study pt 3 IA3

A company did not accrue annual insurance expense in the prior year’s financial statements. The error resulted in a material overstatement of last year’s net income, and the books are closed for last year.

Which account should the company adjust in the books for the current year to correct this error?

Retained Earnings

A manufacturing company measured its raw materials inventory using the LIFO method for all years prior to Year 2. Beginning with January 1, Year 2, the company elects to use the FIFO method and will present two years in the financial statements.

How should the company account for any additional changes?

By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1

An accounting company identifies a material understatement of prior-year amortization expenses on a client's financial statement.

What is part of the current year's entry for the correction of the error?

Debit Retained Earnings

A company has elected to change from using the LIFO method for valuing its inventory from the previously reported FIFO method. As a result of the change, the prior year's net income increases, requiring the company to pay an additional profit-sharing bonus to its employees.

Which statement accurately depicts how this change should be accounted for as it relates to profit-sharing?

Recognize an indirect effect and record the change in expense in the current period

A company discovers an accounting error related to a prior period.

How should the correction of this material error be reported?

On the retained earnings statement as an adjustment to the opening balance

Which of the following statements is the correct amount for a lessee recording a right-of-use asset under a finance lease?

Present value of the lease payments

What is included in the present value of the lease receivable for a lessor under a sales-type lease?

Rental payments plus the present value of guaranteed and unguaranteed residual values

In computing amortization of a leased asset where there is no bargain purchase option, what should the lessee subtract?

No residual value and amortize over the term of the lease

In an operating lease, what does the lessee record?

lease expense

Which of the following would be included in the Lease Receivable account on the lessor’s books?

• I. Guaranteed residual value

• II. Unguaranteed residual value

• III. Overhead costs

• IV. Rental payments

I, II, and IV

Which plan involves an employer adding a certain sum to a pension trust each period, based on a formula?

Defined contribution plan

Which amount does a defined contribution plan specify?

The required payment amount by the employer

Which calculation is used to measure the funding needed for projected benefit obligations of a defined benefit plan?

Present value

Which statement accurately describes an employer's accounting when making a required contribution to a defined contribution pension plan?

The employer pays an amount each year to the plan based on a formula calculated by the plan.

How is a noncontributory pension plan funded?

The employer makes payments to the funding agency.

In substance, who do the trust assets and liabilities belong to under a defined benefit plan?

Employer

Which type of plan is a 401(k)?

Defined contribution

Which type of pension plan allows employees to deduct contributions from their personal taxable income?

Qualified

Which plan outlines the payments that employees will receive when they retire?

Defined benefit plan

Which factor is a function of the defined benefit plan funding model for each employee's benefit?

Employee's compensation level

Which plan involves an employer adding a certain sum to a pension trust each period, based on a formula?

Defined contribution plan

A company provides employees with a noncontributory defined benefit plan as part of the overall compensation package.

Which characteristic is associated with this type of plan?

The company is at risk for payments falling short of the future benefits.

A company has a pension plan where the employer agrees to fund a fixed amount to a pension trust each pay period. The payment is based on a formula that considers the employees’ age, length of service, salaries, and employer's profits.

What is the name for this type of pension plan?

Defined contribution

Which category is considered in a defined contribution plan?

Employer payments

Which type of U.S. pension plan has grown in the number of active participants over the past 40 years?

Defined contribution plans

Which factor is considered when calculating an employee's pension payment in a defined benefit plan?

Length of service

A company includes a pension plan as part of its overall compensation package. The employer bears the entire cost of the plan.

Which type of plan is described in this scenario?

Noncontributory plan

A company includes a pension plan as part of its overall compensation package. Employees may voluntarily make payments to increase benefits, and they assume part of the cost of the benefits.

Which type of plan is described in this scenario?

Contributory plan

Which factor is a function of the defined benefit plan funding model for each employee's benefit?

Employee's compensation level

A company provides a pension plan to eligible new hires. Pension payments are typically based on the employee’s years of service and the compensation level as the employee approaches retirement. It is the responsibility of the employer to pay any shortfall in the accumulated assets held by the trust.

Which type of plan is described in the scenario?

Defined benefit plan