ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 20 solutions complete answers

ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 20 solutions complete answers 

 

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 income statement?

 

Accounting changes include changes in

 

Which of the following are considered a change in accounting principle? (Select all that apply.)

 

Which of the following are changes in accounting estimates? (Select all that apply.)

 

Which of the following are acceptable reasons for an accounting change? (Select all that apply.)

 

Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement? (Select all that apply.)

 

Accounting changes include changes in accounting      , in accounting      , and in reporting entity.

 

In year 2, Rogers Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $5,000 lower than under the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

 

Which of the following is a change in accounting principle?

 

Which of the following is a change in accounting estimate?

 

When a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

 

Which of the following situations would be an appropriate reason for an accounting principle change?

 

If a company changes its inventory method, what financial statement accounts are affected? (Select all that apply.)

 

In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted-average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change?

 

When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ______ approach is used.

 

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

 

When it is impracticable to measure the period-specific effects of a change in accounting principle, the       approach should be used.

 

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs? (Select all that apply.)

 

A change in accounting estimate is accounted for using the       approach.

 

When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?

 

A change in depreciation method is treated as a(n)

 

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and

 

After a recent acquisition, Joann Inc. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in _____.

 

When is the prospective approach used in accounting changes? (Select all that apply.)

 

If a company discovers an error in previously issued financial statements, it must

 

Which of the following are requirements for the correction of an accounting error? (Select all that apply.)

 

What method is used to account for a change in accounting estimate?

 

The term "prior period adjustment" is used for

 

What approach is used to account for a change in depreciation method?

 

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take? (Select all that apply.)

 

Which of the following are considered a change in reporting entity? (Select all that apply.)

 

Jill accrues salaries and records the transaction by debiting salary expense and crediting notes payable. The entry to correct this error is

 

What is the approach used for an error correction?

 

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 balance sheet? (Select all that apply.)

 

A prior period adjustment is

 

If an accountant discovers an error in the current year accounting records before the financial statements are prepared, the accountant should

 

In year 1, Fris Corp. purchased equipment for $100,000. Fris incorrectly recorded the equipment purchase as repair expense in year 1. The equipment had a 5-year life with no residual value. In year 3, Fris discovered the error. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3?

 

Rex Corp. purchased supplies on account and recorded it in the inventory account. What is the journal entry to correct this error?

 

Which of the following errors will self-correct?

 

At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 1 income statement?

 

Lawry Corp. purchased equipment for $100,000 and incorrectly recorded the equipment as inventory. The equipment has a useful life of 10 years with no residual value. The entry to correct this error would include which of the following entries?

 

Haven Corp. purchases equipment and incorrectly debits maintenance expense. Which of the following amounts will be incorrect at year-end? (Select all that apply.)

 

Mirage Corp. miscounts and understates its ending inventory in year 1 by $5,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

 

In year 1, Regal Corp. purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense in year 1 and year 2. Ignoring tax effects, what is the adjustment that should be made to retained earnings in year 3 assuming straight line depreciation?

 

In year 1, Fox Corp. failed to record an entry to record a sale on account. In year 2, Fox recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would include which of the following? (Select all that apply.)

 

Which of the following errors would self-correct in the following year? (Select all that apply.)

 

In year 1, Claire miscounted ending inventory and understated ending inventory by $10,000. The error was discovered in year 2. Ignoring tax effects, the entry to record this error would include which of the following? (Select all that apply.)

 

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements? (Select all that apply.)

 

Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1? (Select all that apply.)

 

In year 1, Clark Corp. failed to record an entry to record a sale on account. In year 2, Clark recorded the entry as a debit to accounts receivable and a credit to sales revenue. The entry in year 2 to correct this entry would be

 

 
An addition to or reduction of the beginning balance of retained earnings is referred to as a(n) _______ _______ adjustment. (Enter one word per blank.)
 
 
 
At the beginning of year 1, Rudolf Corp. purchased equipment for $100,000. Rudolph debited the cost to an expense account. The equipment had a 10-year life with no residual value. The company usually depreciates such assets straight-line. Ignoring tax effects, what is the effect on the year 2 income statement?
 
 
 
Candy changes inventory methods in year 2, resulting in a $20,000 increase to beginning inventory in year 2. The tax rate is 40%. The journal entry required to record the change in accounting principles will require (Select all that apply.)
 
 
 
A change in ______ relates to a change in method of accounting for an item, whereas a change in ______ arises from a new calculation due to new information or new experience
 
 
 
A company's choice of accounting method is important because
 
 
 
 
 
 
 
 
 
 
 
 

 
During 2017, Trey Corporation accrued warranty expense based on 3.5% of net sales revenue. During 2018, Trey Corporation revised its estimate to 4%. Sales revenue was $2 million for each year. For the year ended December 31, 2018, the warranty-related entry would include a debit to:
 
 
 
Emile Company utilized the LIFO inventory costing method for the past ten years and saved $350,500 in taxes. If Emile switches away from LIFO, the company
 
 
 
Error correction requires disclosure of the: (Select all that apply.)
 
 
 
An error in which of the following accounts typically does not self-correct?
 
 
 
Events that cause changes in retained earnings are reported in the
 
 
 
An exception to the retrospective application of voluntary changes in accounting principles is when
 
 
 
For U.S. GAAP, which of the following are considered accounting changes? (Select all that apply.)
 
 
 
 
 
 
 
 
 

 
If a change in accounting principle does not require additional taxes to be paid or taxes to be refunded, which account is used to record the tax effects of a change in accounting principle?
 
 
 
If a change in accounting principle requires prior tax savings to be repaid, the tax effects are recorded in a ________ account; however, if the tax law does not require a recapture of prior tax savings, then the tax effects are recorded in a _________ account.
 
 
 
If a company records an error correction, it must disclose _____________ in its notes to the financial statements.
 
 
 
If a lack of information makes it impracticable to report a voluntary accounting change retrospectively, then (select all that apply)
 
 
 
 
 
 
 
 
 

 
If it is impracticable to adjust each year reported for the effect of a voluntary accounting principle change, the change is applied
 
 
 
Investors should be alert to accounting method changes that may be based on these hidden motivations: (Select all that apply.)
 
 
 
In year 1, Durham Corp. failed to record a sale for $50,000. Durham also failed to record this revenue on the tax return. In year 2, the error was discovered. Durham's tax rate is 40%. Which of the following entries would be required to record the correction of the error including tax effects? (Select all that apply.)
 
 
 
In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. What is the tax effect of the prior period adjustment in year 3?
 
 
 
In year 1, Orrin Company purchased equipment for $120,000. Orrin appropriately debited the equipment account in year 1. The equipment had a 6-year life with no residual value. In year 3, Orrin discovered that it failed to record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation was used for both book and tax purposes. Orrin's tax rate is 30%. Which of the following entries would be required to record the correction of the error including tax effects?
 
 
 
In year 1, Regal Corporation purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation is used. Regal's tax rate is 40%. What is the tax effect of the prior period adjustment in year 3?
 
 
 
 
 
 
 
 
 

 
In year 2, Reynolds changes its inventory method from FIFO to the weighted-average method. If the weighted-average method would have been used in year 1, cost of goods sold would be $10,000 higher. Reynolds has an effective tax rate of 40%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method?
 
 
 
In year 2, Rocco changes its inventory method from the weighted-average to the FIFO method. If FIFO would have been used in year 1, cost of goods sold would be $20,000 lower. Rocco has an effective tax rate of 21%. What is the after-tax effect on retained earnings for year 1 for the change in accounting method?
 
 
 
Kroft changes inventory methods in year 2, resulting in a $10,000 increase to beginning inventory in year 2. The tax rate is 30%. The journal entry required to record the change in accounting principles will require a
 
 
 
 
 
 
 
 
 

 
New information that becomes available about an event or transaction frequently results in a change in
 
 
 
On January 1, year 1, Weston Corp. purchases equipment for $100,000. The equipment has a 10-year useful life with no residual value. Weston uses the double-declining-balance method of depreciation, and depreciates the equipment $20,000 in year 1 and $16,000 in year 2. In year 3, Weston changes its depreciation method to straight-line depreciation. The journal entry in year 3 to record the depreciation expense will include which of the following journal entries
 
 
 
On January 1, year 1, Yuri Corp. purchases equipment for $120,000. The equipment has a 6-year useful life with no residual value. Yuri uses the double-declining-balance method of depreciation, and depreciates the equipment $40,000 in year 1. In year 2, Yuri changes its depreciation method to straight-line depreciation. The journal entry in year 2 to record the depreciation expense will include which of the following journal entries? (Select all that apply.)
 
 
 
The prior period adjustment is applied to ______ for the year following the error or for the earliest period being reported in the comparative financial statements.
 
 
 
The prospective approach for reporting a change in accounting principle requires that
 
 
 
The rationale for a change of depreciation method to be treated as a change in accounting estimate is that
 
 
 
 
 
 
 
 
 

 
Relay Corp. estimates bad debt expense as 3% of credit sales. During year 1 Relay sold $100,000 of goods on account. During year 2, Relay determines that a more accurate estimate of bad debts is 4% of credit sales. Year 2 sales on account was $300,000. The entry in year 2 to record the change in accounting estimate would include a debit to
 
 
 
Schumacher Company used the LIFO inventory costing method for its first 5 years of operations, generating tax savings of $75,000. In year 6, Schumacher switches from LIFO to FIFO. The company
is allowed to continue using LIFO for tax purposes and therefore keeps the tax savings.
 
 
 
The selection of an accounting method is important because it can (Select all that apply.)
 
 
 
True or false: A prior period adjustment requires an adjustment to the beginning balance of retained earnings for the year following the error or for the earliest year being reported in the comparative financial statements if the error occurred prior to the earliest year presented.
 
 
 
True or false: Because of the convergence efforts by FASB and IASB, few differences remain between U.S. GAAP and IFRS with respect to accounting changes and error correction.
 
 
 
A voluntary accounting change can be made only if it is justified as being _______ to the previous method.
 
 
 
A voluntary accounting principle change:
 
 
 
 
 
 
 
 
 

 
What factors strongly contribute to the need for changes in estimates? (Select all that apply.)
 
 
 
What hidden motivations should investors and creditors be wary of when a company makes an accounting method change?
 
 
 
When a company changes accounting methods, and the effects of the change can be calculated for each period, which of the following occurs? (Select all that apply.)
 
 
 
When a company makes accounting choices that cause earnings to follow a steady trend from year to year, this manipulation is called income _______.
 
 
 
When an error causes the ending balance of retained earnings to be incorrect, a prior period adjustment is reported in the
 
 
 
 
 
 
 
 
 

 
When correcting errors in previously issued financial statements, IFRS ______ the effect of the error to be reported in the current period if it is not considered practicable to report it retrospectively; U.S. GAAP ____ such treatment.
 
 
 
When it is impossible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in _______.
 
 
 
When it is impracticable to determine the cumulative effect of prior years of a voluntary change in accounting principle, then the new method is applied _______ beginning in the earliest year practicable.
 
 
 
When it is not possible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in
 
 
 
 
 
 
 
 
 

 
Which of the following are estimates used in asset depreciation? (Select all that apply.)
 
 
 
Which of the following errors typically do not self-correct?
 
 
 
Which of the following is a change in accounting estimate achieved by a change in accounting principle?
 
 
 
 
 
 
 
 
 

 
Which of the following is an exception to retrospective application of voluntary changes in accounting principle? (select all that apply)
 
 
 
Which of the following may be objectives of companies that manage earnings? (Select all that apply.)
 
 
 
Which of the following occur with the prospective approach for reporting a change in accounting principle? (Select all that apply.)
 
 
 
Which of the following should be included in the disclosure for a change in reporting entity? (Select all that apply.)
 
 
 

 

 
Adam needs to correct an error that affected prior year income. Adam correctly judges that retrospective reporting is impracticable for this error. Under which accounting standards may Adam report the effect of the error in the current period?
 
 
 
A change in reporting entity requires
 
 
 
Companies can create smooth earnings patterns by ___________ estimated expenses in a year with higher than expected earnings, which ___________ income in later years.
 
 
 
"Cookie jar" accounting involves
 
 
 
A difference in accounting rules for accounting changes for U.S. GAAP and IFRS is
 
 
 
 
 
 
 
 
 
 

 
An example of a change in accounting estimate that is effected by a change in accounting principle is a change in
 
 
 
GAAP requires that a change from the equity method to another method of accounting for long-term investments is accounted for:
 
 
 
 
 
 
 
 
 

 
If an estimate must be revised because it was based on erroneous information, the revision is
 
 
 
In the past, Marty Corporation held 30% of the outstanding common shares of Trace Company. During the current year, Marty sold 18% of its investment. This change should be accounted for
 
 
 
 
 
 
 
 
 

 

 

 
The rationale for retrospective application for accounting changes is that
 
 
 
A reporting entity can be
 
 
 
Retrospective application for a change in accounting principle requires that
 
 
 
Retrospective application requires that
 
 
 
The retrospective approach to accounting changes supports which principles or concepts? (Select all that apply.)
 
 
 

 

 
When an accounting change is made, what disclosures are necessary in the notes to the financial statements?
 
 
 
When an accounting change is made, what disclosures should be made in the notes to the financial statements?
 
 
 
When financial statements are revised to reflect the impact of a change in accounting principle, the ______ approach is used.
 
 
 
 
 
 
 
 
 

 

 
Which of the following represents a situation when it may be difficult to distinguish between a change in estimate and a change in principle?
 
 
 

 

 
An accounting change that is reported by the prospective approach is reflected in the financial statements of:
 
 
Companies should report the cumulative effect of an accounting change in the income statement:
 
 
 
 
 
 
 
 
 

 
In 2020, Quapau Products introduced a new line of hot water heaters that carry a one-year warranty against manufacturer's defects. Based on industry experience, warranty costs were expected to approximate 5% of sales revenue. First-year sales of the heaters were $300,000. An evaluation of the company's claims experience in late 2021 indicated that actual claims were less than expected—4% of sales rather than 5%. 

Assuming sales of the heaters in 2021 were $350,000 and warranty expenditures in 2021 totaled $12,000, what is the 2021 warranty expense?
 
 
 
In 2021, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of an equipment purchased on January 1, 2018. The equipment's useful life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.

Ignoring income taxes, prepare the journal entry PKE use to correct the error.
 
 
 
In 2023, after the 2022 financial statements were issued, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2018. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.

Ignoring income taxes, prepare the journal entry PKE will use to correct the error.
 
 
 

 

 
True or False: A change in accounting estimate and a change in reporting entity are types of changes in accounting principle.
 
 
 
True or False: A change to the LIFO method of valuing inventory usually requires use of the retrospective method.
 
 
 
True or False: Error corrections require restatement of all the affected prior year financial statements reported in comparative financial statements.
 
 
 
True or False: Most, but not all, changes in accounting principle are reported using the retrospective approach.
 
 
 
True or False: Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements that the change is made.
 
 
 
When a change in accounting principle is reported, what is sometimes sacrificed?
 
 
 
 
 
 
 
 
 

 

 
Which of the following changes is not usually accounted for retrospectively?