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Exam 20: Accounting Changes

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Question 1

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At the end of the current year, a company overstated prepaid insurance by $80,000 and understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this error, net income is:

A) Overstated by $108,000.
B) Overstated by $12,000.
C) Understated by $108,000.
D) Understated by $12,000.

E) A) and B)
F) A) and C)

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Question 2

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How may accounting changes detract from accounting information?

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Comparability and consistency are sacrif...

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Question 3

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C Co. reported a retained earnings balance of $200,000 at December 31, 2008. In September 2009, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2008, had been paid and fully expensed in 2008. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2009 statement of retained earnings?

A change in the residual value of equipment is treated ______________.

JFS Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes:

Describe the approaches of reporting changes in accounting principles.

Which of the following is not a change in reporting entity?

B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2009. The change affects machinery purchased at the beginning of 2007 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B's 2009 depreciation expense?

Max Industries changed its method of accounting for bad debts from the direct write-off method to the allowance method on January 1, 2009. The company's accountant determined that an appropriate allowance of $90,000 should be established. Ignore income taxes. Required: Prepare the journal entry to record the accounting change.

Which of the following changes should be accounted for using the retrospective approach?

Both changes in reporting entities and material error corrections are reported prospectively.

Lugar Company purchased a piece of machinery for $30,000 on January 1, 2007, and has been depreciating the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no salvage value. On January 1, 2009, Lugar decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life is changed to a total of six years from the date of purchase. Ignore income taxes. Required: (1.) Prepare the appropriate journal entry, if any, to record the accounting change. (2.) Prepare the journal entry to record depreciation for 2009.

Popeye Company purchased a machine for $300,000 on January 1, 2008. Popeye depreciates machines of this type by the straight-line method over a five-year period using no salvage value. Due to an error, no depreciation was taken on this machine in 2008. Popeye discovered the error in 2009. What amount should Popeye record as depreciation expense for 2009? The tax rate is 40%.

Branch Industries changes from declining balance depreciation to straight-line depreciation for existing assets. Describe in detail the way Branch would account for the change.

What are the changes in accounting principle that require the prospective approach?

At the end of the current year, a company failed to accrue interest of $500,000 on its investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:

In 2009, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2009 would have been $10 million higher had the new life been used. Barney's tax rate is 30%. Barney's retained earnings as of December 31, 2009, would be:

We record and report most changes in accounting principle retrospectively, but sometimes report the changes prospectively. Explain when it is appropriate to report the changes prospectively. Provide examples.

Describe the way we account for an error when that error is discovered in a subsequent reporting period.

Disclosure notes related to a change in accounting principle under the retrospective approach should include: