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Exam 22: Accounting for Changes and Errors

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Question 61

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On January 1, 2014, Tessa loaned $12,000 to another company on a three-year, 4% note. No interest was accrued in 2014. Cash will not be received for the interest until the end of the three-year period. The error was discovered before adjusting and closing entries were posted on December 31, 2015. Ignoring income taxes, the correct entry on December 31, 2015, should be

A) Interest Receivable $\quad$$\quad$ 480
Retained Earnings $\quad$$\quad$$\quad$$\quad$ 480

B) Interest Receivable $\quad$$\quad$ 960
Interest Revenue $\quad$$\quad$$\quad$$\quad$$\quad$ 960

C) Interest Receivable $\quad$$\quad$$\quad$ 480
Interest Revenue $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 480

D) Interest Receivable $\quad$$\quad$$\quad$ 960
Interest Revenue $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 480
Retained Earnings $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 480

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

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Question 62

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Provide three examples of changes in principle.

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1) Change from one generally accepted ac...

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Question 63

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On January 1, 2014, Suzanne Company purchased equipment for $48,000. The estimated life was five years and the salvage value was estimated at $5,000. On January 1, 2016, it was determined that the equipment's total useful life should have been estimated at seven years and the salvage value should have been estimated at only $4,000. The company used straight-line depreciation. Required: a.What type of change did Suzanne Company make on January 1, 2016, and how should Suzanne account for the change? b.If an adjusting entry is necessary on January 1, 2016, prepare it. c.Compute the amount of depreciation expense on the equipment for 2016.

On January 1, Year 1, the Dole Company purchased an asset that cost $154,000. The asset had an expected useful life of seven years and no estimated residual value. The company initially decided to use sum-of-the-years'-digits (SYD) depreciation for both financial accounting and income tax purposes. Depreciation expense for the straight-line method and the sum-of-the-years'-digits method is as follows:

All of the following would be reported retrospectively by restating prior period's financial results except for a

Disadvantages of using the retrospective application method do not include which of the following?

An advantage of retrospective adjustment method is that it achieves comparability and consistency between accounting periods.

The December 31, 2014, ending inventory failed to include $25,000 of inventory that was received on December 27, 2014. The purchase on account was, however, properly recorded on the date of delivery. What effect will this error have on the December 31, 2014, assets, liabilities, and net income for the year then ended?

Explain the direct and indirect effects of a change in accounting principles.

What are the two methods for reporting changes as approved by GAAP provide a brief explanation of each?

Shelley Construction began operations in 2014 and appropriately used the completed-contract method in accounting for its long-term construction contracts. The prepared the following information: Effective January 1, 2016, Shelley changed to the percentage-of-completion method tax reporting and can justify the change; the company's tax rate is 35%. It determines the construction and revenue expense amounts under the percentage of completion method to be: Required: 1) How would the company account for the change? 2) Prepare the journal entries to reflect the changes.

When a change in method is inseparable from a change in estimate, the change is accounted for

During 2016, Dragon Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and a salvage value of $50,000. The equipment was acquired on January 1, 2014 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2016 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Assuming Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change (if any) for the year ended December 31, 2016, was $180,000, Dragon's net income for 2016 should be

Which of the following should be reported as a change in accounting estimate?

A change in unit depletion rate would be accounted for as a

Exhibit 22-4 Barbara Company's year-end December 31, 2014, financial statements contained the following errors: Ending inventory on December 31, 2014, was overstated by $75,000. Depreciation expense was understated by $7,000. A two-year insurance policy for 2014 and 2015 in the amount of $14,000 was entirely expensed in 2014. Investments in common stock of other companies were sold in 2014 at a gain of $10,000, but the sale was not recorded until 2015. -Refer to Exhibit 22-4. The effect of the above errors on the December 31, 2014, reported assets of Barbara is that assets are

A change in accounting estimate does not result in a retrospective adjustment to previously issued financial statements.

The Jack Company began its operations on January 1, 2014, and used the LIFO method of accounting for its inventory. On January 1, 2016, Jack Company adopted FIFO in accounting for its inventory. The following information is available regarding cost of goods sold for each method: Assuming a tax rate of 35% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in opening retained earnings on the 2016 financial statements?

Which of the following changes would normally require some footnote disclosure?

In Western reviewed their estimated warranty costs which at that time was 5% of sales. This estimated was based upon the warranty accrual method. In 2014 net sales were $3,250,000 they recorded warranty expense of $162,500. Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop in their warranty claims for 2015. The company decided for 2015 to reduce the estimate to 3% of sales. In 2015 Western reported net sales of $3,500,000. Required: 1) How should the company report the change and why? 2) Prepare any necessary journal entries for 2014 or 2015 to account for the change.