D105 Intermediate Accounting III - Set 5 - Part 2

Correct Answer: Retrospectively

Changes in accounting principles, such as revenue recognition, are accounted for retrospectively, adjusting prior period financial statements to reflect the new method.

Correct Answer: Lease commencement date

The right-of-use asset is recognized when the lease commences, which is when the lessor makes the underlying asset available for use.

Correct Answer: Defined contribution plan

In a defined contribution plan, the employer contributes to an employees pension, but the future benefits depend on investment performance, and there is no guarantee of a specific payout amount.

Correct Answer: To reduce tax liability

Many companies choose LIFO or FIFO to minimize tax liability, as these methods impact the cost of goods sold and, consequently, taxable income.

Correct Answer: Prospectively

Changes in accounting estimates, like the useful life of an asset, are applied prospectively, affecting only the current and future financial statements.

Correct Answer: The balance sheet will be understated

Failure to record a lease liability results in an understatement of liabilities on the balance sheet, as the company has not recognized its obligation under the lease.

Correct Answer: Finance lease

Under a finance lease, the lessee records interest expense on the lease liability over the life of the lease using the effective interest method.

Correct Answer: In a note to the financial statements

Subsequent events that are recognized in the financial statements must be disclosed in a note to ensure transparency for financial statement users.

Correct Answer: Debit lease liability, credit cash

The lessees first lease payment in a finance lease reduces the lease liability, as the lessee is repaying part of the obligation.

Correct Answer: Retrospectively

Changes in the reporting entity require retrospective application, adjusting prior period financial statements to reflect the new reporting entity.

Correct Answer: Evenly throughout the lease term

For operating leases, the lease expense is recognized evenly throughout the lease term as a single expense, combining interest and depreciation components.

Correct Answer: Variable lease payments not tied to an index

Variable lease payments that are not tied to an index or rate are excluded from the calculation of the right-of-use asset because they are considered contingent payments.

Correct Answer: Temporary difference

A temporary difference occurs when the book basis and tax basis of an asset or liability differ, typically due to the timing of when revenue or expenses are recognized for financial versus tax purposes.

Correct Answer: Record lease payments as expenses as incurred

For short-term leases (less than 12 months), companies record lease payments as expenses as they are incurred, without recognizing a right-of-use asset or lease liability.

Correct Answer: By restating prior period financial statements

Material errors must be corrected by restating prior period financial statements to reflect the correct information.

Correct Answer: They are corrected in the current year

Noncounterbalancing errors take longer than two periods to correct themselves, so they must be corrected in the current years financial statements.

Correct Answer: Statement of cash flows

The statement of cash flows reports cash flows from operating, investing, and financing activities, showing the inflows and outflows of cash during a specific period.

Correct Answer: Debit lease receivable, debit cost of goods sold, credit inventory, credit sales revenue

In a sales-type lease, the lessor records the present value of the lease payments as a lease receivable and recognizes the cost of goods sold, inventory reduction, and sales revenue.

Correct Answer: Finance leases transfer ownership of the asset to the lessee

In finance leases, control of the asset is transferred to the lessee, often with an ownership transfer or bargain purchase option at the end of the lease term.

Correct Answer: The company restates its prior financial statements

When an error is discovered after financial statements are issued, the company must restate the prior periods financial statements to reflect the corrected information.