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Exam 20: Accounting Changes and Error Corrections

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Question 41

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B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2013. The change affects machinery purchased at the beginning of 2011 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 2013 depreciation expense?

A) $9,120.
B) $13,680.
C) $15,840.
D) $19,200.

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

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Question 42

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

A) True
B) False

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Question 43

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Prior years' financial statements are restated when the prospective approach is used.

Mattson Company receives royalties on a patent it developed several years ago. Royalties are 5% of net sales, receivable on September 30 for sales from January through June and receivable on March 31 for sales from July through December. The patent rights were distributed on July 1, 2012, and Mattson accrued royalty revenue of $60,000 on December 31, 2012, as follows: Mattson received royalties of $65,000 on March 31, 2013, and $80,000 on September 30, 2013. The patent user indicated to Mattson that sales subject to royalties for the second half of 2013 should be $800,000. Required: (1.) Prepare any journal entries Mattson should record during 2013 related to the royalty revenue. (2.) What changes should be made to retained earnings relative to these royalties?

For 2012, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2012. Experience during 2013 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

Popeye Company purchased a machine for $300,000 on January 1, 2012. 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 2012. Popeye discovered the error in 2013. What amount should Popeye record as depreciation expense for 2013? The tax rate is 40%.

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

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?

The after-tax cumulative effect on income is no longer required for changes in accounting principles.

All changes in estimate are accounted for retrospectively.

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

When an accounting change is reported under the retrospective approach, prior years' financial statements are:

Pinnacle Corporation has been using the straight-line depreciation method to depreciate some office equipment that was acquired at the beginning of 2010. At the beginning of 2013, Pinnacle decided to change to the sum-of-the-years'-digits method. The equipment cost $120,000 and is expected to have no salvage value. The estimated useful life of the equipment is five years. The tax rate is 30%. Required: Prepare the journal entry, if any, to record the accounting change at the beginning of 2013.

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards?

An item that should be reported as a prior period adjustment is the:

National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:

During 2013, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2011 $120,000 understated 2012 150,000 overstated 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, 2013, would be:

Macintosh Inc. changed from LIFO to the FIFO inventory costing method on January 1, 2013. Inventory values at the end of each year since the inception of the company are as follows: Required: Ignoring income tax considerations, prepare the entry to report this accounting change.

No entry would be made because this change is handled prospectively under GAAP. 2. The depreciation recorded for 2011 and 2012 was:

Some inventory errors are described as "self-correcting" in that they have the opposite financial statement effect in the period following the errors, thereby "correcting" the original account balance errors. Required: Given this "self-correcting" feature, discuss why these errors should not be ignored and describe the steps needed to correct these errors.