Reference no: EM13880079

The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study accounting changes and errors while preparing for the CPA examination. Determine the response that best completes the statements or questions.

1. Kap Company switched from the sum of the years digits depreciation method to straight line depreciation in 2013. The change affects machinery purchased at the beginning of 2011 at a cost of $36,000. The machinery has an estimated life of five years and an estimated residual value of $1,800. What is Kap's 2013 depreciation expense?

a. $4,200
b. $4,560
c. $4,800
d. $7,920

2. Retrospective restatement usually is appropriate for a change in:Accounting Principle . Accounting Estimate

a. Yes ............. Yes
b. Yes ............. No
c. No ............ Yes
d. No ............ No

3. For 2012, Pac Co. estimated its two year equipment warranty costs based on $100 per unit sold in 2012.Experience during 2013 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported

a. in 2013 income from continuing operations.
b. as an accounting change, net of tax, below 2013 income from continuing operations.
c. as an accounting change requiring 2012 financial statements to be restated.
d. as a correction of an error requiring 2012 financial statements to be restated.

4. A company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in 

a. an accounting change that should be reported prospectively.
b. an accounting change that should be reported by restating the financial statements of all prior periods presented.
c. a correction of an error.
d. neither an accounting change nor a correction of an error.

5. Conn Co. reported a retained earnings balance of $400,000 at December 31, 2012. In August 2013, Conn determined that insurance premiums of $60,000 for the three year period beginning January 1, 2012, had been paid and fully expensed in 2012. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its 2013 statement of retained earnings?

a. $420,000
b. $428,000
c. $440,000
d. $442,000

6. During 2014, Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:
2012 .......... $ 60,000 understated
2013 ..........75,000 overstated

Paul uses the periodic inventory system to ascertain year end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, Paul's retained earnings at January 1, 2014, would be

a. correct.
b. $15,000 overstated.
c. $75,000 overstated.
d. $135,000 overstated.

Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for accounting changes and errors.

7. Under IFRS, how should changes in accounting policy be recognized in the financial statements?

a. Prospectively.
b. Retroactively for all periods presented.
c. In the statement of cash flows.
d. In the statement of comprehensive income.

8. According to IAS 8, how should prior period errors that are discovered in a subsequent reporting period be recognized in the financial statements?

a. As an adjustment to beginning retained earnings for the reporting period in which the error was discovered.
b. As a note in the financial statements that the error was previously made but has since been corrected.
c. In the statement of comprehensive income.
d. Retroactively for all periods presented.

9. Using IFRS, a change in accounting policy for which a standard does not include specific transitional provisions should be applied

a. prospectively.
b. practicably.
c. in accordance with management's judgment.
d. retrospectively.

10. Using IFRS, how should prior period errors that are discovered in a subsequent reporting period be recognized in the financial statements?

a. As an adjustment to beginning retained earnings for the reporting period in which the error was discovered.
b. As a note in the financial statements that the error was previously made but has since been corrected.
c. In the current period if it's not considered practicable to report it retrospectively.
d. In the statement of comprehensive income.

11. Under IFRS, changes in accounting policies are

a. permitted if the change will result in a more reliable and more relevant presentation of the financial statements.
b. permitted if the entity encounters new transactions, events, or conditions that are substantively different from existing or previous transactions.
c. required on material transactions, if the entity had previously accounted for similar, though immaterial, transactions under an unacceptable accounting method.
d. required if an alternate accounting policy gives rise to a material change in assets, liabilities, or the current year net income.

12. Upon first time adoption of IFRS, an entity may elect to use fair value as deemed cost for

a. biological assets related to agricultural activity for which there is no active market.
b. intangible assets for which there is no active market.
c. any individual item of property, plant, and equipment.
d. financial liabilities that are not held for trading.

13. On July 1, year 2, a company decided to adopt IFRS. The company's first IFRS reporting period is as of and for the year ended December 31, year 2. The company will present one year of comparative information. What is the company's date of transition to IFRS?

a. January 1, year 1.
b. January 1, year 2.
c. July 1, year 2.
d. December 31, year 2.

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

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.

15. Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards?

a. Change in reporting entity.
b. Change to the LIFO method from the FIFO method.
c. Change in accounting estimate.
d. Change in depreciation methods.