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Exam 20: Accounting Changes

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Question 31

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A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result of this error, income tax expense is:

A) Unaffected.
B) Overstated by $60,000.
C) Understated by $60,000.
D) Understated by $140,000.$200,000 .3 = $60,000 tax reduction

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

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Question 32

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Error corrections require restatement of all the affected prior year financial statements reported in comparative financial statements.

A) True
B) False

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Question 33

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All changes reported using the retrospective approach require prior period adjustments.

Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2005 and the machine was placed in service at the beginning of 2006. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2009, Red decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, what will be Red's depreciation expense for 2009?

Hepburn Company bought a copyright for $90,000 on January 1, 2006, at which time the copyright had an estimated useful life of 15 years. On January 5, 2009, the company determined that the copyright would expire at the end of 2014. How much should Hepburn record as amortization expense for this copyright for 2009?

When a change in accounting principle is reported, what is sometimes sacrificed?

There is not always a clear-cut distinction between a change in estimate and a change in principle or a simultaneous change in estimate and change in principle. How are such situations accounted for?

Orange Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2005 and the machine was placed in service at the beginning of 2006. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $4 million. At the beginning of 2009, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2009?

On December 1, 2009, LCD Distributing Company ("LCD" or "Company") issued a press release announcing its financial results for the fiscal year ended November 30, 2009. Included was the following information regarding a change in inventory method (in part): In the fourth quarter of fiscal 2009, the Company changed its inventory valuation method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO) method. The change is preferable as it provides a more meaningful presentation of the Company's financial position as it values inventory in a manner which more closely approximates current cost; better represents the underlying commercial substance of selling the oldest products first; and more accurately reflects the Company's realized periodic income. As required by U.S. generally accepted accounting principles, this change in accounting principle has been reflected in the consolidated statements of financial position, consolidated statements of operations, and consolidated statements of cash flows through retroactive application of the FIFO method. Previously reported net income (loss) available to common shareholders' for the fiscal years 2009 and 2008 were increased by $0.4 million and $2 million after income taxes, respectively. Required: 1. Why does GAAP require LCD to retrospectively adjust prior years' financial statements for this type of accounting change? 2. Assuming that the quantity of inventory remained stable during 2008, did the cost of LCD's inventory move up or down during that period?

Annual depreciation expense on equipment purchased a few years ago (using the straight-line method) is $5,000. The cost of the equipment was $100,000. The current book value of the equipment (January 1, 2009) is $85,000. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2009, 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 2009.

Nash Industries changed its method of accounting for warranties from the cash basis to the accrual basis on January 1, 2009. The company's accountant determined that a liability of $70,000 should be established. Ignore income taxes. Required: Prepare the journal entry to record the accounting change.

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.

Describe in detail the way companies report most voluntary changes in accounting principle.

What are the situations deemed to constitute a change in reporting entity? Describe the way changes in reporting entity are reported.

Powell Company had the following errors over the last two years: 2007: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000. 2008: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000. By how much should retained earnings be adjusted on January 1, 2009? (Ignore taxes)

How many acceptable approaches are there for changes in accounting principles?

Which of the following changes would not be accounted for using the prospective approach?

Which of the following is an example of a change in accounting principle?

What is the effect of the error on Berkshire's 12/31/09 balance sheet?

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