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Chapter 22: Q5ISTQ. (page 1328)

Which of the following is true regarding whether IFRS specifically addresses the accounting and reporting for effects of changes in accounting policies?

Direct effects Indirect effects

(a) Yes Yes

(b) No No

(c) No Yes

(d) Yes No

Short Answer

Expert verified

The correct answer is option (d)— yes for the direct effect and no for indirect effect.

Step by step solution

01

Correct Option

The correct answer is option (d)

02

Explanation

There will be a direct effect when there is a change in accounting principle but the IFRS does not explicitly address the accounting and the disclosure of the indirect effect of the change in accounting principle.

03

Explanation for false options

The IFRS only addresses the accounting and reporting for effects of changes in accounting policies in direct effects but not an indirect effect.

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Most popular questions from this chapter

Lowell Corporation has used the accrual basis of accounting for several years. A review of the records, however, indicates that some expenses and revenues have been handled on a cash basis because of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper reported \(29,000 net income for 2016 and \)37,000 net income for 2017. Further examination of the records reveals that the following items were handled improperly.

1. Rent was received from a tenant in December 2016. The amount, \(1,000, was recorded as revenue at that time even though the rental pertained to 2017.

2. Salaries and wages payable on December 31 have been consistently omitted from the records of that date and have been entered as expenses when paid in the following year. The amounts of the accruals recorded in this manner were:

December 31, 2015 \)1,100

December 31, 2016 1,200

December 31, 2017 940

3. Invoices for supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them.

December 31, 2015 $1,300

December 31, 2016 940

December 31, 2017 1,420

Instructions

Prepare a schedule that will show the corrected net income for the years 2016 and 2017. All items listed should be labeled clearly. (Ignore income tax considerations.)

Which of the following is false?

(a) GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

(b) The accounting for changes in estimates is similar between GAAP and IFRS.

(c) Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors.

(d) GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

You have been assigned to examine the financial statements of Zarle Company for the year ended December 31, 2017. You discover the following situations.

1. Depreciation of \(3,200 for 2017 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing \)19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system.

3. A collection of \(5,600 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

4. In 2017, the company sold for \)3,700 fully depreciated equipment that originally cost \(25,000. The company credited the proceeds from the sale to the Equipment account.

5. During November 2017, a competitor company filed a patent-infringement suit against Zarle claiming damages of \)220,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is \(125,000. The company has not reflected or disclosed this situation in the financial statements.

6. Zarle has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2016 \)95,000 \(95,000 December 31, 2017 \)84,000 \(82,000

7. At December 31, 2017, an analysis of payroll information shows accrued salaries of \)12,200. The Salaries and Wages Payable account had a balance of \(16,000 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

8. A large piece of equipment was purchased on January 3, 2017, for \)40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment.

9. A \(12,000 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

10. A trademark was acquired at the beginning of 2016 for \)50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

Instructions

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.)

Botticelli Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.

2015 \(140,000a 2017 \)205,000

2016 160,000b 2018 276,000

a Includes a \(10,000 increase because of change in bad debt experience rate.

bIncludes a gain of \)30,000.

The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.

1. In early 2016, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been \(10,000. The company therefore restated its net income for 2015.

2. In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.

2015 2016 2017 2018

Net income unadjusted—LIFO basis \)140,000 \(160,000 \)205,000 \(276,000

Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000

\) 15,000 \( 5,000 \) 10,000 \( (16,000)

3. In 2018, the auditor discovered that:

(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by \)14,000 in 2017.

(b) A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court’s finding, tax expenses in 2018 were reduced by $60,000.

Instructions

(a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.)

(b) Present net income as reported in comparative income statements for the years 2015 to 2018

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.
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