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Chapter 22: Q1ISTQ. (page 1328)

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.

Short Answer

Expert verified

Option (a) is false as GAAP and IFRS differ in reporting the error correction.

Step by step solution

01

False Statement

The False statement is option A.

02

Explanation for false statement

The statement in option A is false because both GAAP and IFRS differ in reporting the correction of the error in the previously issued financial statement of the business.

03

Explanation for other options

Statement B is true because GAAP and IFRS do have similar treatment for changes in accounting estimates.

Statement C is true, as according to IFRS, the impracticality exception applies to changes in accounting principles and correction of errors

Statement D is true as IFRS does not detail guidance on reporting the indirect effect as GAAP.

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Most popular questions from this chapter

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with “Retirement benefits” on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year’s financial statements should be recast when presented in comparative form with the current year’s financial statements

Joy Cunningham Co. purchased a machine on January 1, 2015, for $550,000. At that time, it was estimated that the machine would have a 10-year life and no salvage value. On December 31, 2018, the firm’s accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment. Instructions Prepare the general journal entries that should be made at December 31, 2018, to record these events. (Ignore tax effects.)

(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.

These items are:

1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.

3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.

4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Identify and describe the approach the FASB requires for reporting changes in accounting principles.

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.
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