FAR 18 - TBS Flashcards
- Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (A, X) A change in the method of accounting for a long-term construction contract is a change in accounting principle and is given retrospective treatment.
- As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over fifteen years should be depreciated over twenty years.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (B, Z) A change in the useful life of a depreciable asset is a change in accounting estimate that is accounted for prospectively.
- The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (B, Z) A change in the estimated cost of fulfilling a warranty obligation is a change in accounting estimated that is accounted for prospectively.
- Quo changed from LIFO to FIFO to account for its finished goods inventory.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (A, X) A change from LIFO to FIFO is a change in accounting principle that is given retrospective treatment.
5.Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (A, X) A change from FIFO to average cost is a change in accounting principle that is given retrospective treatment.
- Quo sells extended service contracts on its products. Because related services are performed over several years, in 20X2, Quo changed from the cash method to the accrual method of recognizing income from these service contracts.
Treatment
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (C, Y) A change from the cash method to the accrual method for recognizing income is achange from an unacceptable accounting principle to an acceptable one. It is considered a correction of an error and requires restatement of prior period financial statements.
- During 20X2, Quo determined that an insurance premium paid and entirely expensed in 20X1 was for the period January 1, 20X1, through January 1, 20X3.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (C, Y) Recognizing the entire 2 year premium as an expense in the first year is an error. A correction of an error is accounted for by retroactively restating prior period financial statements.
- Quo changed its method of depreciating office equipment from an accelerated method to the straight-line method to more closely reflect costs in later years.
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (B, Z) A change in the method of calculating deprecation is a change in accounting principle that cannot be distinguished from a change in accounting estimate. As a result, it is accounted for as a change in accounting estimate and is applied prospectively.
9.Quo instituted a pension plan for all employees in 20X2 and adopted the accounting standards related to pensions. Quo had not previously had a pension plan
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (D, Z) When a company adopts a new accounting principle for a transaction that is new or unlike previous transactions, it is not considered an accounting change but rather the establishment of an accounting policy. It is neither an accounting change nor an error but it is accounted for by applying the approach prospectively to the current and future periods.
- During 20X2, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 20X2, to 30%, and acquired a seat on Worth’s board of directors.
As a result of its increased investment, Quo changed its method of accounting for investment in subsidiary from the cost adjusted for fair value method to the equity method
Treatment:
A. Change in accounting principle. application approach.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting
Approach:
X. Retrospective
Y. Retroactive restatement approach.
Z. Prospective approach.
- (D, Z) An increase in ownership from 10% to 30%, coupled with acquiring a seat on the board of directors gives the company the ability to exercise significant influence over the investee and would require a change from the cost method to the equity method. This would not be considered an accounting change or a correction of an error.
Requirements under ASC 323 indicate that when an investment qualifies for the equity method, it is to be applied prospective basis only, with no need to restate prior period financial statements (As of January 1, 2017)
