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Exam 20: Accounting Changes

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Question 1

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

A) In the quarter in which the change is made.
B) In the annual financial statements only.
C) In the first quarter of the fiscal year in which the change is made.
D) Never.

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

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Question 2

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Which of the following is a change in reporting entity?

A) A change to the full cost method in the extractive industries.
B) Switching to the completed contract method.
C) A change from the cost to the equity method.
D) Consolidating a subsidiary not previously included in consolidated financial statements.

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

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Question 3

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Goosen Company bought a copyright for $90,000 on January 1,2013,at which time the copyright had an estimated useful life of 15 years.On January 5,2016,the company determined that the copyright would expire at the end of 2021.How much should Goosen record retrospectively as the effect of change?

Describe the approaches of reporting changes in accounting principles.

At the end of the current year,a company failed to accrue interest of $500,000 on its investments in municipal bonds.Its tax rate is 30%.As a result of this error,net income is:

Popeye Company purchased a machine for $300,000 on January 1,2015.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 2015.Popeye discovered the error in 2016.What amount should Popeye record as depreciation expense for 2016? The tax rate is 40%.

A company changes depreciation methods.Briefly describe the steps the company should take to report this accounting change in its current comparative financial statements.

Prior to 2016,Trapper John Inc.used sum-of-the-years'-digits depreciation on its store equipment.Beginning in 2016,Trapper John decided to use straight-line depreciation for these assets.The equipment cost $3 million when it was purchased at the beginning of 2014,had an estimated useful life of five years and no estimated residual value.To account for the change in 2016,Trapper John:

Which of the following changes should be accounted for using the retrospective approach?

C Co.reported a retained earnings balance of $200,000 at December 31,2015.In September 2016,C determined that insurance premiums of $30,000 for the three-year period beginning January 1,2015,had been paid and fully expensed in 2015.C has a 30% income tax rate.What amount should C report as adjusted beginning retained earnings in its 2016 statement of retained earnings?

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

In 2016,internal auditors discovered that Fay,Inc. ,had debited an expense account for the $700,000 cost of a machine purchased on January 1,2013.The machine's useful life was expected to be five years with no residual value.Straight-line depreciation is used by Fay.The journal entry to correct the error will include a credit to accumulated depreciation of:

Green Company overstated its inventory by $50 million at the end of 2016.The discovery of this error during 2017,before adjusting or closing entries,would require:

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.The appropriate accounting treatment is that:

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

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

Mattson Company receives royalties on a patent it developed several years ago.Royalties are 5% of net sales,to be received 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 1,2015,and Mattson accrued royalty revenue of $60,000 on December 31,2015,as follows: Mattson received royalties of $65,000 on March 31,2016,and $80,000 on September 30,2016.In December,2016,the patent user indicated to Mattson that sales subject to royalties for the second half of 2016 should be $800,000. Required: (1. )Prepare any journal entries Mattson should record during 2016 related to the royalty revenue. (2. )What changes should be made to retained earnings relative to these royalties?

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

In December 2016,Kojak Insurance Co.received $500,000 in premiums for a two-year property insurance policy.The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount.An internal audit conducted in early 2017 flagged this transaction.The appropriate accounting treatment is that:

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