ACC 305 WEEK 8 QUIZ 5
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ACC 305 WEEK 8 QUIZ 5
ACC 305 Week 8 Quiz 5 – STR NEW
TRUE-FALSE—Conceptual
1. A change in accounting principle is a
change that occurs as the result of new information or additional experience.
2. Errors in financial statements result
from mathematical mistakes or oversight or misuse of facts that existed when
preparing the financial statements.
3. Adoption of a new principle in
recognition of events that have occurred for the first time or that were
previously immaterial is treated as an accounting change.
4. Retrospective application refers to
the application of a different accounting principle to recast previously issued
financial statements—as if the new principle had always been used.
5. When a company changes an accounting
principle, it should report the change by reporting the cumulative effect of
the change in the current year’s income statement.
6. One of the disclosure requirements
for a change in accounting principle is to show the cumulative effect of the
change on retained earnings as of the beginning of the earliest period
presented.
7. An indirect effect of an accounting
change is any change to current or future cash flows of a company that result
from making a change in accounting principle that is applied retrospectively.
8. Retrospective application is
considered impracticable if a company cannot determine the prior period effects
using every reasonable effort to do so.
9. Companies report changes in
accounting estimates retrospectively.
10. When it is impossible to determine
whether a change in principle or change in estimate has occurred, the change is
considered a change in estimate.
11. Companies account for a change in
depreciation methods as a change in accounting principle.
12. When companies make changes that
result in different reporting entities, the change is reported prospectively.
13. Changing the cost or equity method
of accounting for investments is an example of a change in reporting entity.
14. Accounting errors include changes in
estimates that occur because a company acquires more experience, or as it
obtains additional information.
15. Companies record corrections of
errors from prior periods as an adjustment to the beginning balance of retained
earnings in the current period.
16. If an FASB standard creates a new
principle, expresses preference for, or rejects a specific accounting
principle, the change is considered clearly acceptable.
17. Balance sheet errors affect only the
presentation of an asset or liability account.
18. Counterbalancing errors are those
that will be offset and that take longer than two periods to correct
themselves.
19. For counterbalancing errors,
restatement of comparative financial statements is necessary even if a
correcting entry is not required.
20. Companies must make correcting
entries for noncounterbalancing errors, even if they have closed the prior
year’s books.
MULTIPLE CHOICE—Conceptual
21. Accounting changes are often made
and the monetary impact is reflected in the financial statements of a company
even though, in theory, this may be a violation of the accounting concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.
22. Which of the following is not treated as a change
in accounting principle?
a. A change from LIFO to FIFO for inventory
valuation
b. A change to a different method of depreciation
for plant assets
c. A change from full-cost to successful efforts in
the extractive industry
d. A change from completed-contract to
percentage-of-completion
23. Which of the following is not a
retrospective-type accounting change?
a. Completed-contract method to the
percentage-of-completion method for long-term contracts
b. LIFO method to the FIFO method for inventory
valuation
c. Sum-of-the-years’-digits method to the
straight-line method
d. “Full cost” method to another method in the
extractive industry
24. Which of the following is accounted
for as a change in accounting principle?
a. A change in the estimated useful life of plant
assets.
b. A change from the cash basis of accounting to the
accrual basis of accounting.
c. A change from expensing immaterial expenditures
to deferring and amortizing them as they become material.
d. A change in inventory valuation from average cost
to FIFO.
25. A company changes from straight-line
to an accelerated method of calculating depreciation, which will be similar to
the method used for tax purposes. The entry to record this change should
include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the
difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.
26. Which of the following disclosures
is required for a change from sum-of-the-years-digits to straight-line?
a. The cumulative effect on prior years, net of tax,
in the current retained earnings statement
b. Restatement of prior years’ income statements
c. Recomputation of current and future years’
depreciation
d. All of these are required.
27. A company changes from
percentage-of-completion to completed-contract, which is the method used for
tax purposes. The entry to record this change should include a
a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the
amount of the difference on prior years, net of tax.
c. debit to Retained Earnings in the amount of the
difference on prior years, net of tax.
d. credit to Deferred Tax Liability.
28. Which of the following disclosures
is required for a change from LIFO to FIFO?
a. The cumulative effect on prior years, net of tax,
in the current retained earnings statement
b. The justification for the change
c. Restated prior year income statements
d. All of these are required.
29. Stone Company changed its method of
pricing inventories from FIFO to LIFO. What type of accounting change does this
represent?
a. A change in accounting estimate for which the
financial statements for prior periods included for comparative purposes should
be presented as previously reported.
b. A change in accounting principle for which the
financial statements for prior periods included for comparative purposes should
be presented as previously reported.
c. A change in accounting estimate for which the
financial statements for prior periods included for comparative purposes should
be restated.
d. A change in accounting principle for which the
financial statements for prior periods included for comparative purposes should
be restated.
30. Which type of accounting change
should always be accounted for in current and future periods?
a. Change in accounting principle
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error
31. Which of the following is (are) the
proper time period(s) to record the effects of a change in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only
32. When a company decides to switch
from the double-declining balance method to the straight-line method, this
change should be handled as a
a. change in accounting principle.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.
33. The estimated life of a building
that has been depreciated 30 years of an originally estimated life of 50 years
has been revised to a remaining life of 10 years. Based on this information,
the accountant should
a. continue to depreciate the building over the
original 50-year life.
b. depreciate the remaining book value over the
remaining life of the asset.
c. adjust accumulated depreciation to its
appropriate balance, through net income, based on a 40-year life, and then depreciate
the adjusted book value as though the estimated life had always been 40 years.
d. adjust accumulated depreciation to its
appropriate balance through retained earnings, based on a 40-year life, and
then depreciate the adjusted book value as though the estimated life had always
been 40 years.
34. Which of the following statements is
correct?
a. Changes in accounting principle are always
handled in the current or prospective period.
b. Prior statements should be restated for changes
in accounting estimates.
c. A change from expensing certain costs to
capitalizing these costs due to a change in the period benefited, should be
handled as a change in accounting estimate.
d. Correction of an error related to a prior period
should be considered as an adjustment to current year net income.
35. Which of the following describes a
change in reporting entity?
a. A company acquires a subsidiary that is to be
accounted for as a purchase.
b. A manufacturing company expands its market from
regional to nationwide.
c. A company divests itself of a European branch
sales office.
d. Changing the companies included in combined
financial statements.
36. Presenting consolidated financial
statements this year when statements of individual companies were presented
last year is
a. a correction of an error.
b. an accounting change that should be reported
prospectively.
c. an accounting change that should be reported by
restating the financial statements of all prior periods presented.
d. not an
accounting change.
37. An example of a correction of an
error in previously issued financial statements is a change
a. from the FIFO method of inventory valuation to
the LIFO method.
b. in the service life of plant assets, based on
changes in the economic environment.
c. from the cash basis of accounting to the accrual
basis of accounting.
d. in the tax assessment related to a prior period.
38. Counterbalancing errors do not include
a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.
39. A company using a perpetual
inventory system neglected to record a purchase of merchandise on account at
year end. This merchandise was omitted from the year-end physical count. How
will these errors affect assets, liabilities, and stockholders’ equity at year
end and net income for the year?
Assets
Liabilities Stockholders’
Equity Net Income
a. No
effect
Understate
Overstate
Overstate.
b. No
effect
Overstate
Understate
Understate.
c.
Understate
Understate
No
effect
No effect.
d.
Understate
No
effect
Understate
Understate.
40. If, at the end of a period, a
company erroneously excluded some goods from its ending inventory and also
erroneously did not record the purchase of these goods in its accounting
records, these errors would cause
a. the ending inventory and retained earnings to be
understated.
b. the ending inventory, cost of goods sold, and
retained earnings to be understated.
c. no effect on net income, working capital, and
retained earnings.
d. cost of goods sold and net income to be
understated.
Multiple Choice—Computational
41. On January 1, 2010, Neal Corporation
acquired equipment at a cost of $900,000. Neal adopted the
sum-of-the-years’-digits method of depreciation for this equipment and had been
recording depreciation over an estimated life of eight years, with no residual
value. At the beginning of 2013, a decision was made to change to the straight-line
method of depreciation for this equipment. The depreciation expense for 2013
would be
a. $46,875.
b. $75,000.
c. $112,500.
d. $180,000.
42. On January 1, 2010, Knapp
Corporation acquired machinery at a cost of $500,000. Knapp adopted the
double-declining balance method of depreciation for this machinery and had been
recording depreciation over an estimated useful life of ten years, with no
residual value. At the beginning of 2013, a decision was made to change to the
straight-line method of depreciation for the machinery. The depreciation
expense for 2013 would be
a. $25,600.
b. $36,572.
c. $50,000.
d. $71,428.
43. On January 1, 2010, Piper Co.,
purchased a machine (its only depreciable asset) for $450,000. The machine has
a five-year life, and no salvage value. Sum-of-the-years’-digits depreciation
has been used for financial statement reporting and the elective straight-line
method for income tax reporting. Effective January 1, 2013, for financial
statement reporting, Piper decided to change to the straight-line method for
depreciation of the machine. Assume that Piper can justify the change.
Piper’s income before depreciation, before income taxes, and
before the cumulative effect of the accounting change (if any), for the year
ended December 31, 2013, is $375,000. The income tax rate for 2013, as well as
for the years 2010-2012, is 30%. What amount should Piper report as net income
for the year ended December 31, 2013?
a. $90,000
b. $136,500
c. $231,000
d. $262,500
Use the following information for questions 44 and 45.
Ventura Corporation purchased machinery on January 1, 2012 for
$840,000. The company used the sum-of-the-years’-digits method and no salvage
value to depreciate the asset for the first two years of its estimated six-year
life. In 2013, Ventura changed to the straight-line depreciation method for
this asset. The following facts pertain:
2012
2013
Straight-line
$140,000 $140,000
Sum-of-the-years’-digits
240,000 200,000
44. Venturais subject to a 40% tax rate.
The cumulative effect of this accounting change on beginning retained earnings
is
a. $180,000.
b. $160,000.
c. $96,000.
d. $0.
45. The amount that Ventura should report
for depreciation expense on its 2014 income statement is
a. $160,000.
b. $140,000.
c. $100,000.
d. none of the above.
46. During 2013, a construction company
changed from the completed-contract method to the percentage-of-completion
method for accounting purposes but not for tax purposes. Gross profit figures
under both methods for the past three years appear below:
Completed-Contract
Percentage-of-Completion
2011
$
475,000
$ 700,000
2012
625,000
950,000
2013
700,000
1,050,000
$1,800,000 $2,700,000
Assuming an income tax rate of 40% for all years, the affect of
this accounting change on prior periods should be reported by a credit of
a. $540,000 on the 2013 income statement.
b. $330,000 on the 2013 income statement.
c. $540,000 on the 2013 retained earnings statement.
d. $330,000 on the 2013 retained earnings statement.
Use the following information for questions 47 and 48.
On January 1, 2010, Nobel Corporation acquired machinery at a
cost of $800,000. Nobel adopted the straight-line method of depreciation for
this machine and had been recording depreciation over an estimated life of ten
years, with no residual value. At the beginning of 2013, a decision was made to
change to the double-declining balance method of depreciation for this machine.
47. Assuming a 30% tax rate, the
cumulative effect of this accounting change on beginning retained earnings, is
a. $89,600.
b. $0.
c. $105,280.
d. $150,400.
48. The amount that Nobel should record
as depreciation expense for 2013 is
a. $80,000.
b. $112,000.
c. $160,000.
d. none of the above.
All Questions Included.
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