1. (TCO E) Which of the following is accounted for as a change in accounting principle? (Points : 5)
A change in inventory valuation from average cost to FIFO
A change from the cash basis of accounting to the accrual basis of accounting
A change in the estimated useful life of plant assets
A change from expensing immaterial expenditures to deferring and amortizing them as they become material
2. (TCO E) What type of accounting change/correction should always be accounted for in the current and future accounting periods? (Points : 5)
Change in accounting principle
Change in reporting entity
Change in accounting estimate
Correction of an error
3. (TCO E) On December 31, 2013, Gifts Galore, Inc. appropriately changed its inventory valuation method from weighted-average cost to FIFO method for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at January 1, 2013. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (Points : 5)
4. (TCO E) As of January 1, 2011, Survival Industries, Inc. purchased a boat at a cost of $490,000.
When purchased, the company was using the double declining depreciation method.
Key info on the asset at time of purchase is the following.
Estimated useful life is 7 years.
Residual Value is $0.
At the beginning of 2014, the CFO decided to change to straight-line depreciation method.
Compute the depreciation expense for 2014. (Points : 5)
5. (TCO E) Mystical Corporation found the following errors in their year-end financial statements.
As of Dec. 2012 As of Dec. 2013
Ending Inventory $32,000 understated $46,000 overstated
Depreciation Exp. $7,000 understated
On December 31, 2013, a fully depreciated machine was sold for $35,000 but the sale was not recorded until January 15, 2014 when the cash was received. In 2012, a three-year insurance premium was prepaid for $45,000, of which the entire amount was expensed in the first year.
There were no other errors or corrections. Ignore any tax considerations.
What is the total net effect of errors on Mystical’s 2013 net income? (Points : 5)
Net income understated by $39,000
Net income overstated by $32,000
Net income overstated by $51,000
Net income overstated by $58,000
6. (TCO E) The four types of accounting changes, including error correction, are
change in accounting principle;
change in accounting estimate;
change in reporting entity; and
The following are a series of situations. Indicate the type of change.
1 Changing the companies included in combined financial statements
2 Change in both estimate and acceptable accounting principles
3 Change from presenting nonconsolidated to consolidated financial statements
4 Change from FIFO to LIFO inventory procedures
5 Change in amortization period for an intangible asset
6 Change due to failure to recognize an accrued (uncollected) revenue
7 Change due to charging a new asset directly to an expense account
8 Change due to understatement of inventory
9 Change from straight-line to sum-of-the-years’-digits method of depreciation
10 Change in residual value of a depreciable plant asset
11 Change in the loss rate on warranty costs
12 Change in life of a depreciable plant asset
13 Change due to failure to recognize and accrue income
14 Change in expected recovery of an account receivable
15 Change from expensing to capitalizing certain costs, due to a change in periods benefited (Points : 15)