Section 3A - Acct Changes & Error Correction Flashcards
In Year 6, Stuckey Corporation determined that the 6-year estimated useful life of a machine purchased for $198,000 in January of Year 3 should be extended by 2 years. The machine is being depreciated using the straight-line method and has no salvage value.
In addition to the extension of the useful life, Stuckey also determines the asset will have a salvage value of $12,000 at the end of its useful life. What amount of depreciation expense should Stuckey report in its financial statements for the year ending December 31, Year 6?
$33,000
$17,400
$19,800
$34,800
$17,400
Changes in accounting estimates are handled on a ___basis in the current year and future years. t/f
Note disclosure includes an explanation and justification for the change and the impact on current income and ___
Changes in a depreciation, amortization, and depletion method must be reported as a change in accounting ___
prospective
EPS
estimate.
During 20X1, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey’s 20X1 financial statements?
- Both cumulative effect of a change in accounting principle and pro forma effects of retroactive application of new depletion base
- Pro forma effects of retroactive application of new depletion base
- Neither cumulative effect of a change in accounting principle nor pro forma effects of retroactive application of new depletion base
- Cumulative effect of a change in accounting principle
Neither cumulative effect of a change in accounting principle nor pro forma effects of retroactive application of new depletion base
An increase in the estimated quantity of copper recoverable from its mine represents a change in accounting estimate.
FASB ASC 250-10-45-17 provides that a change in accounting estimate be accounted for in the period of change or the period of change and future affected periods if both are affected by the change. Also, “a change in an estimate should not be accounted for by restating amounts reported in financial statements of periods or by reporting pro forma amounts for prior periods.”
Therefore, no is the appropriate answer for both suggested treatments.
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
By restating the financial statements of all prior periods presented
As a component of income from continuing operations
As a correction of an error
By footnote disclosure only
As a component of income from continuing operations
FASB ASC 250-10-45-18 requires that whenever a change in accounting principle is inseparable from a change in an accounting estimate, the change should be considered as a change in estimate. Changes in estimates are handled prospectively.
That is, previously reported information in previous financial statements is not adjusted, nor is a cumulative effect of the change reported. Prospective treatment only requires utilization of the change(s) in the current period as it effects the current period’s income.
It is part of income from continuing operations because no special disclosure is required on the face of the income statement under the prospective approach.
Accounting changes are classified into the following three general categories for purposes of financial statement presentation:
- Changes in accounting ___
- Changes in accounting ___
- Changes in reporting___
These three types of accounting changes, along with the corrections of errors, require special ___in the financial statements to enhance comparability among accounting periods.
principle
estimate
entity
disclosure
Tack, Inc., reported a retained earnings balance of $150,000 on December 31, 20X1. In June 20X2, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 20X1 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 20X2?
$122,000
$150,000
$178,000
$190,000
$178,000
A correction of an error in prior years’ financial statements is reported in the year of correction by __all prior years affected by the error.
The cumulative effect of the error on periods prior to those presented must be reflected in the ___amounts of the assets and liabilities as of the beginning of the earliest year presented in the current period’s financial report.
In addition, the offsetting amount of this cumulative effect must be reported as an adjustment to the opening balance of ___of the earliest year presented in the current period’s financial report.
he FASB chose to use the term “___application” to describe the manner of reporting a change in accounting principle or a change in reporting entity, and to use the term “___” only to refer to the correction of an error.
restating
carrying
retained earnings
retrospective, restatement
On January 1, year 3, a company changed its inventory costing method from LIFO to FIFO. The company’s year 3 financial statements contain comparative information for year 2. How should the company present the year 1 effect of the change in accounting principle in its year 3 comparative financial statements?
As an extraordinary item in the year 2 income statement
As a note disclosure only
As part of income from continuing operations in the year 2 income statement
As an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings
As an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings
- Changing from LIFO (last in, first out) to FIFO (first in, first out) is considered a change in accounting principle. The FASB requires that in the absence of a specific statement by the FASB to the contrary, accounting changes should be accounted for using the retrospective approach.
- Under this approach, all prior years’ financial statements presented should be restated and the cumulative effect of the change should be reported in the retained earnings statement (or in the statement of changes in stockholders’ equity) as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented, which would be year 2 for this question.
Changing from LIFO (last in, first out) to FIFO (first in, first out) is considered a change in accounting ___.
The FASB requires that in the absence of a specific statement by the FASB to the contrary, accounting changes should be accounted for using the ___approach.
principle.
retrospective
Retrospective Approach
Under this approach, all prior years’ financial statements presented should be ___and the cumulative effect of the change should be reported in the ___statement (or in the statement of changes in stockholders’ equity) as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented.
restated
retained earnings
Conn Co. reported a retained earnings balance of $400,000 at December 31 of the previous year. In August of the current year, Conn determined that insurance premiums of $60,000 for the 3-year period beginning January 1 of the previous year had been paid and fully expensed in that year. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its current-year statement of retained earnings?
$420,000
$442,000
$440,000
$428,000
$428,000
Conn should report $428,000:
Beg. Ret. Earn. as originally reported $400,000
Over exp of $40k – Tax of 30% ($12,000) 28,000
Corrected beginning retained earnings $428,000
Mellow Co. depreciated a $12,000 asset over five years, using the straight-line method with no salvage value. At the beginning of the fifth year, it was determined that the asset will last another four years. What amount should Mellow report as depreciation expense for Year 5?
$600
$1,500
$900
$2,400
600
The change in the estimated useful life of a fixed asset is a change in accounting estimate that must be accounted for prospectively. The book value at the end of Year 4 is $2,400 ($12,000 - ($12,000 × 4 years ÷ 5 years)). This $2,400 must be allocated to depreciation expense over the remaining 4-year period ($2,400 ÷ 4 = $600).
On March 15, year 2, a calendar-year company issued its year 1 financial statements. On March 1, year 2, a fire destroyed the company’s only manufacturing plant. Which of the following statements is correct regarding the treatment of the loss in the December 31, year 1, financial statements?
- The loss should not be recognized or disclosed in the year 1 financial statements.
- The loss should be disclosed and not recognized in the year 1 financial statements.
- The loss should be recognized in the year 1 financial statements.
- Any probable insurance recoveries should be recognized in the year 1 financial statements.
The loss should be disclosed and not recognized in the Year 1 financial statements.
There are two types of subsequent events. Type 1 events are recognized in the financial statements and consist of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). Type 2 events are not recognized and consist of events that provide evidence about conditions that did not exist at the date of the balance (as is the case for this situation).
Some Type 2 subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity shall disclose the nature of the event and an estimate of its financial effect. Destruction of the only manufacturing plant would be a disclosure Type 2 eve
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events:
- The first type consists of events or transactions that provide additional evidence about conditions that ___at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
- The second type consists of events that provide evidence about conditions that ___at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).
existed
did not exist
An entity must not recognize subsequent events(which means make an AJE to recognize it…..but should DISCLOSE regardless) that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. The following are examples of nonrecognized subsequent events:
- Sale of __
- Business ___
- Settlement of ___
- Loss of plant/inventory from a ___
- Losses on ___
- Changes in the ___ of assets/liabilities
- Entering into a significant ___ or ___ liability
bond/capital stock
combination
litigation
fire/natural disaster
receivables
FV
commitment/contingency
Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity shall disclose the following:
a. The __of the event
b. An ___of its financial effect, or a statement that such an estimate cannot be made
nature
estimate
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 20X1, financial statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of 20X2 resulted in a cumulative effect of $30,000 on Foy’s retained earnings. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior-period adjustments in 20X2?
$80,000
$30,000
$0
$50,000
$50,000
FASB ASC 250-10-45-22 notes, “Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) shall be reported as an error correction, by restating the prior-period financial statements.”
Foy Corp.’s failure to accrue $50,000 of warranty cost in 20X1 is an error which should be reported in 20X2 as a prior-period adjustment. (The change in depreciation is a change in accounting principle, shown on the income statement.)
- At December 31, 20X2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately
- . Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, 20X1, $300,000 of which were to be written off in 20X2 and the remainder in 20X3.
- Off-Line’s income tax rate is 30%. In its 20X2 income statement, what amount should Off-Line report as cumulative effect of change in accounting principle?
$500,000
$200,000
$140,000
$0
$0
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. Thus, the cumulative effect of Off-Line’s change in accounting principle would not be included in its 20X2 income statement.
Which of the following accounting changes should be given retrospective treatment when preparing the financial statements?
A change in the useful life of a property, plant, and equipment asset
A change in the depreciation method used for a tangible asset
A change in the percentage used to estimate the amount of uncollectible accounts
A change in the method used to account for long-term contracts
A change in the method used to account for long-term contracts
A change in accounting principle is given retrospective treatment when reported in the financial statements. This means that all periods presented need to reflect the new accounting principle. A change in accounting estimate is given prospective treatment, meaning that all changes are reported in current and future periods, but no prior periods are restated.
Of the four answer choice items, only the change in the method used to account for long-term contracts qualifies as a change in accounting principle. Thus, it is the only one of the four that will be treated retrospectively. While a change in depreciation methods is a change in accounting principle, it is treated as a change in accounting estimate.
Which of the following describes the appropriate reporting treatment for a change in accounting estimate?
In the period of change and future periods if the change affects both
By restating amounts reported in financial statements of prior periods
By reporting pro forma amounts for prior periods
In the period of change with no future consideration
In the period of change and future periods if the change affects both
Changes in accounting estimates are handled on a prospective basis—in the current year and future years. There is no retroactive application. An explanation and justification must be disclosed in the notes.
In Year 6, Spirit, Inc., determined that the 12-year estimated useful life of a machine purchased for $48,000 in January of Year 1 should be extended by three years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, Year 6?
$4,200
$4,800
$2,800
$3,200
$2,800