Question

Please answer 1-5!

1. Which of the following best describes the approach a company should take if it decides to make a change in accounting principle?

a. Record the cumulative effect of the change (on prior periods) as an ‘irregular’ gain or loss in the current period

b. Record the cumulative effect of the change (on prior periods) as an ordinary gain or loss in the current period

c. Record the cumulative effect of the change (on prior periods) as an adjustment to beginning retained earnings

d. Record the cumulative effect of the change (on prior periods) as an adjustment to beginning retained earnings, and restate all prior financial periods that are reported in the current period financial statements

e. Record the change on a prospective basis (i.e., use the new accounting principle in the current and future periods, and make no adjustment for prior periods)

2. Death by Christmas Lights, Inc. decides to change depreciation methods from double- declining to straight-line because new information suggests that the asset will last longer than initially expected, and the straight-line method better reflects the pattern of benefits to be received from the asset. How should the company account for this change?

a. As a change in accounting principle

b. As a change in accounting estimate

c. As a counterbalancing error

d. As a non-counterbalancing error

e. As a change in reporting entity

3. In 2017, Coconut Express changed inventory methods from LIFO to FIFO. The cumulative effect of this changed caused an increase to inventory by $50,000 and an increase to Retained Earnings by $50,000. As a result, Coconut Express paid its CEO, Johnny Lingo, a bonus for the previous years increased income. How should Coconut Express record this bonus?

a. In the current year as a one-time expense on the income statement.

b. Retrospectively

c. Prospectively

d. In consolidated financial statements.

e. None of the above.

4. Maui Surf Boards is a retail company based in Hawaii that sells surfing equipment. They use LIFO to track all their inventory. In 2017, Maui begins selling a new line of surf boards. Management decided that they would track the new inventory using FIFO but still uses LIFO to track all other inventory. How should they apply the adoption of FIFO for the new inventory:

a. As a change in accounting principle and applied retrospectively.

b. As a change in accounting estimate and applied prospectively.

c. As a first-time event that is not a change in estimate or change in principle.

d. As a change in accounting estimate and applied retrospectively.

5 In 2015, the accountant for Happy Gilmore Golf Co. inadvertently mixed up the information for ending inventory and cost of goods sold. On the 2015 financial statements, Ending Inventory had a $10,000 balance on the balance sheet and Cost of Goods Sold was reported at $20,000. The error was discovered after the books were closed in 2018, two years after the mistake was made. How should the accountant correct this term?

a. Retrospectively

b. Prospectively

c. A one-time adjustment to the necessary accounts.

d. No entry is required.

Answer 1

1. As per US GAAP requirement, which is in line with IFRS, (IAS 8), in case of change in accounting principle, the entity needs to "Record the cumulative effect of the change (on prior periods) as an adjustment to beginning retained earnings, and restate all prior financial periods that are reported in the current period financial statements". Therefore, the correct option is "d".

2. Change in pattern of providing depreciation is a change in accounting estimate. Correct option "b"

3. The change in retained earning is triggered on the basis of a change in retained earning. However, incremental bonus is considered as a change in accounting estimate. Change in bonus provision is not on account of change in accounting policy, but an outcome of the compensation structure the company has. Therefore, this expense will be recorded in on a prospective basis. Correct option is "c".

4. This is a new transaction being accounted for by the entity. Therefore, as a first-time event that is not a change in estimate or change in principle. The correct option is "c".

5. In case of material errors, the financial statements need to be restated from a proospective basis. Correct option is "ä".