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Exam 20: Accounting Changes and Error Corrections

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Question 61

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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:

A) Unaffected.
B) Understated by $350,000.
C) Understated by $500,000.
D) Understated by $150,000.

E) B) and D)
F) A) and B)

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Question 62

Multiple Choice

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During 2018, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2018, would be:

A) Correct.
B) $30,000 overstated.
C) $150,000 overstated.
D) $270,000 overstated.

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

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Question 63

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A change to the LIFO method of valuing inventory usually requires use of the retrospective method.

Washburn Co. spent $10 million to purchase a new patented technology, debiting an intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets and plans to amortize the intangible asset on a straight-line basis. The appropriate accounting treatment is that:

Annual depreciation expense on a building purchased a few years ago (using the straight-line method) is $5,000. The cost of the building was $100,000. The current book value of the equipment (January 1, 2018) is $85,000. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2018, the company decided to reduce the original useful life by 25% and to establish a salvage value of $5,000. The firm also decided double-declining-balance depreciation was more appropriate. Ignore tax effects. Required: (1.) Record the journal entry, if any, to report the accounting change. (2.) Record the annual depreciation for 2018.

Regardless of the type of accounting change that occurs, the most important responsibility is:

Moonland Company's income statement contained the following errors: Ending inventory, December 31, 2018, understated by $6,000 Depreciation expense for 2018 overstated by $1,000 What is the effect of the errors on 2018 net income before taxes?

What is the difference between U.S. GAAP and IFRS with regard to the correction of accounting errors?

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.

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

A change that uses the prospective approach is accounted for by:

Gore Inc. recorded a liability in 2018 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.

Which of the following is not a change in accounting principle that usually is accounted for by retrospectively revising prior financial statements?

Using International Financial Reporting Standards (IFRS) , which of the following statements is true regarding correcting errors in previously issued financial statements?

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Error corrections

In 2018, internal auditors discovered that Fay, Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2015. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

Cherokee Company's auditor discovered some errors. No errors were corrected during 2017. The errors are described as follows: (1.) Beginning inventory on January 1, 2017, was understated by $5,000. (2.) A two-year insurance policy purchased on April 30, 2017, in the amount of $24,000 was debited to Prepaid Insurance. No adjustment was made on December 31, 2017, or on December 31, 2018. Required: Prepare appropriate journal entries (assume the 2018 books have not been closed). Ignore income taxes.

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Prospective approach

Albatross Company purchased a piece of machinery for $60,000 on January 1, 2016, and has been depreciating the machine using the double-declining-balance method based on a five-year estimated useful life and no salvage value. On January 1, 2018, Albatross decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life did not change. 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 2018.

Popeye Company purchased a machine for $300,000 on January 1, 2017. 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 2017. Popeye discovered the error in 2018. What amount should Popeye record as depreciation expense for 2018? The tax rate is 40%.