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Exam 20: Accounting Changes and Error Corrections

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Question 71

Multiple Choice

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

A) As a prior period adjustment.
B) Prospectively.
C) Retrospectively.
D) None of these answer choices are correct.

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

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Question 72

Multiple Choice

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A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a violation of FCC rules. Its tax rate is 30%. As a result of this error, net income was:

A) Unaffected.
B) Overstated by $400,000.
C) Overstated by $280,000.
D) Overstated by $120,000.

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

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Question 73

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Mobic Inc. acquired some manufacturing equipment in January 2015 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2018, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2021. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2018, Mobic should:

Which of the following is a change in reporting entity?

Retrospective restatement usually is not used for a:

B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2018. The change affects machinery purchased at the beginning of 2016 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 2018 depreciation expense?

Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. 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 2018, Red decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, what will be Red's depreciation expense for 2018?

A change in reporting entity requires note disclosure in all subsequent financial statements prepared for the new entity.

Prior to 2018, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2018, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2016, had an estimated useful life of five years and no estimated residual value. To account for the change in 2018, Trapper John:

Which of the following statements is not true regarding the correction of an error?

Error corrections require restatement of all the affected prior year financial statements reported in comparative 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 most correct term. -Prior period adjustment

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Changes in accounting estimates

Powell Company had the following errors over the last two years: 2016: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000. 2017: 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, 2018? (Ignore taxes)

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:

On January 2, 2018, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2018, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2018 earnings is:

On December 1, 2018, LCD Distributing Company ("LCD or "Company") issued a press release announcing its financial results for the fiscal year ended November 30, 2018. Included was the following information regarding a change in inventory method (in part): In the fourth quarter of fiscal 2018, 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 2018 and 2017 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 2017, did the cost of LCD's inventory move up or down during that period?

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.

A change in reporting entity and a material error correction are both reported prospectively.

Indicate the nature of each of the following situations: