Question 1

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years remaining as at the beginning of the year, the accountant should do the following:
A)Compute current year depreciation as (carrying amount - residual value)divided by 15 years.
B)Adjust prior year's depreciation.
C)Adjust the amount of accumulated depreciation as at the beginning of the year.
D)Compute current year depreciation as (carrying amount)X 15/20.

Accepted Answer

When a company changes the estimated useful life of an asset, it should compute the current year depreciation using the new estimated useful life. This is done by dividing the carrying amount (cost less accumulated depreciation) minus any residual value by the new remaining useful life (15 years in this case). Prior years' depreciation and the accumulated depreciation as at the beginning of the year are not adjusted retrospectively.

Question 2

What is the essential characteristic that distinguishes an error correction from a change in estimate?

Accepted Answer

We can distinguish an error correction from a change in accounting estimate based on whether the relevant information triggering the change was known or should have been known previously. If so, then there exists an error requiring correction. If not, then the information merely updates the accounting estimates going forward.

Question 3

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year, the accountant should do (or not do)the following:
A)Compute current year depreciation as (carrying amount - residual value)divided by 20 years.
B)Do not adjust prior year's depreciation.
C)Adjust the amount of accumulated depreciation as at the beginning of the year.
D)Compute current year depreciation as (carrying amount)× 15/20.

Accepted Answer

When a company changes the estimated useful life of an asset, it does not adjust prior years' depreciation. Instead, it recalculates depreciation for the current and future years based on the new estimate. Accumulated depreciation from prior years remains unchanged.

Question 4

Which of the following statements is true?
A)The last-in, first-out (LIFO)cost flow assumption is an acceptable method for costing inventories in Canada.
B)Over time, the number of areas where management has a free choice over accounting policies has increased.
C)A change in accounting policy is an accounting change made at the discretion of management.
D)Changes in accounting policy occur more frequently than changes in estimates.

Accepted Answer

A change in accounting policy is indeed an accounting change made at the discretion of management, often to provide more relevant or reliable information.

Question 5

A company changes the depreciation for a piece of equipment from 20% declining- balance to units-of-production. Describe a plausible circumstance that would support this change as one of the following: (i)an error, (ii)a change in estimate, or (iii)a change in accounting policy.

Accepted Answer

The answer of A company changes the depreciation for a...

Question 6

What is the essential characteristic that distinguishes a change in accounting policy from either an error correction or a change in estimate?

Accepted Answer

The answer of What is the essential characteristic that distinguishes...

Question 7

Which statement is correct about a correction of an error from prior periods?
A)The correct information was available at the time the error was made.
B)The correct information was not available at the time the error was made.
C)One should use hindsight to judge whether there is an accounting error that requires correction.
D)An example of a correction of an error is the difference between the allowance for doubtful accounts and the actual outcome of bad debts.

Accepted Answer

Corrections of errors from prior periods are made when the correct information was available at the time the error was made but was not used or was misinterpreted. This distinguishes true errors from changes in estimates, which occur when new information becomes available.

Question 8

Over time, has management's free will over accounting changes increased or decreased? Explain why.

Accepted Answer

The answer of Over time, has management's free will over...

Question 9

Which of the following is a change in policy?
A)Inventory was sold below carrying amount even though the inventory had been previously written down to lower of cost and net realizable value.
B)A company changes from the cost model to the revaluation model of measuring the value of land.
C)Development costs were capitalized when only five of six criteria for capitalization had been satisfied.
D)The company miscalculated the weighted average number of ordinary shares outstanding because it used the wrong date for a share issuance.

Accepted Answer

Changing from the cost model to the revaluation model for measuring the value of land represents a change in accounting policy. This involves a deliberate change in the basis of accounting for an item, not merely a correction of an error or a change in an accounting estimate.

Question 10

Which of the following is an accounting error?
A)Inventory was sold below carrying amount even though the inventory had been previously written down to the lower of cost and net realizable value.
B)Convertible securities that were identified as dilutive for computing diluted EPS were not converted by the expiration date.
C)A change in economic conditions resulted in the fair value of goodwill declining from $15 million to $10 million.
D)Development costs of an intangible asset were capitalized when only five of six criteria for capitalization had been satisfied.

Accepted Answer

Capitalizing development costs of an intangible asset when not all required criteria are met is an accounting error. Accounting standards specify criteria that must be fully met for costs to be capitalized; failing to meet all required criteria and still capitalizing the costs is incorrect.

Question 11

Which of the following is a change in an estimate?
A)A company changes the presentation of operating expenses from "by function" to "by nature."
B)An enterprise switches from the gross method to the net method of presenting government grants.
C)A temporary difference was treated as a permanent difference.
D)The useful life on a building was originally estimated to be 20 years but the estimated useful life of the building is changed to only 15 years as at the beginning of the year.

Accepted Answer

Changing the estimated useful life of an asset, such as a building, is a change in accounting estimate. This involves revising an estimate based on new information or new developments and is accounted for prospectively.

Question 12

Which of the following is a change in policy?
A)A company changes from the gross method to the net method of recording cash discounts.
B)A change in the terms of a loan from repayment on demand to a fixed repayment date two years after the fiscal year-end.
C)A contingency for a lawsuit that was evaluated to be likely to lead to an outflow of resources was ultimately resolved against the reporting entity.
D)A temporary tax difference was treated as permanent tax difference.

Accepted Answer

Changing from the gross method to the net method of recording cash discounts is a change in accounting policy, which involves a change in the principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Question 13

Complete the table giving an example of a change in estimate from each of the given areas.

Accepted Answer

The answer of Complete the table giving an example of...

Question 14

For the following types of accounting changes, identify the relevant criteria for each accounting change by selecting "yes," "no," or "n/a" (not applicable).

Accepted Answer

The answer of For the following types of accounting changes,...

Question 15

Which of the following is an accounting error?
A)A company changes from the gross method to the net method of recording cash discounts.
B)A private corporation previously using ASPE chooses to adopt IFRS.
C)Costs not related to the construction of a building were included in the building cost.
D)A patent was expected to provide protection of intellectual property for the full legal life of 20 years, but technological advances made the patent obsolete after only 12 years.

Accepted Answer

Including costs not related to the construction of a building in the building cost is an accounting error because it misallocates expenses, leading to inaccurate financial statements.

Question 16

Complete the following table by giving one example of a change in accounting policy for each financial statement item.

Accepted Answer

The answer of Complete the following table by giving one...

Question 17

The discussion in IAS 16 paragraphs 60-62 indicates that a change in depreciation method is usually a change in accounting estimate. Explain the logic behind why a change in depreciation method is normally considered a change in estimate.

Accepted Answer

The answer of The discussion in IAS 16 paragraphs 60-62...

Question 18

Which of the following statements is true?
A)A correction of an error is the result of information that was unknown at the time of the error.
B)A change is accounting policy is the result of new information.
C)A change in estimate is not due to management choice and not due to information known in a prior period.
D)A correction of an error is due to management choice.

Accepted Answer

A change in estimate is based on new information or developments and is not due to management choice or information known in a prior period.

Question 19

For the following financial statement accounts, provide a description of a change in accounting estimates.

Accepted Answer

The answer of For the following financial statement accounts, provide...

Question 20

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year, the accountant should do (or not do)the following:
A)Compute current year depreciation as (carrying amount - residual value)divided by 20 years.
B)Adjust prior year's depreciation.
C)Do not adjust the amount of accumulated depreciation as at the beginning of the year.
D)Compute current year depreciation as (carrying amount)× 15/20.

Accepted Answer

DWhen a company changes the estimated useful life of an asset, it does not adjust prior year's depreciation (eliminating option B) but rather adjusts the depreciation expense going forward. The correct method is to compute the current year depreciation based on the new estimated useful life, which means recalculating the depreciation expense for the remaining life of the asset, not by applying a simple fraction like 15/20 to the carrying amount (making option D incorrect). The correct approach is to spread the remaining carrying amount (minus any residual value) over the new remaining useful life (not mentioned directly but implied as the correct method, making option A incorrect). Option C is correct because the accumulated depreciation as at the beginning of the year remains unchanged; only the future depreciation calculations are adjusted to reflect the new useful life.

Quiz 9: Accounting Changes

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years remaining as at the beginning of the year, the accountant should do the following:

What is the essential characteristic that distinguishes an error correction from a change in estimate?

For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year, the accountant should do (or not do) the following:

Which of the following statements is true?