FAC1503 ASS 2 UPDATED QUESTIONS AND
ANSWERS COMPLETE STUDY SHEET
REVIEW MATERIAL
●● Would a change from Completed Contract to Percentage of
Completion be a change in accounting principle- or a change of
estimate?How would it be applied?
Answer: A change of principle.Applied retrospectively.
●● Would a change from LIFO to FIFO be a change in accounting
principle or a change of estimate? How would this change be applied?
Answer: A change in accounting principle.Applied retrospectively.
●● How is a change in accounting estimate applied?
Answer: A change in accounting estimate is applied prospectively (going
forward).No backwards adjustment is made.
●● Would a change from straight line depreciation to double declining
balance be a change in accounting principle or a change in
estimate?How would this change be applied?
Answer: Change in depreciation method would be a change in
accounting estimate. It is applied prospectively.
,●● How is a correction of an accounting error made?
Answer: Cumulative effect of error gets adjusted to the beginning
balances of assets and liabilities in the earliest period presented in the
comparative statements.The correction of the error must be included in
the footnotes.
●● What are the requirements for a prior period adjustment?
Answer: Effect is MaterialIs identifiable in Prior PeriodCouldn't be
estimated in Prior Periods
●● How is a change from a non-GAAP accounting method to a GAAP
method recorded?
Answer: It is treated as a correction of an accounting error.Cumulative
effect of error gets adjusted to the beginning balances of assets and
liabilities in the earliest period presented in the comparative
statementsCorrection of the error must be included in the footnotes
●● How does an inventory error effect the financial statements?
Answer: Effect on Ending Inventory : Effect on Net IncomeIf one is
overstated- both overstated. If one is understated- both
understated.Misstating inventory corrects itself after TWO periods.
●● How is a change in entity recorded?
,Answer: Applied retrospectively.All prior periods presented for
comparative purposes must reflect the changeFootnote disclosures must
be madeChanging to Consolidated Statements
●● What is a serial bond?
Answer: Any bond that matures in installments
●● What is a term bond?
Answer: Any bond that matures on a single date
●● What is a debenture bond?
Answer: A bond not secured by any collateral
●● What is a sinking fund bond?
Answer: Cash is held in a sinking fund for repayment of bond at
maturity5 years of requirements and maturity details should be disclosed
●● What is the formula to calculate proceeds of a bond sale?
Answer: Present Value of the principal payment at maturity+ Present
Value of Interest Payments made: Market Value of Bond Proceeds
●● How is the present value of a bond calculated?
, Answer: Step 1: PV of $1 @ Yield Rate (not Stated Rate)x Bond Face
ValuePLUSStep 2: PV of an Ordinary Annuity of $1 for Term @Yieldx
(Stated Rate x Face)
●● Which costs are included in bond issuance costs? How are they
recorded?
Answer: Include Engraving; Printing; Legal; Underwriter;
RegistrationDebited to a deferred charge account and amortized over life
of Bond using S/L Bond Proceeds - Bond Issuance Costs : Net Bond
ProceedsTime of amortization begins when issued
●● How are bonds reported when classified as trading securities?
Answer: Reported at FMV with unreleased gains and losses being
included in earnings
●● How are bonds amortized under the interest method?
Answer: Both discount and premium amortization amounts increase
each year
●● Describe the book value method when converting from bonds to
stocks.
Answer: No gain or loss recognizedAPIC is the plug for the difference
between the Bond's Book Value and the Par Value of the Common Stock
●● What is the stated rate for a bond?
ANSWERS COMPLETE STUDY SHEET
REVIEW MATERIAL
●● Would a change from Completed Contract to Percentage of
Completion be a change in accounting principle- or a change of
estimate?How would it be applied?
Answer: A change of principle.Applied retrospectively.
●● Would a change from LIFO to FIFO be a change in accounting
principle or a change of estimate? How would this change be applied?
Answer: A change in accounting principle.Applied retrospectively.
●● How is a change in accounting estimate applied?
Answer: A change in accounting estimate is applied prospectively (going
forward).No backwards adjustment is made.
●● Would a change from straight line depreciation to double declining
balance be a change in accounting principle or a change in
estimate?How would this change be applied?
Answer: Change in depreciation method would be a change in
accounting estimate. It is applied prospectively.
,●● How is a correction of an accounting error made?
Answer: Cumulative effect of error gets adjusted to the beginning
balances of assets and liabilities in the earliest period presented in the
comparative statements.The correction of the error must be included in
the footnotes.
●● What are the requirements for a prior period adjustment?
Answer: Effect is MaterialIs identifiable in Prior PeriodCouldn't be
estimated in Prior Periods
●● How is a change from a non-GAAP accounting method to a GAAP
method recorded?
Answer: It is treated as a correction of an accounting error.Cumulative
effect of error gets adjusted to the beginning balances of assets and
liabilities in the earliest period presented in the comparative
statementsCorrection of the error must be included in the footnotes
●● How does an inventory error effect the financial statements?
Answer: Effect on Ending Inventory : Effect on Net IncomeIf one is
overstated- both overstated. If one is understated- both
understated.Misstating inventory corrects itself after TWO periods.
●● How is a change in entity recorded?
,Answer: Applied retrospectively.All prior periods presented for
comparative purposes must reflect the changeFootnote disclosures must
be madeChanging to Consolidated Statements
●● What is a serial bond?
Answer: Any bond that matures in installments
●● What is a term bond?
Answer: Any bond that matures on a single date
●● What is a debenture bond?
Answer: A bond not secured by any collateral
●● What is a sinking fund bond?
Answer: Cash is held in a sinking fund for repayment of bond at
maturity5 years of requirements and maturity details should be disclosed
●● What is the formula to calculate proceeds of a bond sale?
Answer: Present Value of the principal payment at maturity+ Present
Value of Interest Payments made: Market Value of Bond Proceeds
●● How is the present value of a bond calculated?
, Answer: Step 1: PV of $1 @ Yield Rate (not Stated Rate)x Bond Face
ValuePLUSStep 2: PV of an Ordinary Annuity of $1 for Term @Yieldx
(Stated Rate x Face)
●● Which costs are included in bond issuance costs? How are they
recorded?
Answer: Include Engraving; Printing; Legal; Underwriter;
RegistrationDebited to a deferred charge account and amortized over life
of Bond using S/L Bond Proceeds - Bond Issuance Costs : Net Bond
ProceedsTime of amortization begins when issued
●● How are bonds reported when classified as trading securities?
Answer: Reported at FMV with unreleased gains and losses being
included in earnings
●● How are bonds amortized under the interest method?
Answer: Both discount and premium amortization amounts increase
each year
●● Describe the book value method when converting from bonds to
stocks.
Answer: No gain or loss recognizedAPIC is the plug for the difference
between the Bond's Book Value and the Par Value of the Common Stock
●● What is the stated rate for a bond?
