FAR 1 Flashcards
On January 1, Yr1, Schreiber Company purchased a 300,000 machine with a five-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machines carrying amount was 120,000 on December 31, Yr 2. On January 1, Yr 3, Schreiber changed to the straight line method for financial statement purposes. Schreiber’s income tax rate is 40%.
Assuming that Schreiber can justify the change, in its Yr 3 statement of retained earnings, what amount should Schreiber report as the cumulative effect of this change?
…..1. 60,000 …. 2. 24,000 …… 3. 36,000 …. 4. -0-
- -10-
……………………. A change in accounting principle is normally recorded using retrospective adjustment where the cumulative effect of the adjustment on prior years is reported in beginning retained earnings of the earliest year presented, net of the related tax effect.
Gonzales Company purchased a machine on January 1, Year 1 for 600,000. On the date of acquisition, the machine had an estimated useful life of six years no salvage value. The machine was being depreciated on a straight line basis. On January 1, Year 4, Gonzales determined that the machine had an estimated life of eight years from the date of acquisition, An accounting change was in Year 4. What is the amount of the deprecation expense that should be recorded for the year ended Year 4? ….. 1. 75,000 …….. 2. -0- ………. 3. 60,000 ………. 4. 100,000
- 60,000
……………….. The accounting change is a change in accounting estimate, which is handled prospectively. Before the change, depreciation was calculated on the straight line basis using a life of 6 years. The depreciable base was 600,000, so the accum deprec for the 3 years before the change was 300,000. (600,000/6*3). Thus the carrying amount at the date of the change was also 300,000. A change om accounting estimate is handled prospectively. In this case, the remaining carrying amount of 300,000 is depreciated over the new remaining life of 5 years (8-3) . The new depreciation each year is 60,000.
On December 31, Year 10, Brown Company changed its inventory valuation method from the weighted average method to FIFO for financial statement purposes. The change will result in an 800,000 decrease in the beginning inventory at January 1, Year 10. The tax rate is 30%. The cumulative effect of this accounting change for the year ended December 31, Year 10 in the statement of retained earnings is: ….. 1. -0- ……. 2. 560,000 …….. 3. 800,000 …… 4. 240,000
- 560,000
…………………The particular change is from weighted average to FIFO. It is a change in accounting principle. Accounting changes are reported on the statement of retained earnings net of tax. 560,000 (800,000 * .70)
The proper accounting treatment to account for a change in inventory valuation from FIFO to LIFO under US GAAP is: ….. 1. Prospective application …… 2. ignored …… 3. retroactive approach …… 4. retrospective application
- Prospective application
…………….A change in accounting principle, if considered “impractical to accurately calculate the cumulative effect adjustment,” is handled prospectively. A change from FIFO to LIFO (US GAAP) would require the establishment and recalculation of old inventory layers, which are considered impractical to rebuild. Hence the beginning inventory of the year of change is the first LIFO layer.
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this change should be be reported in Lore’s current year financial statements as a: …. 1. prior period adjustment resulting from the correction of an error …… 2. Component of income after extraordinary items …… 3. prior period adjustment resulting from the change in accounting principle ….. 4. component of income before extraordinary items.
- prior period adjustment resulting from the correction of an error
…………………………… The cash basis for financial reporting is not a generally accepted basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is reported as a prior period adjustment to retained earnings.
How should the effect of a change in accounting estimate be account for? 1. by restating amounts reported in the financial statements of prior periods …………. 2. In the period of change and future periods if the change affects both ……..3. as a prior period adjustment to beginning retained earnings …………. 4. by reporting pro forma amounts for prior periods
- In the period of change and future periods if the change affects both
…………………… A “change in accounting estimate” affects only the current and subsequent (future) periods, if the change affects both. It does not affect prior periods or retained earnings.
On August 31 of the current year, Harvey Co decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey uses US GAAP, is on a calendar year basis and does not present comparative financial statements. The cumulative effect of the change is determined: 1. as of January 1 of the current year ……. 2. during the current year by a weighted average of the purchases. ……………. 3. as of august 31 of the current year ……… 4. during the eight month ending august 31, by weighted average of the purchases
- as of January 1 of the current year
……………… When comparative financial statements are not presented, the cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods. If comparative financial statements are presented, then the cumulative effect is calculated at the beginning of the earliest period presented.
On August 31 of the current year, Harvey Co decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey uses IFRS and is on a calendar year basis. The cumulative effect of the change is shown as an adjustment to beginning retained earnings on the balance sheet for: 1. August 31 of the current year . ……. 2. January 1 of the prior year ………… 3. January 1 of the current year ………. 4. December 31 of the current year
- January 1 of the prior year ………………………….. Under IFRS, when an entity records a change in accounting principle, the entity must (at a minimum) present three balance sheets (end of current period, end of prior period, and beginning of prior period) and two of each other financial statement (current period and prior period). The cumulative effect adjustment is shown as an adjustment to beginning retained earnings on the balance sheet for the beginning of the prior period, which would be January 1, of the prior year.
