F1 M6 Accounting Changes and Error Corrections

Question 1

When the effect of a change in accounting principle is INSEPARABLE from the effect of a change in accounting estimate, the effect is reported:
A. By restating the financial statements of all prior periods presented.
B. By footnote disclosure only.
C. As a component of income from continuing operations.
D. As a correction of an error

Answer 1

C

Question 2

The cash basis of financial reporting is not a generally accepted accounting basis of account (GAAP); therefore it is _____. Correction of this is reported as _____.

Answer 2

Error

Correction of an error from a prior period is a reported prior period adjustment to retained earnings.

Question 3

The cumulative effect of a change in accounting principle (i.e. FIFO to weighted average) is shown as an adjustment to _____.

Answer 3

Beginning retained earnings

Question 4

How should the change in accounting estimate be accounted for?

Answer 4

In the period of change and future periods if the change affects both.

A change in accounting estimate affects only the current and subsequent periods, if the change affects both. It does not affect “prior periods” nor “retained earnings”

Question 5

Foy Corp. failed to accrue warranty costs of $50,000 in its Dec 31, Y1, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of Y2. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in Y2?
A. $50,000
B. $0
C. $80,000
D. $30,000

Answer 5

A change in depreciation method is no longer considered a change in accounting principle. It is a change in estimate and change in method so it doesn’t require a prior period adjustment.

A. $50,000

Question 6

A change in the method of depreciation is now considered to be both a ____ and a ____.
How should the change be handled?

Answer 6

Change in method and a change in estimate.

It should be handled as a change in estimate. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made and no adjustment should be made to retained earnings.

Question 7

The correction of an error in the financial statement of a prior period should be reported where on the income statement?

Answer 7

In the current statement of retained earnings as an adjustment of the opening balance

Question 8

For Y1, Pac Co. estimated its two-year equipment warranty costs based on $100 per unit sold in Y1. Experience during Y2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported:
A. In Y2, as income from continuing operations.
B. As an accounting change, net of tax, below y2 income from continuing operations.
C. As an accounting change requiring Y1 financial statements to be restated.
D. As a correction of an error requiring Y1 financial statements to be restated.

Answer 8

A

Changes in estimates affect only the current and subsequent periods

Question 9

On Jan 2, Y4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on Jan 2, Y1. Raft estimated the machine's original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its Dec 31, Y4, financial statements, what amount should Raft report as a prior period adjustment?
A. $102,900
B. $165,900
C. $105,000
D. $168,000

Answer 9

If the machine would have been capitalized correctly in Y1, Raft would have had annual depreciation of $20,000 a year.

Correct accounting $60,000
Incorrect accounting -$210,000
Prior period adjustment $150,000

Needs to be reported net of tax $150,000 * .70 = C $105,000

Question 10

Under IFRS, when an entity records a change in accounting principle, the entity must at a minimum show three balance sheets (___, ___, and ___) and two of each other financial statement (___ & ___). This cumulative effect adjustment is shown as an adjustment to beginning retained earnings on the balance sheet for ____.

Answer 10

Three balance sheets, end of the current period, end of prior period, and beginning of the prior period

Current period and prior period

Beginning of the prior period

Question 11

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in ____ and is accounted for retrospectively/prospectively.

Answer 11

Estimate and is accounted for prospectively.

Question 12

When there is a change in reporting entity, how should the change be reported in the financial statements?
A. Currently, including note disclosures.
B. Note disclosures only
C. Prospectively, including note disclosures
D. Retrospectively, including note disclosures, and application to al prior period financial statements.

Answer 12

D

Question 13

Under IFRS, each of the following is a disclosure requirement related to the correction of a material prior period error, except:
A. The impact of the correction on basic and diluted earnings per share for each period presented.
B. The amount of the correction at the beginning of the earliest period presented.
C. A description of the internal controls put in place to prevent the occurrence of the error in the future periods.
D. The nature of the error.

Answer 13

C