Accounting Changes & Error Corrections

Question 1

Which of the following items would not be considered a change in accounting estimate?
A A change in the useful lives or salvage values of depreciable assets
B A change in the recovery periods benefited by a deferred cost
C A change in the method of accounting for long-term construction contracts
D A change in expected losses on receivables

Answer 1

A change in the method of accounting for long-term construction contracts

A change in the method of accounting for long-term construction contracts would be considered a change in accounting principle, not a change in accounting estimate.

Question 2

When a company changes the expected service life of an asset because additional information has been obtained, which of the following should be reported?

Pro forma effects of
retroactive application

and/or

Cumulative effect
of a change in
accounting principle

Answer 2

Neither

A change in the expected service life of an asset because additional information has been obtained is an example of a change in an accounting estimate. A change in estimate should be accounted for prospectively. Therefore, no cumulative effect of the change is reported and no pro forma effects of retroactive application are disclosed.

Question 3

During December of the previous year, Nile Co. incurred special insurance costs but did not record these costs until payment was made during the current year. These insurance costs related to inventory that had been sold by December 31 of the previous year. What is the effect of the omission on Nile’s accrued liabilities and retained earnings at December 31 of the previous year?

Accrued liabilities Retained Earnings

Understated overstated or no effect

Answer 3

Accrued liabilities Understated
Retained Earnings Overstated

The insurance costs were not recorded during the period to which they relate, so the accrued liabilities is understated. Because the expense was not included in the inventory that was sold, the COGS was less than it should have been, and as a result, the retained earnings were overstated.

Question 4

At December 31 of the current year, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31 of the previous year, $300,000 of which were to be written off in the current year and the remainder in the following year. Off-Line’s income tax rate is 30%. In its current year financial statements, what should Off-Line report?

Answer 4

500,000 as current period transaction with no prior period adjustment

A change in accounting estimate affected by a change in accounting principle is accounted for as a change in estimate. A change in accounting estimate shall be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. Because the change was made, the total amount of $500,000 would be recorded.

Question 5

If an entity has a change in accounting estimate during an accounting period, it should report the change in estimate by doing which of the following?

A Accounting for it as a change in accounting principle, when, within the same situation, the effects of a change in an accounting estimate and a change in an accounting principle cannot be separated.

B Accounting for it only in the period of change, and not in subsequent periods, as a component of income from continuing operations.

C Disclosing the effects of the change on income from continuing operations, net income and related per share amounts in the period of the change or in future periods, if the change also affects those future periods.

Answer 5

Disclosing the effects of the change on income from continuing operations, net income and related per share amounts in the period of the change or in future periods, if the change also affects those future periods.