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Exam 20: Accounting Changes and Error Corrections

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Question 21

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When an accounting change is reported under the retrospective approach, account balances in the general ledger:

A) Are not adjusted.
B) Are closed out and then updated.
C) Are adjusted net of the tax effect.
D) Are adjusted to what they would have been had the new method been used in previous years.

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

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Question 22

Multiple Choice

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Which of the following accounting changes should not be accounted for prospectively?

A) The correction of an error.
B) A change from declining balance to straight-line depreciation.
C) A change from straight-line to declining balance depreciation.
D) A change in the expected salvage value of a depreciable asset.

E) B) and D)
F) None of the above

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Question 23

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Diversified Systems, Inc., reports consolidated financial statements this year in place of statements of individual companies reported in previous years. This results in:

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

Albatross Company purchased a piece of machinery for $60,000 on January 1, 2011, 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, 2013, 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 2013.

Which of the following is not an example of a change in accounting principle?

Which of the following is a change in reporting entity?

On January 1, 2013, Bubba Construction decided to change from the completed contract method of accounting for long-term construction contracts to the percentage-of-completion method. The company will continue to use the completed contract method for tax purposes. The tax rate is 30%. The following is all relevant data concerning the change. Required: Prepare the journal entry to record the accounting change.

Companies should report the cumulative effect of an accounting change in the income statement:

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

Name and briefly describe the three categories of accounting changes.

Most, but not all, changes in accounting principle are reported using the retrospective approach.

Indicate the nature of each of the situations described below using the following three-letter code. CODE DESCRIPTION CPR: Change in principle reported retrospectively CPP: Change in principle reported prospectively CES: Change in estimate CRE: Change in reporting entity PPA: Prior period adjustment required ____ Technological advance that renders worthless a patent with an unamortized cost of $45,000. ____ Change from LIFO inventory costing to average inventory costing. ____ Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years. ____ Change from FIFO inventory method to LIFO. ____ Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated. ____ Change from the pay-as-you-go method to estimating warranty expense in the period the related product is sold. ____ Change from declining balance depreciation to straight-line. ____ Change from determining lower of cost or market for inventories by the individual item approach to the aggregate approach. ____ Settling a lawsuit for less than the amount accrued previously as a loss contingency. ____ Change in the estimated useful life of office equipment.

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

Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements after the change is made.

Lundholm Company purchased a machine for $100,000 on January 1, 2011. Lundholm depreciates machines of this type by the straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2013, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2013? The tax rate is 40%.

How are accounting errors treated?

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 and include reasons for the accounting.

A change in the residual value of equipment is accounted for:

($500,000 + $400,000) - ($300,000 + $250,000) = $350,000