How should the effect of a change in accounting estimate be accounted for?
Answer(s): D
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future) periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is incorrect. Restating prior years' financial statements is required when comparative financial statements are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in accounting principle.Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect prior periods.
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993?
Answer(s): C
Choice "c" is correct. $50,000.The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment.Choices "a", "b", and "d" are incorrect, per the above .
The following question is based on the following:Vane Co.'s trial balance of income statement accounts for the year ended December 31, 2002, included the following:Vane's income tax rate is 30%.In Vane's 2002 multiple-step income statement, what amount should Vane report as income from continuing operations?
Choice "c" is correct, $140,000.
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:
Answer(s): A
Choice "a" is correct, Yes - Yes. A material transaction that is "infrequent in occurrence" but not "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss.
An extraordinary item should be reported separately on the income statement as a component of income:
Answer(s): B
Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income statement as a component of income:Yes - net of income taxes.No - after (not before) "discontinued operations of a segment of a business."
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