest year in the statement affected by the error.

Question 5

Define “prior period adjustment.”

Answer 5

Change in retained earnings for error corrections.

Question 6

What is the change in retained earnings for an error correction called?

Answer 6

Prior period adjustment.

Question 7

Define “counterbalancing error.”

Answer 7

An error whose effect on retained earnings automatically corrects itself after a number of years.

Question 8

What happens to the net book value of the asset?

Answer 8

Depreciated or depleted.

Question 9

List the components of asset retirement obligation (ARO) costs.

Answer 9

Costs to dismantle, reclaim, remove, etc.

Question 10

What amount does the asset retirement obligation increase to over time?

Answer 10

The final amount expected to be paid.

Question 11

How is the annual accretion expense and corresponding increase to asset retirement obligation (ARO) found?

Answer 11

Multiplying the interest rate used in capitalizing the initial amount, by the beginning balance in the ARO.

Question 12

How much is capitalized to the asset retirement obligation?

Answer 12

The present value of the estimated future payments (initial fair value).

Question 13

When does an environmental liability need to be accrued?

Answer 13

When the liabilities are both probable and reasonably estimable.

Question 14

What accounting approach is applied to changes in depreciation method?

Answer 14

Prospective

Question 15

What is the amount of cumulative effect recorded for change in depreciation method?

Answer 15

None (prospective approach is applied).

Question 16

What disclosures are required for estimate changes?

Answer 16

Effect of the change on income from continuing operations and net income for the year of change.

Question 17

How is a change in depletion method accounted for?

Answer 17

Prospective approach (same as estimate change).

Question 18

What is the rationale for applying the prospective method to estimate changes?

Answer 18

The new information triggering the change is not applicable to prior years.

Question 19

What is the most frequent type of accounting change?

Answer 19

Estimate change.

Question 20

What is the first computation in accounting for an estimate change involving a depletable resource?

Answer 20

Compute book value at the beginning of the year of change.

Question 21

What accounting change is often impracticable to compute a cumulative effect?

Answer 21

Change to Last In First Out (LIFO).

Question 22

What account records the effect of principle change on prior years?

Answer 22

Retained earnings.

Question 23

What account is debited when an accounting principle change causes income in prior years to decrease?

Answer 23

Retained earnings (cumulative effect of change).

Question 24

What is the amount recorded for the change in deferred taxes for a change in accounting principle?

Answer 24

The pretax cumulative effect multiplied by the tax rate.

Question 25

What is the amount of the cumulative effect reported in the earliest reported year of the retained earnings statement?

Answer 25

The effect of the change on years before the earliest year reported.

Question 26

What is the pretax amount of the cumulative effect of a change in inventory method?

Answer 26

The difference in inventory balance for the new and old methods, at the beginning of the year of change.

Question 27

How is a change in method that is indistinguishable from a change in estimate accounted for?

Answer 27

Change in estimate.

Question 28

What type of changes and events are comparative financial statements of prior periods changed for?

Answer 28

Accounting principle changes and error corrections.

Question 29

What accounting approach is used for a change in reporting entity?

Answer 29

Retrospective method.

Question 30

What is a change in accounting principle?

Answer 30

A change from one generally accepted accounting principle to another when there are at least two acceptable principles or when the current principle used is no longer generally accepted.

Question 31

What accounting approach is applied to error corrections?

Answer 31

Retrospective (Restatement).

Question 32

What accounting approach is applied to estimate changes?

Answer 32

Prospective.

Question 33

What accounting approach is applied to principle changes?

Answer 33

Retrospective

Question 34

What concept is displayed when there is restatement of prior year financial statements?

Answer 34

Comparability

Question 35

List the three types of accounting changes.

Answer 35

1. Change in accounting principle;2. Change in accounting estimate;3. Change in reporting entity.

Question 36

What is the date of application used by firms for accounting changes?

Answer 36

First day of the year of change.

Question 37

List the two accounting approaches for recording accounting changes.

Answer 37

1. Retrospective;2. Prospective.