Kieso 14e TB-IfRS Error P1

CHAPTER 22
ACCOUNTING CHANGES AND ERROR ANALYSIS

TRUE-FALSEConceptual
Anse! No" Desc!#pt#on
F 1. Change in accounting estimate.
T 2. Errors in financial statements.
F 3. Adoption of a new principle.
T 4. Retrospective application of accounting polic.
F !. Reporting cumulative effect of change in polic.
T ". #isclosure re$uirements for a change in polic.
T %. &ndirect effect of an accounting change.
F '. #irect effects of a change in accounting polic.
T (. Accounting for changes and new &FR).
F 1*. #isclosure re$uirements for voluntar and mandated changes.
F 11. &mpracticalit e+eption under ,.).-AA..
T 12. Retrospective application impracticalit.
F 13. Reporting changes in accounting estimates.
T 14. Change in principle vs. change in estimate.
F 1!. Accounting for change in depreciation method.
F 1". Accounting error vs. change in estimate.
T 1%. Accounting for corrections of errors.
T 1'. /ew principle created 0 FA)1 standard.
F 1(. 1alance sheet errors.
F 2*. #efinition of counter0alancing errors.
T 21. Accounting for counter0alancing errors.
T 22. Correcting entries for noncounter0alancing errors.
T 23. &ncome statement classification error effect on net income.
F 24. Accounding for changes in estimates.
T 2!. /on2counter0alancing errors definition.
$ULTIPLE CHOICEConceptual
0 2". Accounting changes and consistenc concept.
c 2%. &dentification of an accounting changes.
0 2'. E+planation for &A)1 accounting changes categories.
0 2(. Reporting changes in accounting policies.
0 3*. &dentif changes in accounting polic.
c 31. &dentif a non2retrospective change.
d 32. &dentif a change in accounting polic.
a 33. Entr to record a change in depreciation methods.
c 34. #isclosures re$uired for a change in depreciation methods.
0 3!. Reason &A)1 permits change in accounting polic.
0 3". -uidance in the selection of an accounting polic.
c 3%. Change from percentage2of2completion to Cost2recover.
Test %an& 'o! Inte!(e)#ate Account#n*+ IFRS E)#t#on
d 3'. #isclosures re$uired for a change from average cost to F&F3.
$ULTIPLE CHOICEConceptual ,cont"-
0 3(. Change from average cost to F&F3.
c 4*. Change in accounting estimate.
a 41. Change in accounting estimate.
0 42. &dentif a change in accounting estimate.
0 43. Change in accounting estimate.
c 44. &dentif a change in accounting estimate.
a 4!. Reason for &A)14s treatment of changes in estimates.
c 4". &A)1 guidelines for changes in accounting polic.
c 4%. &dentif errors that overstate net income.
d 4'. &dentification of a change in accounting estimate.
c 4(. &dentif a correction of an error.
a !*. &A)1 assessment of proposed standard4s merits.
d !1. &FR) accounting for direct and indirect effects.
0 !2. &dentif num0er of ear of comparative data.
0 !3. &dentification of counter0alancing errors.
c !4. &mpact of failure to record purchase and count ending inventor.
c !!. &mpact of failure to record purchase and count ending inventor.
$ULTIPLE CHOICECo(putat#onal
0 !". Calculate cumulative effect of a change in depreciation method.
0 !%. Calculate cumulative effect of a change in depreciation method.
c !'. Calculate net income with change in accounting polic with ta+ effects.
d !(. Calculate cumulative effect of accounting change.
c "*. Calculate depreciation e+pense after change in accounting polic.
d "1. Calculate cumulative effect of a change on retained earnings.
0 "2. Calculate cumulative effect of a change on retained earnings.
c "3. Compute depreciation e+pense after a change in depreciation methods.
0 "4. Calculate cumulative effect of a change in inventor methods.
d "!. 5ournal entr to record change in accounting polic.
d "". 5ournal entr to record change in accounting polic.
c "%. Calculate indirect effect amount of change in accounting polic.
c "'. Calculate net income after a change to 6&F3 method.
a "(. Calculate net income with change from F&F3 to 6&F3.
0 %*. Calculate depreciation after a change in estimate.
a %1. Calculate net income with change in an accounting estimate.
a %2. #etermine depreciation e+pense after a change in estimated life.
d %3. Calculate depreciation after a change in estimate.
d %4. Entr to record correction of an error.
d %!. Calculate depreciation after correction of an error.
c %". 5ournal entr to record correction of an error.
a %%. Compute effect of errors on income 0efore ta+es.
c %'. Compute effect of errors on retained earnings.
d %(. Calculate effect of errors on net income.
c '*. Calculate effect of errors on wor7ing capital.
c '1. Calculate effect of errors on retained earnings.
22 - 2
Accounting Changes and Error Analsis
a '2. Effect of errors on income and retained earnings.
$ULTIPLE CHOICE Co(putat#onal ,cont"-
a '3. Calculate effect of errors on net income.
0 '4. Calculate effect of errors on retained earnings.
c '!. Calculate effect of errors on wor7ing capital.
d '". #etermine cumulative effect of error on income statement.
c '%. #etermine the understatement of retained earnings.
a ''. Calculate effect of error on net income.
c '(. Compute effect of error on retained earnings.
$ULTIPLE CHOICECPA A)apte)
0 (*. &dentif a change in accounting polic.
c (1. Cumulative effect of a change from average cost to F&F3.
a (2. Reporting a change to F&F3 from average cost.
a (3. 1alance of accumulated depreciation after a change in estimate.
0 (4. #etermine carring value of a patent with a change in estimate.
d (!. Reporting roalt income when amount reali8ed differs from estimate.
0 (". #epreciation e+pense to 0e recorded following an error.
c (%. &mpact of failure to accrue insurance costs.
a ('. Retained earnings 0alance with multiple errors.
E.ERCISES
Ite( Desc!#pt#on
E222(( 9atching accounting changes to situations.
E2221** :ow changes or corrections are recogni8ed.
E2221*1 9atching disclosures to situations.
E2221*2 Change in accounting polic.
E2221*3 Change in estimate; corrections of errors.
E2221*4 Changes in depreciation methods; estimates.
E2221*! /oncounter0alancing error.
E2221*" Effects of errors.
E2221*% Effects of errors.
PRO%LE$S
Ite( Desc!#pt#on
.2221*' Accounting for changes and error corrections.
.2221*( Corrections of errors.
.22211* Error corrections and ad<ustments.
CHAPTER LEARNING O%/ECTI0ES
1. &dentif the two tpes of accounting changes.
2. #escri0e the accounting for changes in accounting policies.
22 - 1
3. ,nderstand how to account for retrospective accounting changes.
4. ,nderstand how to account for impractica0le changes.
!. #escri0e the accounting for changes in estimates.
". #escri0e the accounting for correction of errors.
%. &dentif economic motives for changing accounting methods.
'. Anal8e the effect of errors.
SU$$ARY OF LEARNING O%/ECTI0ES %Y 2UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Lea!n#n* O34ect#5e 6
1. TF 2. TF 2". 9C 2%. 9C 2'. 9C
3. TF 2(. 9C 31. 9C 33. 9C ((. E
4. TF 3*. 9C 32. 9C '*. E 1**. E
!. TF (. TF 3". 9C !(. 9C "3. 9C "%. 9C 1*2. E
". TF 1*. TF !". 9C "*. 9C "4. 9C (1. 9C 1*'. .
%. TF 34. 9C !%. 9C "1. 9C "!. 9C 1**. E
'. TF 3!. 9C !'. 9C "2. 9C "". 9C 1*1. E
11. TF 3%. 9C 3(. 9C "(. 9C 1**. E 1*2. E
12. TF 3'. 9C "'. 9C (2. 9C 1*1. E 1*'. E
13. TF 41. 9C 4!. 9C %3. 9C (4. 9C 1*1. E 11*. .
14. TF 42. 9C %*. 9C %4. 9C (!. 9C 1*3. E
1!. TF 43. 9C %1. 9C %!. 9C ((. E 1*4. .
4*. 9C 44. 9C %2. 9C (3. 9C 1**. E 1*'. .
1". TF 4". 9C 4(. 9C %'. 9C 1**. E 1*!. E 11*. .
1%. TF 4%. 9C %". E (". 9C 1*1. E 1*'. .
1'. TF 4'. 9C %%. E ((. E 1*3. E 1*(. .
Lea!n#n* O34ect#5e :
1(. TF 24. TF !3. 9C '1. 9C '". 9C ('. 9C
2*. TF 2!. TF !4. 9C '2. 9C '%. 9C 1*". E
21. TF !*. 9C !!. 9C '3. 9C ''. 9C 1*%. E
22. TF !1. 9C %(. 9C '4. 9C '(. 9C 1*'. .
23. TF !2. 9C '*. 9C '!. 9C (%. 9C 1*(. .
/ote= TF > True2False
9C > 9ultiple Choice
E > E+ercise
22 - 7
. > .ro0lem
22 - 8
TRUE-FALSEConceptual
1. A change in accounting polic is a change that occurs as the result of new information or
additional e+perience.
2. Errors in financial statements result from mathematical mista7es or oversight or misuse of
facts that e+isted when preparing the financial statements.
3. Adoption of a new polic in recognition of events that have occurred for the first time or
that were previousl immaterial is treated as an accounting change.
4. Retrospective application refers to the application of a different accounting polic to recast
previousl issued financial statements?as if the new polic had alwas 0een used.
!. @hen a compan changes an accounting polic; it should report the change 0 reporting
the cumulative effect of the change in the current earAs income statement.
". 3ne of the disclosure re$uirements for a change in accounting polic is to show the
cumulative effect of the change on retained earnings as of the 0eginning of the earliest
period presented.
%. An indirect effect of an accounting change is an change to current or future cash flows of
a compan that result from ma7ing a change in accounting polic that is applied
retrospectivel.
'. The &)A1 is silent on the application of the direct effects of a change in accounting polic.
(. The new &FR) on financial instruments will 0e su0<ect to the proper accounting for
changes in accounting polic.
1*. The re$uirements for disclosure are the same whether a change is voluntar or is
mandated 0 the issuance of a new &FR).
11. ,nder ,.). -AA.; the impracticalit e+ception applies 0oth to changes in accounting
policies and to the correction of errors.
12. Retrospective application is considered impractica0le if a compan cannot determine the
prior period effects using ever reasona0le effort to do so.
13. Companies report changes in accounting estimates retrospectivel.
14. @hen it is impossi0le to determine whether a change in polic or change in estimate has
occurred; the change is considered a change in estimate.
1!. Companies account for a change in depreciation methods as a change in accounting
polic.
1". Accounting errors include changes in estimates that occur 0ecause a compan ac$uires
more e+perience; or as it o0tains additional information.
22 - 9
1%. Companies record corrections of errors from prior periods as an ad<ustment to the
0eginning 0alance of retained earnings in the current period.
1'. &f an &A)1 standard creates a new polic; e+presses preference for; or re<ects a specific
accounting polic; the change is considered clearl accepta0le.
1(. )tatement of financial position errors affect onl the presentation of an asset or lia0ilit
account.
2*. Counter0alancing errors are those that will 0e offset and that ta7e longer than two periods
to correct themselves.
21. For counter0alancing errors; restatement of comparative financial statements is necessar
even if a correcting entr is not re$uired.
22. Companies must ma7e correcting entries for noncounter0alancing errors; even if the
have closed the prior earAs 0oo7s.
23. An income statement classification error has no effect on the statement of financial
position and no effect on net income.
24. The accounting for change in estimates differs 0etween ,.).-AA. and &FR).
2!. /on2counter 0alancing errors are those that longer than two periods to correct
themselves.
T!ue-False Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
1. F '. F 1!. F 22. T
2. T (. T 1". F 23. T
3. F 1*. F 1%. T 24. F
4. T 11. F 1'. T 2!. T
!. F 12. T 1(. F
". T 13. F 2*. F
%. T 14. T 21. T
22 - ;
$ULTIPLE CHOICEConceptual
2". Accounting changes are often made and the monetar impact is reflected in the financial
statements of a compan even though; in theor; this ma 0e a violation of the accounting
concept of
a. materialit.
0. consistenc.
c. prudence.
d. o0<ectivit.
2%. @hich of the following is not classified as an accounting change 0 &A)1B
a. Change in the accounting polic
0. Change in accounting estimate
c. Errors in the financial statements
d. All of these are classified as an accounting change
2' @hich of the following is the 0est e+planation for wh &A)1 has classified accounting
changes into different categoriesB
a. &A)1 esta0lished categories 0ased on the materialit of the changes involved.
0. &A)1 classifies changes in the categories 0ecause each categor involves different
method of recogni8ing changes in the financial statements.
c. &A)1 esta0lished categories 0ased on the fact that some treatment are consider
-AA. and some are not.
d. &A)1 esta0lished the categories 0ased on a surve of managers and their need to
provide a favora0le profit picture.
2(. &A)1 re$uires companies to use which method for reporting changes in accounting
policiesB
a. cumulative effect approach
0. retrospective approach
c. prospective approach
d. averaging approach
3*. @hich of the following is not treated as a change in accounting policB
a. A change from average cost to F&F3 for inventor valuation
0. A change to a different method of depreciation for plant assets
c. A change from full2cost to successful efforts in the e+tractive industr
d. A change from cost2recover to percentage2of2completion
31. @hich of the following is not a retrospective2tpe accounting changeB
a. Cost2recover method to the percentage2of2completion method for long2term contracts
0. Cost2recover method to the F&F3 method for inventor valuation
c. )um2of2the2earsC2digits method to the straight2line method
d. DFull costD method to another method in the e+tractive industr
32. @hich of the following is accounted for as a change in accounting policB
a. A change in the estimated useful life of plant assets.
0. A change from the cash 0asis of accounting to the accrual 0asis of accounting.
c. A change from e+pensing immaterial e+penditures to deferring and amorti8ing them as
the 0ecome material.
d. A change in inventor valuation from average cost to F&F3.
22 - :
33. A compan changes from straight2line to an accelerated method of calculating
depreciation; which will 0e similar to the method used for ta+ purposes. The entr to
record this change should include a
a. credit to Accumulated #epreciation.
0. de0it to Retained Earnings in the amount of the difference on prior ears.
c. de0it to #eferred Ta+ Asset.
d. credit to #eferred Ta+ 6ia0ilit.
34. @hich of the following disclosures is re$uired for a change from sum2of2the2ears2digits to
straight2lineB
a. The cumulative effect on prior ears; net of ta+; in the current retained earnings
statement
0. Restatement of prior earsA income statements
c. Recomputation of current and future earsA depreciation
d. All of these are re$uired.
3!. @hich of the following would 0e a reason where &A)1 would permit companies to change
accounting policB
a. The change would allow the compan to present a more favora0le profit picture.
0. The change would result in the financial statements providing more relia0le and
relevant information a0out a compan4s financial position; financial performance; and
cash flows.
c. The change is made 0 the internal auditor.
d. The change will 0e long2term.
3". &f a particular transaction is not specificall addressed 0 &FR); where should an
accountant turn to find a hierarch of guidance to 0e consicered in the selection of an
accounting policB
a. accounting standards from other countries
0. &A) '
c. the companAs 0oard of directors
d. the companAs e+ternal auditors
3%. A compan changes from percentage2of2completion to cost2recover; which is the method
used for ta+ purposes. The entr to record this change should include a
a. de0it to Construction in .rocess.
0. de0it to 6oss on 6ong2term Contracts in the amount of the difference on prior ears;
net of ta+.
c. de0it to Retained Earnings in the amount of the difference on prior ears; net of ta+.
d. credit to #eferred Ta+ 6ia0ilit.
3'. @hich of the following disclosures is not re$uired for a change from average cost to
F&F3B
a. 1asic and diluted earnings per share for the current period and each prior period
presented
0. The nature of the change in accounting polic
c. The amount of the ad<ustment relating to periods 0efore those presented
d. All of these are re$uired.
22 - <
3(. )tone Compan changed its method of pricing inventories from average cost to F&F3.
@hat tpe of accounting change does this representB
a. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should 0e presented as previousl reported.
0. A change in accounting polic for which the financial statements for prior periods
included for comparative purposes should 0e presented as previousl reported.
c. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should 0e restated.
d. A change in accounting polic for which the financial statements for prior periods
included for comparative purposes should 0e restated.
4*. @hich tpe of accounting change should alwas 0e accounted for in current and future
periodsB
a. Change in accounting polic
0. Change in reporting entit
c. Change in accounting estimate
d. Correction of an error
41. @hich of the following is EareF the proper time periodEsF to record the effects of a change
in accounting estimateB
a. Current period and prospectivel
0. Current period and retrospectivel
c. Retrospectivel onl
d. Current period onl
42. @hen a compan decides to switch from the dou0le2declining 0alance method to the
straight2line method; this change should 0e handled as a
a. change in accounting polic.
0. change in accounting estimate.
c. prior period ad<ustment.
d. correction of an error.
43. The estimated life of a 0uilding that has 0een depreciated 3* ears of an originall
estimated life of !* ears has 0een revised to a remaining life of 1* ears. 1ased on this
information; the accountant should
a. continue to depreciate the 0uilding over the original !*2ear life.
0. depreciate the remaining 0oo7 value over the remaining life of the asset.
c. ad<ust accumulated depreciation to its appropriate 0alance; through net income; 0ased
on a 4*2ear life; and then depreciate the ad<usted 0oo7 value as though the
estimated life had alwas 0een 4* ears.
d. ad<ust accumulated depreciation to its appropriate 0alance through retained earnings;
0ased on a 4*2ear life; and then depreciate the ad<usted 0oo7 value as though the
estimated life had alwas 0een 4* ears.
44. @hich of the following statements is correctB
a. Changes in accounting polic are alwas handled in the current or prospective period.
0. .rior statements should 0e restated for changes in accounting estimates.
c. A change from e+pensing certain costs to capitali8ing these costs due to a change in
the period 0enefited; should 0e handled as a change in accounting estimate.
d. Correction of an error related to a prior period should 0e considered as an ad<ustment
to current ear net income.
22 - 6=
4!. @h does &A)1 prohi0it retrospective treatment of changes in accounting estimatesB
a. The &A)1 view changes in estimates as normal recurring corrections and ad<ustments;
which are the natural result of the accounting process.
0. The &A)1 does not allow the retrospective treatment for an tpe of presentation.
c. The &A)1 prohi0its retrospective treatment of changes in accounting estimates
0ecause &FR) re$uires it.
d. &A)1 does not prohi0it retrospective treatment of changes in accounting estimates;
0ut is silent on this issue
4". All of the following statements are true regarding &A)1As guideline that companies must
demonstrate change in accounting polic as prefera0le or as an improvement; e+cept=
a. #iversit in situations and characteristics of the items encountered in practice re$uire
the use of professional <udgment.
0. Changes in accounting polic are appropriate onl when a compan demonstrates
that the newl adopted generall accepted accounting polic is more relevant and
relia0le than the e+isting one.
c. Changes in accounting polic are appropriate onl when a compan demonstrates an
improved income ta+ effect alone.
d. /one of theseG all statements are true.
4%. Each of the following errors will overstate 2*12 net income e+cept=
a. E$uipment purchased in 2*11 was e+pensed.
0. @ages paa0le were not recorded at 12H31H12.
c. E$uipment purchased in 2*12 was e+pensed.
d. 2*12 ending inventor was overstated
4' Iee Construction Co. had follwed the practice of e+pensing all materials assigned to a
construction <o0 without recogni8ing an residual inventor. 3n #ecem0er31; 2*12; it was
determained that residual inventor should 0e valued at J!";***. 3f this amount;J23;***
arose during the current ear. 1ased on this information; all of the following statements is
true regarding the affect on the financial statements to 0e prepared at the end of 2*12
e+cept=
a. J23;*** should 0e reported in the 2*12 statements as a reduction of materials cost.
0. J33;*** should 0e reported as an ad<ustment to the 0eginning 0alance of retained
earnings in the 2*12 financial statements.
c. This change should 0e handled as a correction of an error.
d. This ch ange should 0e handled as a change in accounting estimate.
4(. An e+ample of a correction of an error in previousl issued financial statements is a
change
a. from the F&F3 method of inventor valuation to the average cost method.
0. in the service life of plant assets; 0ased on changes in the economic environment.
c. from the cash 0asis of accounting to the accrual 0asis of accounting.
d. in the ta+ assessment related to a prior period.
!*. The &A)1 has declared; as part of its conceptual framewor7; that it will assess the merits
of proposed standards
a. from a position of neutralit.
0. from a position of materialit.
c. 0ased on the possi0le impact on 0ehavior.
d. 0ased on lo00ist arguments.
22 - 66
!1 @hich of the following is true regarding whether &FR) specificall addresses the
accounting and reporting for effects of changes in accounting policiesB
#irect effects &ndirect effects
a. IE) IE)
0. /3 /3
c. /3 IE)
d. IE) /3
!2 ,nder &FR); when a compan prepares financial statements on a new 0asis; how man
ears of comparative data are reportedB
a. 3ne
0. Two
c. Three
d. Five
!3. Counter0alancing errors do not include
a. errors that correct themselves in two ears.
0. errors that correct themselves in three ears.
c. an understatement of purchases.
d. an overstatement of unearned revenue.
!4. A compan using a perpetual inventor sstem neglected to record a purchase of
merchandise on account at ear end. This merchandise was omitted from the ear2end
phsical count. :ow will these errors affect assets; lia0ilities; and e$uit at ear end and
net income for the earB
Assets 6ia0ilities E$uit /et &ncome
a. /o effect ,nderstate 3verstate 3verstate.
0. /o effect 3verstate ,nderstate ,nderstate.
c. ,nderstate ,nderstate /o effect /o effect.
d. ,nderstate /o effect ,nderstate ,nderstate.
!!. &f; at the end of a period; a compan erroneousl e+cluded some goods from its ending
inventor and also erroneousl did not record the purchase of these goods in its
accounting records; these errors would cause
a. the ending inventor and retained earnings to 0e understated.
0. the ending inventor; cost of goods sold; and retained earnings to 0e understated.
c. no effect on net income; wor7ing capital; and retained earnings.
d. cost of goods sold and net income to 0e understated.
$ult#ple C>o#ce Anse!sConceptual
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
2". 0 31. c 3". 0 41. a 4". c !1. d
2%. c 32. d 3%. c 42. 0 4%. c !2. 0
2'. 0 33. a 3'. d 43. 0 4'. d !3. 0
2(. 0 34. c 3(. d 44. c 4(. c !4. c
3*. 0 3!. 0 4*. c 4!. a !*. a !!. c
22 - 62
$ULTIPLE CHOICECo(putat#onal
!". 3n 5anuar 1; 2**(; /eal Corporation ac$uired e$uipment at a cost of K!4*;***. /eal
adopted the sum2of2the2earsA2digits method of depreciation for this e$uipment and had
0een recording depreciation over an estimated life of eight ears; with no residual value.
At the 0eginning of 2*12; a decision was made to change to the straight2line method of
depreciation for this e$uipment. The depreciation e+pense for 2*12 would 0e
a. K2';12!.
0. K4!;***.
c. K"%;!**.
d. K1*';***.
!%. 3n 5anuar 1; 2**(; Lnapp Corporation ac$uired machiner at a cost of K2!*;***. Lnapp
adopted the dou0le2declining 0alance method of depreciation for this machiner and had
0een recording depreciation over an estimated useful life of ten ears; with no residual
value. At the 0eginning of 2*12; a decision was made to change to the straight2line
method of depreciation for the machiner. The depreciation e+pense for 2*12 would 0e
a. K12;'**.
0. K1';2'".
c. K2!;***.
d. K3!;%14.
!'. 3n 5anuar 1; 2**(; .iper Co.; purchased a machine Eits onl deprecia0le assetF for
K3**;***. The machine has a five2ear life; and no salvage value. )um2of2the2earsC2
digits depreciation has 0een used for financial statement reporting and the elective
straight2line method for income ta+ reporting. Effective 5anuar 1; 2*12; for financial
statement reporting; .iper decided to change to the straight2line method for depreciation
of the machine. Assume that .iper can <ustif the change.
.iperCs income 0efore depreciation; 0efore income ta+es; and 0efore the cumulative effect
of the accounting change Eif anF; for the ear ended #ecem0er 31; 2*12; is K2!*;***.
The income ta+ rate for 2*12; as well as for the ears 2**(22*11; is 3*M. @hat amount
should .iper report as net income for the ear ended #ecem0er 31; 2*12B
a. K"*;***
0. K(1;***
c. K1!4;***
d. K1%!;***
,se the following information for $uestions !( and "*.
Nentura Corporation purchased machiner on 5anuar 1; 2**( for K"3*;***. The compan used
the sum2of2the2earsA2digits method and no salvage value to depreciate the asset for the first two
ears of its estimated si+2ear life. &n 2*1*; Nentura changed to the straight2line depreciation
method for this asset. The following facts pertain=
2**( 2*1*
)traight2line K1*!;*** K1*!;***
)um2of2the2earsA2digits 1'*;*** 1!*;***
22 - 61
!(. Nentura is su0<ect to a 4*M ta+ rate. The cumulative effect of this accounting change on
0eginning retained earnings is
a. K13!;***.
0. K12*;***.
c. K%2;***.
d. K*.
"*. The amount that Nentura should report for depreciation e+pense on its 2*11 income
statement is
a. K12*;***.
0. K1*!;***.
c. K%!;***.
d. none of the a0ove.
"1. #uring 2*11; a construction compan changed from the cost2recover method to the
percentage2of2completion method for accounting purposes 0ut not for ta+ purposes. -ross
profit figures under 0oth methods for the past three ears appear 0elow=
Cost2Recover .ercentage2of2Completion
2**( K 4%!;*** K '**;***
2*1* "2!;*** (!*;***
2*11 %**;*** 1;*!*;***
K1;'**;*** K2;'**;***
Assuming an income ta+ rate of 4*M for all ears; the affect of this accounting change on
prior periods should 0e reported 0 a credit of
a. K"**;*** on the 2*11 income statement.
0. K3(*;*** on the 2*11 income statement.
c. K"**;*** on the 2*11 retained earnings statement.
d. K3(*;*** on the 2*11 retained earnings statement.
,se the following information for $uestions "2 and "3.
3n 5anuar 1; 2**(; /o0el Corporation ac$uired machiner at a cost of K"**;***. /o0el adopted
the straight2line method of depreciation for this machine and had 0een recording depreciation
over an estimated life of ten ears; with no residual value. At the 0eginning of 2*12; a decision
was made to change to the dou0le2declining 0alance method of depreciation for this machine.
"2. Assuming a 3*M ta+ rate; the cumulative effect of this accounting change on 0eginning
retained earnings; is
a. K"%;2**.
0. K*.
c. K%';("*.
d. K112;'**.
"3. The amount that /o0el should record as depreciation e+pense for 2*12 is
a. K"*;***.
0. K'4;***.
c. K12*;***.
d. none of the a0ove.
22 - 67
"4. 3n #ecem0er 31; 2*11 #ean Compan changed its method of accounting for inventor
from the average cost method to the F&F3 method. This change caused the 2*11
0eginning inventor to increase 0 K42*;***. The cumulative effect of this accounting
change to 0e reported for the ear ended 12H31H11; assuming a 4*M ta+ rate; is
a. K42*;***.
0. K2!2;***.
c. K1"';***.
d. K*.
"!. )un construction compan decided at the 0eginning of 2*12 to change from the cost2
recover method to the percentage2of2completion method for financial reporting purposes.
The compan will continue to use the cost2recover method for ta+ purposes.For ears
prior to 2*12; preta+ income under the two methods was as follows= percentage2of2
completion O12*;***; and cost2recover O'*;***. The ta+ rate is 3!M. sunAs 2*12 <ournal
entr to record the change in accounting polic will include=
a. a de0it to Retained Earnings for O4*;***.
0. a credit to Construction in .rocess for O4*;***.
c. a de0it to #eferred Ta+ Asset for O14;***.
d. a credit to deferred Ta+ 6ia0ilit for O14;***
"". 5aco0; &nc.; changed from the average cost to the F&F3 cost flow assumption in 2*12. the
increase in the prior ear4s income 0efore ta+es is P1;1**;***. The ta+ rate is 3!M.
5aco0As 2*12 <ournal entr to record the change in accounting polic will include.
a. a de0it to Retained Earnings for P1;1**;***.
0. a credit to Retained Earnings for P1;1**;***.
c. a de0it to &nventor for P%1!;***.
d. a credit to deferred Ta+ 6ia0ilit for P3'!;***
"%. #etmer Constuction Compan decided at the 0eginning of 2*12 to change from the cost2
recover method to the percentage2of2completion method for financial reporting purposes.
The compan will continue to use the cost2recover method for ta+ purposes. For ears
prior to 2*12; preta+ income under the two methods was as follows= percentage2of2
completion O144;***; and cost2recover O114;***. The ta+ rate is 3!M. #etmer has a
profit2sharing plan; which pas all emploees a 0onus at ear2end 0ased on 1.!M of
preta+ income. @hat is the amount of the indirect effect of #etmerAs change in accounting
polic that will 0e reported in the 2*12 income statement; assuming that the profit2sharing
contract e+plicitl re$uires ad<ustment for changes in income num0ersB
a. O2;1"*
0. O1;%1*
c. O 4!*
d. O (!4
"'. :ein8 Compan 0egan operations on 5anuar 1; 2*1*; and uses the F&F3 method in
costing its raw material inventor. 9anagement is contemplating a change to the average
cost method and is interested in determining what effect such a change will have on net
income. Accordingl; the following information has 0een developed=
Final &nventor 2*1* 2*11
F&F3 K"4*;*** K %12;***
6&F3 !"*;*** "3";***
/et &ncome Ecomputed under the F&F3 methodF ('*;*** 1;*'*;***
22 - 68
1ased on the a0ove information; a change to the average cost method in 2*11 would
result in net income for 2*11 of
a. K1;12*;***.
0. K1;*'*;***.
c. K1;**4;***.
d. K1;***;***.
"(. 6anier Compan 0egan operations on 5anuar 1; 2*1*; and uses the F&F3 method in
costing its raw material inventor. 9anagement is contemplating a change to the average
cost method and is interested in determining what effect such a change will have on net
income. Accordingl; the following information has 0een developed=
Final &nventor 2*1* 2*11
F&F3 K32*;*** K3"*;***
Average cost 24*;*** 3**;***
/et &ncome Ecomputed under the F&F3 methodF !**;*** "**;***
1ased upon the a0ove information; a change to the average cost method in 2*11 would
result in net income for 2*11 of
a. K!4*;***.
0. K"**;***.
c. K"2*;***.
d. K""*;***.
%*. E$uipment was purchased at the 0eginning of 2**( for K2*4;***. At the time of its
purchase; the e$uipment was estimated to have a useful life of si+ ears and a residual
value of K24;***. The e$uipment was depreciated using the straight2line method of
depreciation through 2*11. At the 0eginning of 2*12; the estimate of useful life was
revised to a total life of eight ears and the e+pected residual value was changed to
K1!;***. The amount to 0e recorded for depreciation for 2*12; reflecting these changes in
estimates; is
a. K12;3%!.
0. K1(;'**.
c. K22;'**.
d. K23;"2!.
,se the following information for $uestions %1 and %2.
)wift Compan purchased a machine on 5anuar 1; 2**(; for K3**;***. At the date of
ac$uisition; the machine had an estimated useful life of si+ ears with no residual value. The
machine is 0eing depreciated on a straight2line 0asis. 3n 5anuar 1; 2*12; )wift determined; as a
result of additional information; that the machine had an estimated useful life of eight ears from
the date of ac$uisition with no residual value. An accounting change was made in 2*12 to reflect
this additional information.
%1. Assume that the direct effects of this change are limited to the effect on depreciation and
the related ta+ provision; and that the income ta+ rate was 3*M in 2**(; 2*1*; 2*11; and
2*12. @hat should 0e reported in )wiftCs income statement for the ear ended #ecem0er
31; 2*12; as the cumulative effect on prior ears of changing the estimated useful life of
the machineB
a. K*
0. K2*;***
c. K3*;***
d. K1*!;***
22 - 69
%2. @hat is the amount of depreciation e+pense on this machine that should 0e charged in
)wiftCs income statement for the ear ended #ecem0er 31; 2*12B
a. K3*;***
0. K3%;!**
c. K"*;***
d. K%!;***
%3. 1rittan Compan purchased a computer sstem for O(4;2!* on 5anuar 1; 2*11. it was
depreciated 0ased on a %2ear life and an O1(;*** residual value.3n 5anuar
1;2*13;1rittan revised these estimates to a total useful life of 4 ears and a residual
value of O1*;***.1rittanAs entr to record 2*13 depreciation e+pense will inclide de0it to
#epreciation E+pense for=
a. O%!;2!*
0. O%2;%!*
c. O1(;***
d. O31;3%!
,se the following information for $uestions %4 and %!.
&n 5anuar 2*12; 9arcus 6td. has installation costs of O(;*** on new machiner that were
charged to Repair E+pense. 3ther costs of this machiner of O3*;*** were correctl recorded
and have 0een depreciated using the straight2line method with an estimated life of 1* ears and
no residual value. At #ecem0er 31;2*12; 9arcus decides that the machiner ha a remaining
useful life of 1! ears; starting with 5anuar 1;2*12
%4. &f the 0oo7 have not 0een closed for 2*12 and depreciation e+pense has not et 0een
recorded for 2*12; the entr that marcus ma7es in 2*12 to correct for the error of
e+pensing installation costs on the machiner ac$uired in 5anuar; 2*11; will include=
a. a de0it to Retained Earnings for O(;***
0. a credit to Retained Earnings for O(;***.
c. a de0it to Retained Earnings for O';1**.
d. a credit to Retained Earnings for O';1**.
%!. &f the 0oo7 have not 0een closed for 2*12 and depreciation e+pense has not et 0een
recorded for 2*12; the entr that marcus ma7es in 2*12 to record depreciation on the
machiner ac$uired in 5anuar; 2*11; will include=
a. a de0it to #epreciation E+pense for O2;"**
0. a credit to Accumulated #epreciation for O(**.
c. a de0it to #epreciation E+pense for O3;(**
d. a credit to #epreciation E+pense for O2;34*
%". &n 2*12; Lrasn Corporation discovered that e$uipment purchased on 5anuar 1;2*1*; for
P!2;!** was e+pensed at that time. The e$uipment should have 0een depreciated over !
ears; with no residual value. The effective ta+ rate is 3*M.LrasnAs 2*12 <ournal entr to
correct the error would include
a. a credit to E$uipment for P!2;!**
0. a de0it to Retained Earnings for P!2;!**.
c. a credit to Retained Earnings for P22;*!*.
d. a credit to #eferred Ta+ 6ia0ilit for P1!;%!*.
22 - 6;
,se the following information for $uestions %% and %'.
Armstrong &nc. is a calendar2ear corporation. &ts financial statements for the ears ended
12H31H1* and 12H31H11 contained the following errors=
2*1* 2*11
Ending inventor K1!;*** overstatement K24;*** understatement
#epreciation e+pense ";*** understatement 12;*** overstatement
%%. Assume that the 2*1* errors were not corrected and that no errors occurred in 2**(. 1
what amount will 2*1* income 0efore income ta+es 0e overstated or understatedB
a. K21;*** overstatement
0. K(;*** overstatement
c. K21;*** understatement
d. K(;*** understatement
%'. Assume that no correcting entries were made at 12H31H1*; or 12H31H11. &gnoring income
ta+es; 0 how much will retained earnings at 12H31H11 0e overstated or understatedB
a. K24;*** overstatement
0. K21;*** overstatement
c. K3*;*** understatement
d. K(;*** understatement
,se the following information for $uestions %( through '1.
6angle CompanCs #ecem0er 31 ear2end financial statements contained the following errors=
#ec. 31; 2*1* #ec. 31; 2*11
Ending inventor K%;!** understated K11;*** overstated
#epreciation e+pense 2;*** understated
An insurance premium of K1';*** was prepaid in 2*1* covering the ears 2*1*; 2*11; and 2*12.
The prepament was recorded with a de0it to insurance e+pense. &n addition; on #ecem0er 31;
2*11; full depreciated machiner was sold for K(;!** cash; 0ut the sale was not recorded until
2*12. There were no other errors during 2*11 or 2*12 and no corrections have 0een made for
an of the errors. &gnore income ta+ considerations.
%(. @hat is the total net effect of the errors on 6angleCs 2*11 net incomeB
a. /et income understated 0 K14;!**.
0. /et income overstated 0 K%;!**.
c. /et income overstated 0 K13;***.
d. /et income overstated 0 K1!;***.
'*. @hat is the total net effect of the errors on the amount of 6angleCs wor7ing capital at
#ecem0er 31; 2*11B
a. @or7ing capital overstated 0 K!;***
0. @or7ing capital overstated 0 K1;!**
c. @or7ing capital understated 0 K4;!**
d. @or7ing capital understated 0 K12;***
22 - 6:
'1. @hat is the total effect of the errors on the 0alance of 6angleCs retained earnings at
#ecem0er 31; 2*11B
a. Retained earnings understated 0 K1*;***
0. Retained earnings understated 0 K4;!**
c. Retained earnings understated 0 K2;!**
d. Retained earnings overstated 0 K3;!**
'2. Accrued salaries paa0le of K!1;*** were not recorded at #ecem0er 31; 2*1*. 3ffice
supplies on hand of K24;*** at #ecem0er 31; 2*11 were erroneousl treated as e+pense
instead of supplies inventor. /either of these errors was discovered nor corrected. The
effect of these two errors would cause
a. 2*11 net income to 0e understated K%!;*** and #ecem0er 31; 2*11 retained
earnings to 0e understated K24;***.
0. 2*1* net income and #ecem0er 31; 2*1* retained earnings to 0e understated
K!1;*** each.
c. 2*1* net income to 0e overstated K2%;*** and 2*11 net income to 0e understated
K24;***.
d. 2*11 net income and #ecem0er 31; 2*11 retained earnings to 0e understated
K24;*** each.
,se the following information for $uestions '3 through '!.
1ishop Co. 0egan operations on 5anuar 1; 2*1*. Financial statements for 2*1* and 2*11 con2
tained the following errors=
#ec. 31; 2*1* #ec. 31; 2*11
Ending inventor K132;*** too high K1!";*** too low
#epreciation e+pense '4;*** too high ?
&nsurance e+pense "*;*** too low "*;*** too high
.repaid insurance "*;*** too high ?
&n addition; on #ecem0er 31; 2*11 full depreciated e$uipment was sold for K2';'**; 0ut the sale
was not recorded until 2*12. /o corrections have 0een made for an of the errors. &gnore income
ta+ considerations.
'3. The total effect of the errors on 1ishopCs 2*11 net income is
a. understated 0 K3%";'**.
0. understated 0 K244;'**.
c. overstated 0 K11!;2**.
d. overstated 0 K1((;2**.
'4. The total effect of the errors on the 0alance of 1ishopCs retained earnings at #ecem0er
31; 2*11 is understated 0
a. K32';'**.
0. K2"';'**.
c. K1'4;'**.
d. K13";'**.
'!. The total effect of the errors on the amount of 1ishopCs wor7ing capital at #ecem0er 31;
2*11 is understated 0
a. K4**;'**.
0. K31";'**.
c. K1'4;'**.
d. K124;'**.
22 - 6<
,se the following information for $uestions '" and '%.
6in7 Co. purchased machiner that cost K'1*;*** on 5anuar 4; 2**(. The entire cost was
recorded as an e+pense. The machiner has a nine2ear life and a K!4;*** residual value. The
error was discovered on #ecem0er 2*; 2*11. &gnore income ta+ considerations.
'". 6in7Cs income statement for the ear ended #ecem0er 31; 2*11; should show the
cumulative effect of this error in the amount of
a. K%2";***.
0. K"42;***.
c. K!!';***.
d. K*.
'%. 1efore the correction was made; and 0efore the 0oo7s were closed on #ecem0er 31;
2*11; retained earnings was understated 0
a. K'1*;***.
0. K%2";***.
c. K"42;***.
d. K!!';***.
,se the following information for $uestions '' and '(.
Ernst Compan purchased e$uipment that cost K%!*;*** on 5anuar 1; 2*1*. The entire cost
was recorded as an e+pense. The e$uipment had a nine2ear life and a K3*;*** residual value.
Ernst uses the straight2line method to account for depreciation e+pense. The error was
discovered on #ecem0er 1*; 2*12. Ernst is su0<ect to a 4*M ta+ rate.
''. ErnstAs net income for the ear ended #ecem0er 31; 2*1*; was understated 0
a. K4*2;***.
0. K4!*;***.
c. K"%*;***.
d. K%!*;***.
'(. 1efore the correction was made and 0efore the 0oo7s were closed on #ecem0er 31;
2*12; retained earnings was understated 0
a. K332;***.
0. K33";***.
c. K3!4;***.
d. K4!*;***.
$ult#ple C>o#ce Anse!sCo(putat#onal
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
!". 0 "1. d "". d %1. a %". c '1. c '". d
!%. 0 "2. 0 "%. c %2. a %%. a '2. a '%. c
!'. c "3. c "'. c %3. d %'. c '3. a ''. a
!(. d "4. 0 "(. a %4. d %(. d '4. 0 '(. c
"*. c "!. d %*. 0 %!. d '*. c '!. c
22 - 2=
$ULTIPLE CHOICECPA A)apte)
(*. @hich of the following should 0e reported as a prior period ad<ustmentB
Change in Change from
Estimated 6ives ,naccepted .olic
of #eprecia0le Assets to Accepted .olic
a. Ies Ies
0. /o Ies
c. Ies /o
d. /o /o
(1. 3n #ecem0er 31; 2*11; -rantham; &nc. appropriatel changed its inventor valuation
method to F&F3 cost from average cost for financial statement and income ta+ purposes.
The change will result in a K1;!**;*** increase in the 0eginning inventor at 5anuar 1;
2*11. Assume a 3*M income ta+ rate. The cumulative effect of this accounting change on
0eginning retained earnings is
a. K*.
0. K4!*;***.
c. K1;*!*;***.
d. K1;!**;***.
(2. 3n 5anuar 1; 2*11; Frost Corp. changed its inventor method to F&F3 from average cost
for 0oth financial and income ta+ reporting purposes. The change resulted in an K'**;***
increase in the 5anuar 1; 2*11 inventor. Assume that the income ta+ rate for all ears is
3*M. The cumulative effect of the accounting change should 0e reported 0 Frost in its
2*11
a. retained earnings statement as a K!"*;*** addition to the 0eginning 0alance.
0. income statement as a K!"*;*** cumulative effect of accounting change.
c. retained earnings statement as an K'**;*** addition to the 0eginning 0alance.
d. income statement as an K'**;*** cumulative effect of accounting change.
(3. 3n 5anuar 1; 2**'; 6a7e Co. purchased a machine for K%(2;*** and depreciated it 0
the straight2line method using an estimated useful life of eight ears with no residual
value. 3n 5anuar 1; 2*11; 6a7e determined that the machine had a useful life of si+
ears from the date of ac$uisition and will have a residual value of K%2;***. An
accounting change was made in 2*11 to reflect these additional data. The accumulated
depreciation for this machine should have a 0alance at #ecem0er 31; 2*11 of
a. K43';***.
0. K4"2;***.
c. K4'*;***.
d. K!2';***.
(4. 3n 5anuar 1; 2**(; :ess Co. purchased a patent for K!(!;***. The patent is 0eing
amorti8ed over its remaining legal life of 1! ears e+piring on 5anuar 1; 2*24. #uring
2*12; :ess determined that the economic 0enefits of the patent would not last longer than
ten ears from the date of ac$uisition. @hat amount should 0e reported in the statement
of financial position for the patent; net of accumulated amorti8ation; at #ecem0er 31;
2*12B
a. K3!%;***
0. K4*';***
c. K42*;***
d. K43";3%!
22 - 26
(!. #uring 2*1*; a te+t0oo7 written 0 9ercer Co. personnel was sold to Roar7 .u0lishing;
&nc.; for roalties of 1*M on sales. Roalties are receiva0le semiannuall on 9arch 31; for
sales in 5ul through #ecem0er of the prior ear; and on )eptem0er 3*; for sales in
5anuar through 5une of the same ear.
Roalt income of K1*';*** was accrued at 12H31H1* for the period 5ul2#ecem0er
2*1*.
Roalt income of K12*;*** was received on 3H31H11; and K1!";*** on (H3*H11.
9ercer learned from Roar7 that sales su0<ect to roalt were estimated at K1;"2*;***
for the last half of 2*11.
&n its income statement for 2*11; 9ercer should report roalt income at
a. K2%";***.
0. K2'';***.
c. K31';***.
d. K33*;***.
(". 3n 5anuar 1; 2*1*; 5ani7 Corp. ac$uired a machine at a cost of K!**;***. &t is to 0e
depreciated on the straight2line method over a five2ear period with no residual value.
1ecause of a 0oo77eeping error; no depreciation was recogni8ed in 5ani7Cs 2*1* financial
statements. The oversight was discovered during the preparation of 5ani7Cs 2*11 financial
statements. #epreciation e+pense on this machine for 2*11 should 0e
a. K*.
0. K1**;***.
c. K12!;***.
d. K2**;***.
(%. 3n #ecem0er 31; 2*11; special insurance costs; incurred 0ut unpaid; were not recorded.
&f these insurance costs were related to wor7 in process; what is the effect of the omission
on accrued lia0ilities and retained earnings in the #ecem0er 31; 2*11 statement of
financial positionB
Accrued 6ia0ilities Retained Earnings
a. /o effect /o effect
0. /o effect 3verstated
c. ,nderstated /o effect
d. ,nderstated 3verstated
('. 1lac7; &nc. is a calendar2ear corporation whose financial statements for 2*1* and 2*11
included errors as follows=
Iear Ending &nventor #epreciation E+pense
2*1* K1"2;*** overstated K13!;*** overstated
2*11 !4;*** understated 4!;*** understated
Assume that purchases were recorded correctl and that no correcting entries were made
at #ecem0er 31; 2*1*; or at #ecem0er 31; 2*11. &gnoring income ta+es; 0 how much
should 1lac7Cs retained earnings 0e retroactivel ad<usted at 5anuar 1; 2*12B
a. K144;*** increase
0. K3";*** increase
c. K1';*** decrease
d. K(;*** increase
22 - 22
$ult#ple C>o#ce Anse!sCPA A)apte)
Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"
(*. 0 (2. a (4. 0 (". 0 ('. a
(1. c (3. a (!. d (%. c
DERI0ATIONS Co(putat#onal
No" Anse! De!#5at#on
!". 0 QE' R % R "F 36] $540,000 = $ 315,000 (AD)
($540,000 - $ 315,000) 5 = $ 45,000.
!%. 0 SK2!*;*** T QEK2!*;*** .2F R EK2**;*** .2F R EK1"*;*** .2FUV 7 = $18,286.
!'. c QE!H1! R 4H1! R 3H1!F K3**;***U > K24*;*** EA#F
EK3**;*** T K24*;***F > K"*;*** E1NF
QK2!*;*** T EK"*;*** W 2FU X E1 T .3F > K1!4;***.
!(. d K*; /o cumulative effectG handle prospectivel.
"*. c QK"3*;*** T EK1'*;*** R K1!*;***FU W 4 > K%!;***.
"1. d QEK'**;*** R K(!*;***F T EK4%!;*** R K"2!;***FU X E1 T .4*F > K3(*;***.
"2. 0 K*; /o cumulative effectG handle prospectivel.
"3. c SEK"**;*** T QEK"**;*** W 1*F X 3UV W % X 2 > K12*;***.
"4. 0 K42*;*** X E1 T .4*F > K2!2;***.
"!. d QEO12*;*** T O'*;***F X .3!U > O14;*** cr
"". d P1;1**;*** X .3! > P3'!;***
"%. c EO144;*** T O114;***F X .*1! > O4!*
"'. c K1;*'*;*** T EK%12;*** T K"3";***F > K1;**4;***.
"(. a K"**;*** T EK3"*;*** T K3**;***F > K!4*;***.
%*. 0 K2*4;*** T SQEK2*4;*** T K24;***F W "U X 3V > K114;***
EK114;*** T K1!;***F W E' T 3F > K1(;'**.
%1. a K*; no cumulative effect; handle prospectivel Echange in estimateF.
%2. a EK3**;*** W "F X 3 > K1!*;***
K1!*;*** W ! > K3*;***.
%3. d QEO(4;2!* T O1(;***F W %U X 2 > O21;!**
QEO(4;2!* T O21;!**F T O1*;***U W E4 T 2F > O31;3%!
22 - 21
DERI0ATIONS Co(putat#onal ,cont"-
%4. d QO(;*** T EO(;*** W 1*FU > O';1** cr
%!. d O3(;*** T EO3(;*** W 1*FU > O3!;1**
O3!;1** W 1! > O2;34*
%". c QP!2;!** T EP!2;!** X 2H!FU > P31;!**
QP31;!** X E1 T .3*FU > P22;*!*
%%. a K1!;*** R K";*** > K21;*** overstatement.
%'. c K24;*** R K";*** > K3*;*** understatement.
%(. d K%;!** EoF R K11;*** EoF R K";*** EoF T K(;!** EuF > K1!;*** EoF.
'*. c K11;*** EoF T K";*** EuF T K(;!** EuF > K4;!** EuF.
'1. c K2;*** EoF R K11;*** EoF T K";*** EuF T K(;!** EuF > K2;!** EuF.
'2. a 2*11 /& > K!1;*** EuF R K24;*** EuF > K%!;*** EuF.
2*11 RE > K24;*** EuF QThe 2*1* K!1;*** EoF is offset 0 2*11 K!1;*** EuFU.
'3. a K132;*** EuF R K1!";*** EuF R K"*;*** EuF R K2';'** EuF > K3%";'** EuF.
'4. 0 K1!";*** EuF R K'4;*** EuF T K"*;*** EoF R K"*;*** EuF R K2';'** EuF
> K2"';'** EuF.
'!. c K1!";*** EuF R K2';'** EuF > K1'4;'** EuF.
'". d CE > K*; correction of error.
'%. c K'1*;*** T
$810, 000 $54, 000
2
9
1 _
1
, ]
> K"42;***
''. a EK%!*;*** T QEK%!*;*** T K3*;***F W (UF X E1 T .4*F > K4*2;***.
'(. c K%!*;*** T QEK%!*;*** T K3*;***F W ( X 2U > K!(*;***.
K!(*;*** X E1 T .4*F > K3!4;***.
DERI0ATIONS CPA A)apte)
(*. 0 Conceptual.
(1. c K1;!**;*** X E1 T .3F > K1;*!*;***.
(2. a K'**;*** X E1 T .3F > K!"*;***.
(3. a K%(2;*** X 3H' > K2(%;***
K2(%;*** R QEK%(2;*** T K2(%;*** T K%2;***F X 1H3U > K43';***.
22 - 27
DERI0ATIONS CPA A)apte) ,cont"-
(4. 0 K!(!;*** X 3H1! > K11(;***
K!(!;*** T K11(;*** T QEK!(!;*** T K11(;***F X 1H%U > K4*';***.
(!. d EK12*;*** T K1*';***F R K1!";*** R EK1;"2*;*** X .1*F > K33*;***.
(". 0 K!**;*** W ! > K1**;***.
(%. c Conceptual.
('. a K!4;*** EuF R K13!;*** EuF T K4!;*** EoF > K144;*** EuF.
E.ERCISES
E?" 22-<<?9atching accounting changes to situations.
The three tpes of accounting changes; including error correction; are=
Code
a. Change in accounting polic.
0. Change in accounting estimate.
c. Error correction.
Inst!uct#ons
Following are a series of situations. Iou are to enter a code letter to the left to indicate the tpe of
change.
YYYYYY 1. Change due to understatement of inventor.
YYYYYY 2. Change due to charging a new asset directl to an e+pense account.
YYYYYY 3. Change from e+pensing to capitali8ing certain costs; due to a change in periods
0enefited.
YYYYYY 4. Change from F&F3 to average2cost inventor procedures.
YYYYYY !. Change due to failure to recogni8e an accrued EuncollectedF revenue.
YYYYYY ". Change in amorti8ation period for an intangi0le asset.
YYYYYY %. Change in e+pected recover of an account receiva0le.
YYYYYY '. Change in the loss rate on warrant costs.
YYYYYY (. Change due to failure to recogni8e and accrue income.
YYYYYY1*. Change in residual value of a deprecia0le plant asset.
YYYYYY11. Change from an unaccepta0le to an accepta0le accounting polic.
YYYYYY12. Change in 0oth estimate and accepta0le accounting policies.
YYYYYY13. Change due to failure to recogni8e a prepaid asset.
22 - 28
E?" 22-<< Econt.F
YYYYYY14. Change from straight2line to sum2of2the2earsC2digits method of depreciation.
YYYYYY1!. Change in life of a deprecia0le plant asset.
YYYYYY1". Change from one accepta0le polic to another accepta0le polic.
Solut#on 22-<<
1. c 4. a %. 0 1*. 0 13. c 1". a
2. c !. c '. 0 11. c 14. 0
3. 0 ". 0 (. d 12. 0 1!. 0
E?" 22-6==?:ow changes or corrections are recogni8ed.
For each of the following items; indicate the tpe of accounting change and how each is
recogni8ed in the accounting records in the current ear.
EaF Change from straight2line method of depreciation to sum2of2the2earsC2digits
E0F Change from the cash 0asis to accrual 0asis of accounting
EcF Change from cost2recover to percentage2of2completion method on construction contracts.
EdF Change due to failure to record depreciation in a previous period
EeF Change in the reali8a0ilit of certain receiva0les
EfF Change from average cost to F&F3 method for inventor valuation purposes
Solut#on 22-6==
EaF Change in accounting estimateG currentl and prospectivel.
E0F Correction of an errorG restatement of financial statements of all prior periods presentedG
ad<ustment of 0eginning retained earnings of the current period.
EcF Change in accounting policG retrospective restatement of all affected prior financial
statementsG ad<ustment of 0eginning retained earnings of the current period.
EdF Correction of an errorG restatement of financial statements of the period affectedG prior period
ad<ustmentG ad<ustment of 0eginning retained earnings of the first period after the error.
EeF Change in accounting estimateG currentl and prospectivel.
EfF Change in accounting policG retrospective restatement of all affected prior financial
statementsG ad<ustment of 0eginning retained earnings of the current period.
22 - 29
E?" 22-6=6?9atching disclosures to situations.
&n the 0lan7 to the left of each $uestion; fill in the letter from the following list which 0est descri0es
the presentation of the item on the financial statements of :elton Corporation for 2*11.
a. Change in estimate
0. .rior period ad<ustment Enot due to change in principleF
c. Retrospective tpe accounting change with note disclosure
d. /one of the a0ove
YYYYY 1. &n 2*11; the compan changed its method of recogni8ing income from the cost2
recover method to the percentage2of2completion method.
YYYYY 2. At the end of 2*11; an audit revealed that the corporationCs allowance for dou0tful
accounts was too large and should 0e reduced to 2M. @hen the audit was made in
2*1*; the allowance seemed appropriate.
YYYYY 3. #epreciation on a truc7; ac$uired in 2**'; was understated 0ecause the useful life
had 0een overestimated. The understatement had 0een made in order to show
higher net income in 2**( and 2*1*.
YYYYY 4. The compan switched from an average2cost to a F&F3 inventor valuation method
during the current ear.
YYYYY !. &n the current ear; the compan decides to change from e+pensing certain costs to
capitali8ing these costs; due to a change in the period 0enefited.
YYYYY ". #uring 2*11; a long2term 0ond with a carring value of K3;"**;*** was retired at a
cost of K4;1**;***.
YYYYY %. After negotiations with the ta+ing authorit; income ta+es for 2**( were esta0lished
at K42;(**. The were originall estimated to 0e K2';"**.
YYYYY '. &n 2*11; the compan incurred interest e+pense of K2(;*** on a 2*2ear 0ond issue.
YYYYY (. &n computing the depreciation in 2**( for e$uipment; an error was made which
overstated income in that ear K%!;***. The error was discovered in 2*11.
YYYYY 1*. &n 2*11; the compan changed its method of depreciating plant assets from the
dou0le2declining 0alance method to the straight2line method.
Solut#on 22-6=6
1. c 3. 0 !. a %. a (. 0
2. a 4. c ". d '. d 1*. a
22 - 2;
E?" 22-6=2?Change in accounting polic.
&n 2*12; Fischer Corporation changed its method of inventor pricing from average cost to F&F3.
/et income computed on an average cost as compared to a F&F3 0asis for the four ears
involved is= E&gnore income ta+es.F
ANERA-E F&F3
2**( K%';2** K'3;%**
2*1* '4;!** '';1**
2*11 '%;*** (1;4**
2*12 (2;!** (4;%**
Inst!uct#ons
EaF &ndicate the net income that would 0e shown on comparative financial statements issued at
12H31H12 for each of the four ears; assuming that the compan changed to the F&F3
method in 2*12.
E0F Assuming that the compan switched from the F&F3 to the average cost method; what
would 0e the net income reported on comparative financial statements issued at 12H31H12
for 2**(; 2*1*; and 2*11B
Solut#on 22-6=2
EaF 2**(; K'3;%**G 2*1*; K'';1**G 2*11; K(1;4**G 2*12; K(4;%**; ERetrospective restatementF.
E0F 2**(; K%';2**G 2*1*; K'4;!**G 2*11; K'%;***G 2*12; K(2;!**; ERetrospective restatementF.
E?" 22-6=1?Change in estimate and correction of errors.
#iscuss the accounting procedures for and illustrate the following=
EaF Change in estimate
E0F Correction of an error
Solut#on 22-6=1
EaF Accounting estimates will change as new events occur; as more e+perience is ac$uired; or
new information is o0tained. E+amples of changes in estimate are= EaF collecti0ilit of
receiva0les; E0F inventor o0solescence; EcF estimated lives or residual values; and EdF
warrant costs. Changes in estimates are handled prospectivelG that is; in current and
future periods. /o restatement of previous financial statements is made.
E0F E+amples of accounting errors are= EaF a change from an accounting polic that is not
generall accepted to an accounting polic that is accepta0le; E0F mathematical mista7es; EcF
changes in estimates that occur 0ecause the estimates are not made in good faith; EdF an
oversight; EeF a misuse of facts; and EfF misclassification of an e+pense as an asset or vice
versa. Corrections of errors are recorded in the ear discovered; are treated as prior period
ad<ustments; and the 0eginning 0alance of retained earnings is ad<usted. .rior financial
statements are restated.
22 - 2:
E?" 22-6=7?Changes in depreciation methods; estimates.
3n 5anuar 1; 2**%; .owell Compan purchased a 0uilding and machiner that have the
following useful lives; residual value; and costs.
1uilding; 2!2ear estimated useful life; K4;***;*** cost; K4**;*** residual value
9achiner; 1*2ear estimated useful life; K!**;*** cost; no residual value
The 0uilding has 0een depreciated under the straight2line method through 2*11. &n 2*12; the
compan decided to switch to the dou0le2declining 0alance method of depreciation for the
0uilding. .owell also decided to change the total useful life of the machiner to ' ears; with a
residual value of K2!;*** at the end of that time. The machiner is depreciated using the straight2
line method.
Inst!uct#ons
EaF .repare the <ournal entr necessar to record the depreciation e+pense on the 0uilding in
2*12.
E0F Compute depreciation e+pense on the machiner for 2*12.
Solut#on 22-6=7
Computation of 2*12 depreciation e+pense on the 0uilding=
Cost of 0uilding K4;***;***
Accumulated depreciation
QEK4;***;*** T K4**;***F W 2!U X ! ears %2*;***
1oo7 value; 1H1H12 K3;2'*;***
2*12 #epreciation e+pense= K3;2'*;*** X 1*M > K32';***
#epreciation E+pense..................................................................... 32';***
Accumulated #epreciation?1uilding...................................... 32';***
Computation of 2*12 depreciation e+pense on machiner=
Cost of machiner K!**;***
Accumulated depreciation
QEK!**;*** T K*F W 1*U X ! ears 2!*;***
1oo7 value; 1H1H12 K2!*;***
2*12 #epreciation e+pense= EK2!*;*** T K2!;***F W E' T !F > K22!;*** W 3 > K%!;***
E?" 22-6=8?/oncounter0alancing error.
Zuigle Co. 0ought a machine on 5anuar 1; 2**( for K'%!;***. &t had a K%!;*** estimated
residual value and a ten2ear life. An e+pense account was de0ited on the purchase date.
Zuigle uses straight2line depreciation. This was discovered in 2*11.
Inst!uct#ons
.repare the entr or entries related to the machine for 2*11.
22 - 2<
Solut#on 22-6=8
9achine................................................................................................ '%!;***
Retained Earnings..................................................................... %1!;***
Accumulated #epreciation E2 X K'*;***F................................... 1"*;***
#epreciation E+pense........................................................................... '*;***
Accumulated #epreciation......................................................... '*;***
E?" 22-6=9?Effects of errors.
)how how the following independent errors will affect net income on the &ncome )tatement and
the stoc7holdersC e$uit section of the )tatement of Financial .osition E)F.F using the sm0ol R
EplusF for overstated; T EminusF for understated; and * E8eroF for no effect.
2*12 2*13
&ncome )F. &ncome )F.
)tatement )tatement
1. Ending inventor in 2*12 overstated.
2. Failed to accrue 2*12 interest
revenue.
3. A capital e+penditure for factor
e$uipment Euseful life; ! earsF was
erroneousl charged to maintenance
e+pense in 2*12.
2*12 2*13
)tatement )tatement
4. Failed to count office supplies on hand
at 12H31H12. Cash e+penditures have
0een charged to an office supplies
e+pense account during the ear 2*12.
!. Failed to accrue 2*12 wages.
". Ending inventor in 2*12 understated.
%. 3verstated 2*12 depreciation
e+penseG 2*11 e+pense
correct.
22 - 1=
Solut#on 22-6=9
2*12 2*13
)tatement )tatement
1. Ending inventor in 2*12 overstated.
2. Failed to accrue 2*12 interest reve2
nue.
3. A capital e+penditure for factor
e$uipment Euseful life; ! earsF was
erroneousl charged to maintenance
e+pense in 2*12.
4. Failed to count office supplies on hand
at 12H31H12. Cash e+penditures have
0een charged to 3ffice )upplies
E+pense during the ear 2*12.
!. Failed to accrue 2*12 wages.
". Ending inventor in 2*12 understated.
%. 3verstated 2*12 depreciation e+2
penseG 2*13 e+pense correct
E?" 22-6=;?Effects of errors.
5oseph Co. 0egan operations on 5anuar 1; 2*1*. Financial statements for 2*1* and 2*11
contained the following errors=
#ec. 31; 2*1* #ec. 31; 2*11
Ending inventor K(*;*** too high K114;*** too high
#epreciation e+pense 4';*** too low ?
Accumulated depreciation 4';*** too low 4';*** too low
&nsurance e+pense 42;*** too high 42;*** too low
.repaid insurance 3";*** too low
&n addition; on #ecem0er 2"; 2*11 full depreciated e$uipment was sold for K!';***; 0ut the sale
was not recorded until 2*12. /o corrections have 0een made for an of the errors.
Inst!uct#ons
&gnoring income ta+es; show our calculation of the total effect of the errors on 2*11 net income.
22 - 16
R R T *
T T R *
T T R T
T T R *
R R T *
T T R *
T T * T
Solut#on 22-6=;
2*1* ending inventor K E(*;***F
2*11 ending inventor 114;***
&nsurance e+pense 42;***
,nrecorded gain E!';***F
3verstatement of 2*11 income K ';***
/ote= The error in depreciation e+pense has no effect on 2*11 income. The error in prepaid
insurance is related to the error in insurance e+pense.
PRO%LE$S
P!" 22-6=:?Accounting for changes and error corrections.
#7e CompanCs net incomes for the past three ears are presented 0elow=
2*12 2*11 2*1*
K4'*;*** K4!*;*** K3"*;***
#uring the 2*12 ear2end audit; the following items come to our attention=
1. #7e 0ought a truc7 on 5anuar 1; 2**( for K1(";*** with a K1";*** estimated residual value
and a si+2ear life. The compan de0ited an e+pense account and credited cash on the
purchase date for the entire cost of the asset. E)traight2line methodF
2. #uring 2*12; #7e changed from the straight2line method of depreciating its cement plant to
the dou0le2declining 0alance method. The following computations present depreciation on
0oth 0ases=
2*12 2*11 2*1*
)traight2line 3";*** 3";*** 3";***
#ou0le2declining 4";*'* !%;"** %2;***
The net income for 2*12 was computed using the dou0le2declining 0alance method; on the
5anuar 1; 2*12 0oo7 value; over the useful life remaining at that time. The depreciation
recorded in 2*12 was K%2;***.
3. #7e; in reviewing its provision for uncollecti0les during 2*12; has determined that 1M is the
appropriate amount of 0ad de0t e+pense to 0e charged to operations. The compan had used
1H2 of 1M as its rate in 2*11 and 2*12 when the e+pense had 0een K1';*** and K12;***;
respectivel. The compan recorded 0ad de0t e+pense under the new rate for 2*12. The
compan would have recorded K";*** less of 0ad de0t e+pense on #ecem0er 31; 2*12
under the old rate.
Inst!uct#ons
EaF .repare in general <ournal form the entr necessar to correct the 0oo7s for the transaction
in part 1 of this pro0lem; assuming that the 0oo7s have not 0een closed for the current ear.
E0F Compute the net income to 0e reported each ear 2*1* through 2*12.
22 - 12
P!" 22-6=: Econt.F
EcF Assume that the 0eginning retained earnings 0alance Eunad<ustedF for 2*1* was
K1;2"*;***. At what ad<usted amount should this 0eginning retained earnings 0alance for
2*1* 0e stated; assuming that comparative financial statements were preparedB
EdF Assume that the 0eginning retained earnings 0alance Eunad<ustedF for 2*12 is K1;'**;***
and that non2comparative financial statements are prepared. At what ad<usted amount
should this 0eginning retained earnings 0alance 0e statedB
Solut#on 22-6=:
EaF E$uipment.................................................................................... 1(";***
#epreciation E+pense.................................................................. 3*;***
Accumulated #epreciation E4 ears; *(212F...................... 12*;***
Retained Earnings............................................................ 1*";***
E0F 2*1*= K3"*;*** T K3*;*** > K33*;***.
2*11= K4!*;*** T K3*;*** > K42*;***.
2*12= K4'*;*** T K3*;*** > K4!*;***.
EcF Retained earnings Eunad<ustedF K1;2"*;***
Correction of 2**( error EK1(";*** T K3*;***F 1"";***
Retained earnings Ead<ustedF K1;42";***
EdF Retained earnings Eunad<ustedF K1;'**;***
Correction of error EK1(";*** T K(*;***F 1*";***
Retained earnings Ead<ustedF K1;(*";***
P!" 22-6=<?Correction of errors.
Nance Compan reported net incomes for a three2ear period as follows=
2**(; K1'";***G 2*1*; K1'(;***G 2*11; K1'*;***.
&n reviewing the accounts in 2*12 after the 0oo7s for the prior ear have 0een closed; ou find
that the following errors have 0een made in summari8ing activities=
2**( 2*1* 2*11
3verstatement of ending inventor K42;*** K!1;*** K24;***
,nderstatement of accrued advertising e+pense ";"** 12;*** %;2**
Inst!uct#ons
EaF #etermine corrected net incomes for 2**(; 2*1*; and 2*11.
E0F -ive the entr to 0ring the 0oo7s of the compan up to date in 2*12; assuming that the
0oo7s have 0een closed for 2*11.
22 - 11
Solut#on 22-6=<
EaF 2**( 2*1* 2*11
/et income Eunad<ustedF K1'";*** K1'(;*** K1'*;***
3verstatement of ending inventor?2**( E42;***F 42;***
3verstatement of ending inventor?2*1* E!1;***F !1;***
3verstatement of ending inventor?2*11 E24;***F
,nderstatement of accrued advertising e+pense?2**( E";"**F ";"**
,nderstatement of accrued advertising e+pense?2*1* E12;***F 12;***
,nderstatement of accrued advertising e+pense?2*11 E%;2** F
/et income EcorrectedF K13%;4** K1%4;"** K211;'**
E0F Retained Earnings......................................................................... 31;2**
Advertising E+pense............................................................ %;2**
&nventor.............................................................................. 24;***
P!" 22-66=?Error corrections and ad<ustments.
The controller for :ale Corporation is concerned a0out certain 0usiness transactions that the
compan e+perienced during 2*11. The controller; after discussing these matters with various
individuals; has come to ou for advice. The transactions at issue are presented 0elow.
1. The compan has decided to switch from the direct write2off method in accounting for 0ad
de0t e+pense to the percentage2of2sales approach. Assume that :ale Corporation has
recogni8ed 0ad de0t e+pense as the receiva0les have actuall 0ecome uncollecti0le in the
following wa=
2*1* 2*11
From 2*1* sales 31;'** 12;***
From 2*11 sales 4!;***
The controller estimates that an additional K"!;4** will 0e charged off in 2*12= K11;4**
applica0le to 2*1* sales and K!4;*** to 2*11 sales.
2. &nventor has 0een shipped on consignment. These transactions have 0een recorded as
ordinar sales and 0illed as such on account. At #ecem0er 31; 2*11; inventor 0illed and in
the hands of consignees amounted to K4**;***. The percentage mar7up on selling price is
2*M. Assume that consigned inventor is sold the following ear. The compan uses the
perpetual inventor sstem.
Inst!uct#ons
EaF Assume that :ale Corporation reported net income of K1;***;*** for 2*11. .resent a
schedule showing the corrected net income after reviewing the a0ove transactions.
E0F .repare the <ournal entries necessar at #ecem0er 31; 2*11; assuming that the 0oo7s have
0een closed.
22 - 17
Solut#on 22-66=
EaF Reported net income K1;***;***
1. Additional charge for 0ad de0ts
2*1* de0ts written off in 2*11 K 12;***
2*11 de0ts to 0e written off in 2*12 E!4;***F E42;***F
2. Consignment?E2*M X K4**;***F E'*;***F
Corrected net income K'%';***
E0F 1. Retained Earnings.................................................................. "!;4**
Allowance for #ou0tful Accounts................................. "!;4**
2. &nventor on Consignment...................................................... 32*;***
Retained Earnings.................................................................. '*;***
Accounts Receiva0le................................................... 4**;***
22 - 18

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CHAPTER 22

ACCOUNTING CHANGES AND ERROR ANALYSIS

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