Chapter 20 Strategy Guide and MC

Question 1

Which of the following concepts or principles relates most directly to reporting accounting changes and errors?

a. conservatism
b. consistency
c. objectivity
d. materiality

Answer 1

b. consistency

Question 2

Which of the following is the proper time period in which to record a change in accounting estimate or a change in accounting principle involving depreciation method change?

a. current period and future periods
b. current period and retroactively
c. retroactively
d. current period only

Answer 2

Current Period and Future Periods. Change in accounting estimates are accounted for differently than a change in accounting principle unless it is a change in depreciation method. Retroactive restatement is not required.

Question 3

Intangibles ‘R Us bought a patent for $600,000 on January 1, 2010, at which time the patent had an estimated useful life of 10 years. On February 15, 2013, it was determined that the patent’s useful life would expire in four years. How much would Intangibles ‘R Us record as amortization expense for this patent for the year ending December 31, 2013

a. $140,000
b. $120,000
c. $105,000
d. $60,000

Answer 3

c. $105,000

Question 4

An accounting change that requires retrospectively adjusting the financial statements for all years reported is a change in

a. the life of equipment from five to seven years.
b. depreciation method from straight-line to double-declining-balance.
c. inventory method from LIFO to FIFO.
d. the percentage used to determine the allowance for bad debts.

Answer 4

c. Inventory Method from Lifo to Fifo

Question 5

In 2013, Maggie Corporation appropriately changed its inventory valuation method to FIFO from LIFO for both financial statement and income tax purposes. The change will result in a $140,000 increase in the beginning inventory on January 1, 2013. Assume a 30 percent tax rate. The effect of this accounting change will be to change prior-year net income and/or retained earnings amounts by a cumulative total of

a. $0.
b. $98,000.
c. $(98,000).
d. $140,000.

Answer 5

b. $98000

Question 6

Which of the following accounting treatments is proper for a business combination?

a. Prepare pro forma financial statements as if the businesses were combined at the beginning of this year and prior years presented.
b. Restate only the current period financial statements.
c. Include a note disclosure detailing the combination and combine the financial statements in future periods.
d. Adjust only the retained earnings balance and include a note disclosure detailing the combination.

Answer 6

a. Prepare pro forma financial statements as if the businesses were combined at the beginning of this year and prior years presented.

Question 7

An example of an item that should be reported as a prior-period adjustment is the

a. collection of previously written-off accounts receivable.
b. payment of income taxes resulting from examination of prior years’ income tax returns.
c. correction of an error in financial statements of a prior year.
d. receipt of insurance proceeds for damage to a building sustained in a prior year.

Answer 7

c. correction of an error in financial statements of a prior year.

Question 8

Nelson Corporation reports on a calendar-year basis. Its 2012 and 2013 financial statements contained the following errors:

2012	2013 Over(Under)statement of ending inventory 	$(10,000)		$  5,000 Depreciation understatement 		4,000		6,000 Failure to accrue salaries at year-end		8,000		12,000

As a result of the above errors, 2013 income would be overstated by

a. $24,000.
b. $25,000.
c. $23,000.
d. $16,000.

Answer 8

$25,000

Question 9

Empire Company’s December 31 year-end financial statements contained the following errors:

December 31, 2012	December 31, 2013 Ending inventory		$4,000 understated	$3,600 overstated Depreciation expense		800 understated	—

An insurance premium of $3,600 was prepaid in 2012 equally covering the years 2012, 2013, and 2014. The entire amount was charged to expense in 2012. In addition, on December 31, 2013, fully depreciated machinery was sold for $6,400 cash, but the sale was not recorded until 2014. There were no other errors made, and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on Empire’s 2013 net income?

a. Net income is understated by $12,800.
b. Net income is overstated by $3,600.
c. Net income is understated by $1,600.
d. Net income is overstated by $2,400.

Answer 9

d. Net income is overstated by $2400

Question 10

Dimmu Company purchased a machine on January 1, 2012, at a cost of $120,000. An additional $50,000 was spent for installation, but this amount was charged erroneously to Repairs Expense and not discovered until 2014. The machine has a useful life of five years and a salvage value of $20,000. As a result of the error,

a. retained earnings at December 31, 2013, was understated by $30,000, and 2013 income was overstated by $6,000.
b. retained earnings at December 31, 2013, was understated by $38,000, and 2013 income was overstated by $6,000.
c. retained earnings at December 31, 2013, was understated by $30,000, and 2013 income was overstated by $10,000.
d. 2012 income was understated by $50,000.

Answer 10

c. retained earnings at December 31, 2013, was understated by $30,000, and 2013 income was overstated by $10,000.

Question 11

accounting changes

Answer 11

A general term used to describe the use of different estimates or accounting principles or reporting entities from those used in a prior year.

Question 12

accounting errors

Answer 12

Incorrect accounting treatment resulting from mathematical mistakes, improper application of accounting principles, or omissions of material facts.

Question 13

Change in accounting estimate

Answer 13

A specific type of accounting change that modifies predictions of future events, for example, the useful life of a depreciable asset; changes in estimates are to be reflected in current and future periods

Question 14

change in accounting principle

Answer 14

A specific type of accounting change that uses an accounting principle or method different from that used previously, for example, using straight-line depreciation instead of the declining-balance method.

Question 15

At the time Starr Corporation became a subsidiary of Bosley Inc., Starr switched depreciation of its plant assets from the straight-line method to the sum-of-the-years’-digits method used by Bosley. With respect to Starr, this change was a

Answer 15

Change in accounting principle

Question 16

As part of convergence efforts, which standard did the U.S. adopt for accounting changes and error corrections so that it will be in greater conformity with IAS 8

a. FASB Codification Topic 250
b. SFAS No. 154
c. More than one answer is correct.
d. SFAS No. 12

Answer 16

C. More than one answer correct

Question 17

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

a. Retroactively only
b. Current period and future periods
c. Current period only
d. Current period and retroactively

Answer 17

B. Current period and future period

Question 18

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported

a. by showing the pro forma effects of retroactive application.
b. in the period of change and future periods.
c. as a correction of an error.
d. by restating the financial statements of all prior periods presented

Answer 18

b. in the period of change and future periods

Question 19

When a firm changed its method of accounting for inventory from LIFO to FIFO in 2012, it decided that the 2012 financial statements should be shown comparatively with the 2011 results.

Which of the following statements concerning reporting the change in the retained earnings statement is correct?

a. Only the January 1, 2012, retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.
b. No direct change to retained earnings is needed since earnings for both years have been adjusted to reflect the change.
c. Both the January 1, 2011, and January 1, 2012, retained earnings balances are reported at different amounts to reflect the effects of the change in earnings before those respective dates.
d. Only the January 1, 2011, retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.

Answer 19

C. Both the January 1, 2011, and January 1, 2012, retained earnings balances are reported at different amounts to reflect the effects of the change in earnings before those respective dates.

Question 20

Which of the following changes in accounting principle does not require the retrospective approach?

Answer 20

Change of the inventory method from FIFO to LIFO

Question 21

Which of the following changes in accounting principle does not require the retrospective approach?

a. Change of inventory method from FIFO to LIFO
b. Change from the percentage-of-completion to the completed-contract method
c. Change of inventory method from LIFO to FIFO
d. All of these require retroactive adjustment.

Answer 21

a. Change of inventory method from FIFO to LIFO

Question 22

Which of the following is not correct regarding a change in reporting entity?

a. Financial statements presented for all prior periods must be restated.
b. Financial statements of the year in which the change in reporting entity is made should disclose the nature of the change and the reason for the change.
c. The effect of the change on income before extraordinary items, net income, and earnings per share amounts should be reported for all periods presented and must be repeated in all periods subsequent to the period of the change.
d. The effect of the change on income before extraordinary items, net income, and earnings per share amounts should be reported for all periods presented.

Answer 22

c. The effect of the change on income before extraordinary items, net income, and earnings per share amounts should be reported for all periods presented and must be repeated in all periods subsequent to the period of the change.

Question 23

After a business combination, supplemental disclosure of __________ and ___________ must be made as if the combination had occurred at the beginning of both the combination year and the preceding year.

a. assets;liabilities
b. revenues;net income
c. expenses;liabilities
d. inventory;receivables

Answer 23

b. Revenues; net income

Question 24

An example of an item that should be reported as a prior period adjustment is the

a. correction of an error in financial statements of a prior year.
b. collection of previously written off accounts receivable.
c. receipt of insurance proceeds for damage to a building sustained in a prior year.
d. payment of taxes resulting from examination of prior years’ income tax returns.

Answer 24

a. correction of an error in financial statements of a prior year.

Question 25

A company changes from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported as a

a. correction of an error.
b. change in accounting principle.
c. change of accounting estimate effected by a change in accounting principle.
d. change in accounting estimate

Answer 25

a. correction of an error.

Question 26

Which of the following concepts or principles relates most directly to reporting accounting changes and errors?

a. Consistency
b. Objectivity
c. Materiality
d. Conservatism

Answer 26

a. Consistency

Question 27

Which of the following is not a change in reporting entity?

a. A company presents consolidated or combined statements in place of statements of individual companies.
b. A company changes the companies included in combined financial statements.
c. A company changes the subsidiaries for which consolidated statements are presented.
d. A company acquires a subsidiary that is to be accounted for as a purchase.

Answer 27

d. A company acquires a subsidiary that is to be accounted for as a purchase.

Question 28

A change in the estimated useful life of a building

a. affects the depreciation on the building beginning with the year of the change.
b. must be handled as a retroactive adjustment to all accounts affected, back to the year of the acquisition of the building.
c. creates a new account to be recognized on the income statement reflecting the difference in net income up to the beginning of the year of the change.
d. is not allowed by generally accepted accounting principles.

Answer 28

a. affects the depreciation on the building beginning with the year of the change.

Question 29

Which of the following is not a change in accounting principle?

a. A change from completed-contracts to percentage-of-completion
b. A change from eight years to five years in the useful life of a depreciable asset
c. A change from double-declining-balance to straight-line depreciation
d. A change from FIFO to LIFO for inventory valuation

Answer 29

b. A change from eight years to five years in the useful life of a depreciable asset

Question 30

An accounting change that requires the retrospective approach is a change in

a. depreciation method from straight-line to double-declining-balance.
b. the specific subsidiaries included in consolidated financial statements.
c. the percentage used to determine the allowance for bad debts.
d. the life of equipment from five to seven years.

Answer 30

b. the specific subsidiaries included in consolidated financial statements.

Question 31

On December 31, 2012, Worthen Corporation appropriately changed its inventory valuation method to FIFO cost from LIFO cost for both financial statement and income tax purposes. The change will result in a $150,000 increase in the beginning inventory at January 1, 2012. Assume a 30 percent income tax rate. The cumulative effect of this accounting change Worthen for the year ended December 31, 2012, is

a. $45,000.
b. $105,000.
c. $150,000.
d. $0.

Answer 31

b. $105,000.

Question 32

Which of the following accounting treatments is proper for a change in reporting entity?

a. Restatement of current period financial statements
b. Note disclosure and supplementary schedules
c. Adjustment to retained earnings and note disclosure
d. Restatement of all financial statements presented

Answer 32

d. Restatement of all financial statements presented

Question 33

Which of the following does not represent a change in reporting entity?

a. Disposition of a subsidiary or other business unit
b. Presenting consolidated statements in place of the statements of individual companies
c. Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are presented
d. Changing the companies included in combined financial statements

Answer 33

a. Disposition of a subsidiary or other business uni

Question 34

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

a. income statement after income from continuing operations and after extraordinary items.
b. retained earnings statement after net income but before dividends.
c. retained earnings statement as an adjustment of the opening balance.
d. income statement after income from continuing operations and before extraordinary items.

Answer 34

c. retained earnings statement as an adjustment of the opening balance.

Question 35

Larson, Inc. receives subscription payments for annual (one year) subscriptions to its magazine. Payments are recorded as revenue when received. Amounts received but unearned at the end of each of the last three years are shown below:

Larson failed to record the unearned revenues in each of the three years. As a result of the omission, 2012 income was

a. understated by $146,000.
b. understated by $36,000.
c. overstated by $36,000.
d. overstated by $56,000.

Answer 35

c. overstated by $36,000