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Homework answers / question archive / University of Houston ACCT 33367 Chapter 22 Accounting Changes and Error Analysis Pre-Class Quiz 1)Which of the following changes should be accounted for using the retrospective approach? A) A change in the estimated life of a depreciable asset
University of Houston
ACCT 33367
Chapter 22 Accounting Changes and Error Analysis
Pre-Class Quiz
1)Which of the following changes should be accounted for using the retrospective approach?
A) A change in the estimated life of a depreciable asset. (P)
B) A change from straight-line to declining balance depreciation. (P – can be P or R)
C) A change in the expected forfeiture rates of executive option plans to compute compensation expense. (P)
D) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.
2. Which of the following changes should not be accounted for using the retrospective approach?
A) A change in the estimated useful life of a depreciable asset.
B) A change from the FIFO method of inventory costing to the average method.
C) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.
D) A change from the LIFO method of costing inventories.
3. Which of the following is not a change in accounting principle that usually is accounted for by retrospectively revising prior financial statements?
A) Change from FIFO to the average method of inventory costing. B) Change from SYD to DDB depreciation.
C) Change from the average method of inventory costing to FIFO.
D) Change from the LIFO to the FIFO method of inventory costing.
4. Which of the following changes would not be accounted for using the prospective approach?
A) A change in the percentage of sales used to estimate bad debt expense.
B) A change from application of the LCNRV rule from individual item costing to an aggregate costing approach.
C) A change from straight-line to double-declining balance depreciation.
D) A change from double-declining balance to straight-line depreciation.
5. Which of the following accounting changes should not be accounted for prospectively? A) The correction of an error.
B) A change from declining balance to straight-line depreciation.
C) A change from straight-line to declining balance depreciation.
D) A change in the expected salvage value of a depreciable asset.
6. Which of the following would not be accounted for using the prospective approach?
A) A change to LIFO from FIFO for inventory costing. (could be prospective too)
B) A change in price indexes used under the LIFO method of inventory costing.
C) A change in estimate.
D) A change from the cash basis to accrual accounting.
7. Which of the following is accounted for prospectively?
A) Changes from the weighted-average method of inventory costing to FIFO.
B) Change in reporting entity.
C) Change in the percentage used to determine warranty expense.
D) Correction of an error.
8. Which of the following is not a change in estimate?
A) A change in the useful life of a depreciable asset.
B) A change in the mortality rate used for pension computations.
C) A change from the cost to the equity method in accounting for investments.
D) A change in the warranty expense percentage.
9. A change in the residual value of equipment is accounted for:
A) As a prior period adjustment. B) Prospectively.
C) Retrospectively.
D) None of these answer choices are correct.
10. Goosen Company bought a copyright for $90,000 on January 1, 2018, at which time the copyright had an estimated useful life of 15 years. On January 5, 2021, the company determined that the copyright would expire at the end of 2026. How much should Goosen record retrospectively as the effect of change?
A) $0. (no retrospective change)
B) $12,000.
C) $8,000.
D) $14,400.
11. AB Company purchased an equipment for $100,000 on January 1, 2019. AB depreciates using straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2021, management determines the useful life of the machine to be a total of five years. What should AB record for depreciation expense for 2021? Tax rate is 25%.
A) $20,000.
B) $16,000.
C) $17,778.
D) $26,667.
12. WWO acquired a patent in 2018 at a cost of $150 million and amortizes the patent on a straight-line basis. During 2021, WWO decided that the benefits from the patent would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. WWO's 2021 financial statements should include:
A) A patent balance of $150 million. B) A patent balance of $102 million.
C) Patent amortization expense of $15 million.
D) Patent amortization expense of $7.5 million.
13. Which of the following is a change in reporting entity?
A) A change to the full cost method in the extractive industries.
B) Discontinuing a segment of operations.
C) A change from the cost to the equity method.
D) Consolidating a subsidiary not previously included in consolidated financial statements.
14. Which of the following is not a change in reporting entity?
A) Reporting using comparative financial statements for the first time.
B) Changing the companies that comprise a consolidated group.
C) Presenting consolidated financial statements for the first time.
D) All are changes in reporting entity.
15. An item that should be reported as a prior period adjustment is the: A) Correction of an error in depreciation from last year.
B) Payment of taxes due to a tax audit of last year's tax return.
C) Payment of a previously recorded warranty expense.
D) Receipt of the proceeds of a note receivable that was due last year.
16. The auditors discovered on January 2021 that Fay, Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2018. The machine's useful life was expected to be five years with no residual value. Fay uses straight-line depreciation. The journal entry to correct the error will include a credit to accumulated depreciation of:
A) $140,000.
B) $280,000. C) $420,000. D) $700,000.
17. MCD purchased a machine for $300,000 on January 1, 2020. MCD depreciates machines of this type by the straight-line method over a five-year period and no salvage value. Due to an error, no depreciation was taken on this machine in 2020. MCD discovered the error in 2021. What should MCD record as depreciation expense for 2021? The tax rate is 25%.
A) $120,000.
B) $60,000.
C) $45,000.
D) $90,000.
18. FLR overstated accumulated depreciation by $20 million as of December 31, 2021. FLR has a tax rate of 25%. FLR 's retained earnings as of December 31, 2021, would be:
A) Overstated by $15 million. B) Understated by $15 million.
C) Overstated by $5 million.
D) Understated by $5 million.
19. A company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 25%. As a result of this error, net income was:
A) Understated by $75,000.
B) Overstated by $75,000.
C) Understated by $25,000.
D) Overstated by $25,000.
20. NP Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assuming 25% income tax rate, what is the effect of this error on NP's December 31, 2020 balance sheet?
A) Assets understated by $600,000 and equity understated by $600,000.
B) Assets understated by $450,000 and equity understated by $450,000.
C) Assets understated by $600,000, liabilities understated by $150,000, and equity understated by $450,000.
D) None of these answer choices are correct.
21. NP Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assuming 25% income tax rate, what is the effect of this error on NP's December 31, 2020 income statement?
A) Net income is understated by $450,000.
B) Cost of goods sold is understated by $450,000.
C) There are no errors in the 2021 income statement.
D) None of these answer choices are correct.
22. At the beginning of 2021, Ashland discovered that a five-year insurance premium payment of $750,000 at the beginning of 2018 was debited to insurance expense. The correcting entry is:
A) A debit to prepaid insurance of $750,000.
B) A debit to insurance expense of $300,000.
C) A debit to prepaid insurance of $450,000. D) A credit to retained earnings of $300,000.
23. In December 2021, KC received $500,000 in premiums for a two-year property insurance policy. KC recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit flagged this transaction in early 2022. The appropriate accounting treatment is that:
A) KC needs to correct an accounting error.
B) KC has made a change in accounting principle, requiring retrospective adjustment.
C) KC is required to adjust a change in accounting estimate prospectively.
D) KC is not required to make any accounting adjustments.
24. C Co. has a retained earnings balance of $200,000 at December 31, 2020. In September 2021, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2020, had been paid and fully expensed in 2020. Income tax rate is 25%. What should C report as adjusted beginning retained earnings in its 2021 statement of retained earnings?
A) $210,000. B) $215,000. C) $220,000.
D) $222,500.
25. FLR failed to record unrealized gains of $20 million on its available for sale debt security investments. Its tax rate is 25%. As a result of this error, comprehensive income would be: A) Understated by $15 million.
B) Understated by $5 million.
C) Understated by $20 million.
D) Unaffected.
26. BT failed to record unrealized gains of $20 million on debt investments classified as trading securities. Its tax rate is 25%. As a result of this error, total shareholders' equity would be:
A) Understated by $15 million.
B) Understated by $5 million.
C) Understated by $20 million.
D) Unaffected.
27. PS failed to adjust for a $60,000 actual loss on pension plan assets in 2021, resulting in an underfunded pension plan. PS's tax rate is 25%. As result of this error, retained earnings would be:
A) Unaffected.
B) Overstated by $60,000.
C) Overstated by $45,000.
D) Overstated by $15,000.
