IS2 Flashcards
what is the journal entry for On January 1, Year 10, Acme changed inventory methods from LIFO to FIFO for both financial and income tax reporting purposes. The change resulted in a $500,000 increase in the January 1, Year 10, inventory.assume the tax 30%
Dr inventory
$500,000
CR Retained earnings
$350,000
CR Deferred tax liability
150,000
A change from LIFO to FIFO inventory measurement is a change in accounting principle, requiring retrospective application to the financial statements for all periods presented. Given that Acme issues single-period statements only, the adjustment should be made directly to the balance of beginning retained earnings for Year 10. Because Acme’s inventory under FIFO would have been $500,000 greater, the aggregate cost of goods sold in prior periods would have been $500,000 less, and net income, net of taxes, would have been $350,000 greater. Thus, the proper treatment is to credit the beginning balance of retained earnings for the after-tax effect of $350,000.
what is the journal entry forOn January 1, Year 7, Acme purchased a machine for $528,000 and depreciated it by the straight-line method using an estimated useful life of 8 years with no salvage value. On January 1, Year 10, Acme determined that the machine had a useful life of 6 years from the date of acquisition and would have a salvage value of $48,000. An accounting change was made in Year 10 to reflect the additional data.
DR Depreciation expense
$94,000
Cr Accumulated depreciation
$94,000
A change in estimate is accounted for prospectively. The effect of the change is accounted for in the period the change occurs and in future periods. For each of the first 3 years (Years 7, 8, and 9), Acme recorded depreciation expense as $66,000. Accumulated depreciation at 1/1/Yr 10 was $198,000, resulting in the machine’s carrying amount of $330,000. For Year 10, the depreciation expense is $94,000 [($330,000 carrying amount – $48,000 estimated salvage value) ÷ 3 remaining years of expected useful life].
what is the journal entry for In August Year 10, Acme’s accountant discovered that insurance premiums of $60,000 for the 3-year period beginning January 1, Year 9, had been paid and fully expensed in Year 9.
Dr Prepaid insurance
$40,000
Cr Retained earnings
$28,000
Cr Deferred tax liability
12,000
Prior-period adjustments reported in single-period financial statements are adjustments of the opening balance of retained earnings. For the $60,000 insurance prepayment in Year 9, Acme should have expensed it equally over the 3-year period. Consequently, Year 9 net income was understated by $40,000, net of tax effect, and $40,000 should have been reported as a prepaid expense (an asset) at the beginning of Year 10.
Which of the following is considered a pervasive constraint by the FASB’s conceptual framework?
Cost is a pervasive constraint on the information provided by financial reporting. The benefits of financial information should exceed the costs of reporting.
The management’s discussion and analysis (MD&A) section of an annual report
The MD&A section is included in SEC filings. It addresses in a nonquantified manner the prospects of a filer. The SEC examines it with care to determine that management has disclosed material information affecting future results. Disclosures about commitments and events that may affect operations or liquidity are mandatory. Thus, the MD&A section pertains to liquidity, capital resources, and results of operations.
