Question 1

A company failed to record unrealized gains of $20 million on its available for sale debt security investments. Its tax rate is 30%. As a result of this error, comprehensive income would be:
A) Understated by $14 million.
B) Understated by $6 million.
C) Understated by $20 million.
D) Unaffected.

Accepted Answer

Unrealized gains on debt securities classified as available for sale are reported net of tax in other comprehensive income.

Question 2

Using International Financial Reporting Standards (IFRS), which of the following statements is true regarding correcting errors in previously issued financial statements?
A) Retrospective application is required with no exception.
B) The error can be reported in the current period if it's not considered practicable to report it prospectively.
C) The error can be reported prospectively if it's not considered practicable to report it retrospectively.
D) The error can be reported in the current period if it's not considered practicable to report it retrospectively.

Accepted Answer

The answer of Using International Financial Reporting Standards (IFRS), which...

Question 3

Green Company overstated its inventory by $50 million at the end of 2018. The discovery of this error during 2019, before adjusting or closing entries, would require:
A) An increase in retained earnings.
B) A prospective adjustment in the 2019 income statement.
C) A debit to inventory of $50 million.
D) None of these answer choices are correct.

Accepted Answer

In 2019, retained earnings would be debited for $50 million for the 2018 effect on net income (before tax), and 2019 beginning inventory would be credited for $50 million.

Question 4

After issuing its financial statements, a company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was:
A) Understated by $70,000.
B) Overstated by $70,000.
C) Understated by $30,000.
D) Overstated by $30,000.

Accepted Answer

If beginning inventory is overstated, COGS is overstated and net income is understated: $100,000 × (1 - 30%) = $70,000.

Question 5

Powell Company had the following errors over the last two years: 2016: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.
2017: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000.
By how much should retained earnings be adjusted on January 1, 2018? (Ignore taxes)
A) Increase by $15,000.
B) Decrease by $25,000.
C) Decrease by $6,000.
D) Increase by $25,000.

Accepted Answer

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Question 6

In 2018, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2018 would have been $10 million higher had the new life been used. Barney's tax rate is 30%. Barney's retained earnings as of December 31, 2018, would be:
A) Overstated by $7 million.
B) Overstated by $3 million.
C) Overstated by $10 million.
D) Unaffected.

Accepted Answer

This is a change in estimate. No prior period adjustment is needed.

Question 7

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2018. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2018, would be:
A) Overstated by $14 million.
B) Understated by $14 million.
C) Overstated by $6 million.
D) Understated by $6 million.

Accepted Answer

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Question 8

Early in 2018, Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2015 was debited to insurance expense. The correcting entry would include:
A) A credit to retained earnings of $20,000.
B) A debit to insurance expense of $20,000.
C) A debit to prepaid insurance of $30,000.
D) A debit to prepaid insurance of $50,000.

Accepted Answer

The correcting entry would include a debit to prepaid insurance for $20,000 and a credit to retained earnings for $20,000 since there are two years remaining on the insurance policy.

Question 9

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:
A) Understated by $7,000.
B) Overstated by $7,000.
C) Understated by $33,000.
D) Overstated by $33,000.

Accepted Answer

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Question 10

At the end of the current year, a company overstated prepaid insurance by $80,000 and understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this error, net income is:
A) Overstated by $108,000.
B) Overstated by $12,000.
C) Understated by $108,000.
D) Understated by $12,000.

Accepted Answer

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Question 11

Which of the following statements is not true regarding the correction of an error?
A) The correction is reported prospectively and previous financial statements are not revised.
B) A journal entry is needed to correct any account balances that are incorrect as a result of the error.
C) Prior years' financial statements are restated to reflect the correction of the error (if the error affected those statements).
D) A disclosure note should describe the nature of the error and the impact of its correction on net income, income from continuing operations, and earnings per share.

Accepted Answer

The effect of the error is reported as an adjustment to beginning-of-period retained earnings and prior years' financial statements are restated.

Question 12

In 2018, management discovered that Dual Production had debited expense for the full cost of an asset purchased on January 1, 2015, at a cost of $36 million with no expected residual value. Its useful life was 5 years. Dual uses straight-line depreciation. The correcting entry, assuming the error was discovered in 2018 before preparation of the adjusting and closing entries, includes:
A) A debit to accumulated depreciation of $14.4 million.
B) A credit to accumulated depreciation of $21.6 million.
C) A credit to an asset of $36 million.
D) A debit to retained earnings of $14.4 million.

Accepted Answer

Accumulated depreciation would be credited for three year's depreciation (2015 to 2017) at $7.2 million per year. Depreciation for 2018 will be accounted for normally. In addition, an asset account would be debited for $36 million and retained earnings would be credited for $14.4 million.

Question 13

A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a violation of FCC rules. Its tax rate is 30%. As a result of this error, net income was:
A) Unaffected.
B) Overstated by $400,000.
C) Overstated by $280,000.
D) Overstated by $120,000.

Accepted Answer

$400,000 × (1 - 0%) = $400,000.
Fines paid for violations of the law are not tax deductible.

Question 14

At the end of the current year, a company failed to accrue interest of $500,000 on its investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:
A) Unaffected.
B) Understated by $350,000.
C) Understated by $500,000.
D) Understated by $150,000.

Accepted Answer

$500,000 × (1 - 0%) = $500,000.
Municipal bond interest is tax exempt.

Question 15

A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result of this error, income tax expense is:
A) Unaffected.
B) Overstated by $60,000.
C) Understated by $60,000.
D) Understated by $140,000.

Accepted Answer

$200,000 × .3 = $60,000 tax reduction.

Question 16

Patterson Company failed to adjust for a $600,000 actual loss on pension plan assets in 2018, resulting in an underfunded pension plan. Patterson's tax rate is 30%. As result of this error, retained earnings would be:
A) Unaffected.
B) Overstated by $60,000.
C) Overstated by $42,000.
D) Overstated by $18,000.

Accepted Answer

The actual loss on pension plan assets is entered to accumulated other comprehensive income (AOCI) and because it is not reflected as part of pension expense, it has no effect on net income and, thus, no effect on retained earnings.

Question 17

Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2018. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2018, would be:
A) Overstated by $36 million.
B) Understated by $36 million.
C) Overstated by $24 million.
D) Understated by $24 million.

Accepted Answer

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Question 18

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards (IFRS)?
A) The error can be reported in the current period if it's not considered practicable to report it retrospectively.
B) The error can be reported in the current period if it's not considered practicable to report it prospectively.
C) The error can be reported prospectively if it's not considered practicable to report it retrospectively.
D) Retrospective application is required with no exception.

Accepted Answer

Under IFRS, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods, the entity may adjust the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable. This allows for reporting the correction in the current period when retrospective application is not practicable.

Question 19

A company failed to record unrealized gains of $20 million on its debt investments classified as trading securities. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:
A) Understated by $14 million.
B) Understated by $7 million.
C) Understated by $20 million.
D) Unaffected.

Accepted Answer

Unrealized gains on trading securities of debt investments are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 × (1 - 30%) = $14,000,000.

Question 20

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:
A) Report a prior period adjustment decreasing retained earnings by $600,000.
B) Report a prior period adjustment decreasing retained earnings by $1,400,000.
C) Report a current period charge decreasing net income by $600,000.
D) Report a current period charge decreasing net income by $1,400,000.

Accepted Answer

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Quiz 20: Accounting Changes and Error Corrections

A company failed to record unrealized gains of $20 million on its available for sale debt security investments. Its tax rate is 30%. As a result of this error, comprehensive income would be:

Using International Financial Reporting Standards (IFRS) , which of the following statements is true regarding correcting errors in previously issued financial statements?

Green Company overstated its inventory by $50 million at the end of 2018. The discovery of this error during 2019, before adjusting or closing entries, would require:

After issuing its financial statements, a company discovered that its beginning inventory was overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was:

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2018. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2018, would be:

Early in 2018, Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2015 was debited to insurance expense. The correcting entry would include:

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

At the end of the current year, a company overstated prepaid insurance by $80,000 and understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this error, net income is:

Which of the following statements is not true regarding the correction of an error?

A broadcasting company failed to make a year-end accrual of $400,000 for fines due to a violation of FCC rules. Its tax rate is 30%. As a result of this error, net income was:

At the end of the current year, a company failed to accrue interest of $500,000 on its investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:

A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result of this error, income tax expense is:

Patterson Company failed to adjust for a $600,000 actual loss on pension plan assets in 2018, resulting in an underfunded pension plan. Patterson's tax rate is 30%. As result of this error, retained earnings would be:

Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2018. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2018, would be:

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards (IFRS) ?

A company failed to record unrealized gains of $20 million on its debt investments classified as trading securities. Its tax rate is 30%. As a result of this error, total shareholders' equity would be: