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Chapter 22: Question 4 (page 1305)
Identify and describe the approach the FASB requires for reporting changes in accounting principles.
FASB is an organization that regulates the accounting standards, and they believe that the best approach is retrospective.
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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.
(Error Analysis) When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.
2017 2018 Over- Under- No Over- Under- No Item statement statement Effect statement statement Effect
1. Failure to record amortization of patent in 2018.
2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.
3. Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.
4. Failure to record accrued interest on notes payable in 2017; that amount was recorded when paid in 2018.
5. Failure to reflect supplies on hand on the balance sheet at end of 2017.
Whittier Construction Co. had followed the practice of expensing all materials assigned to a construction job without recognizing any salvage inventory. On December 31, 2017, it was determined that salvage inventory should be valued at \(52,000. Of this amount, \)29,000 arose during the current year. How does this information affect the financial statements to be prepared at the end of 2017?
Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2017 net income and 2018 net income. 2017 2018 (a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015. (b) Wages payable were not recorded at 12/31/17. (c) Equipment purchased in 2017 was expensed. (d) 2017 ending inventory was overstated. (e) Patent amortization was not recorded in 2018.
Under IFRS, the retrospective approach should not be used if:
(a) retrospective application requires assumptions about management’s intent in a prior period.
(b) the company does not have trained staff to perform the analysis.
(c) the effects of the change have counterbalanced.
(d) the effects of the change have not counterbalanced.
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