Intermediate Accounting Ch 22

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Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.

B. Consistency

Which of the following is not treated as a change in accounting principle?
a. A change from LIFO to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full-cost to successful efforts in the extractive industry
d. A change from completed-contract to percentage-of-completion

B. A change to a different method of depreciation for plant assets

Which of the following is not a retrospective-type accounting change?
a. Completed-contract method to the percentage-of-completion method for long-term contracts
b. LIFO method to the FIFO method for inventory valuation
c. Sum-of-the-years'-digits method to the straight-line method
d. "Full cost" method to another method in the extractive industry

C. Sum-o-the-years'-digits method to the straight-line method

Which of the following is accounted for as a change in accounting principle?
a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing them as they become material.
d. A change in inventory valuation from average cost to FIFO.

D. A change in inventory valuation from average cost to FIFO

A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.

A. credit to Accumulated Depreciation

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line?
a. The cumulative effect on prior years, net of tax, in the current retained earnings statement
b. Restatement of prior years' income statements
c. Recomputation of current and future years' depreciation
d. All of these are required.

C. Recomputation of current and future years' depreciation

A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a
a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d. credit to Deferred Tax Liability.

C. debit to Retained Earnings in the amount of the difference on prior years, net of tax

Which of the following disclosures is required for a change from LIFO to FIFO?
a. The cumulative effect on prior years, net of tax, in the current retained earnings statement
b. The justification for the change
c. Restated prior year income statements
d. All of these are required.

D. All of these are required

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
a. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
b. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
c. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
d. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

B. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.

Which type of accounting change should always be accounted for in current and future periods?
a. Change in accounting principle
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error

C. change in accounting estimate

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only

A. current period and prospectively

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a
a. change in accounting principle.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.

B. change in accounting estimate

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

B. depreciate the remaining book value over the remaining life of the asset

Which of the following statements is correct?
a. Changes in accounting principle are always handled in the current or prospective period.
b. Prior statements should be restated for changes in accounting estimates.
c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
d. Correction of an error related to a prior period should be considered as an adjustment to current year net income.

C. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.

Which of the following describes a change in reporting entity?
a. A company acquires a subsidiary that is to be accounted for as a purchase.
b. A manufacturing company expands its market from regional to nationwide.
c. A company divests itself of a European branch sales office.
d. Changing the companies included in combined financial statements.

D. Changing the companies included in combined financial statements

Presenting consolidated financial statements this year when statements of individual companies were presented last year is
a. a correction of an error.
b. an accounting change that should be reported prospectively.
c. an accounting change that should be reported by restating the financial statements of all prior periods presented.
d. not an accounting change.

C. an accounting change that should be reported by restating the financial statements of all prior periods presented

An example of a correction of an error in previously issued financial statements is a change
a. from the FIFO method of inventory valuation to the LIFO method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.

C. from the cash basis of accounting to the accrual basis of accounting

Counterbalancing errors do not include
a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.

B. errors that correct themselves in three years

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?
Assets Liabilities Stockholders' Equity Net Income
a. No effect Understate Overstate Overstate.
b. No effect Overstate Understate Understate.
c. Understate Understate No effect No effect.
d. Understate No effect Understate Understate.

C. Understate Understate No effect No Effect

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause
a. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated.

C. Cost of goods sol and net income to be understated

On January 1, 2008, Neal Corporation acquired equipment at a cost of $540,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2011, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2011 would be
a. $28,125.
b. $45,000.
c. $67,500.
d. $108,000.

b [(8 + 7 + 6) ÷ 36] × $540,000 = $ 315,000 (AD)
($540,000 - $ 315,000) ÷ 5 = $ 45,000.

On January 1, 2008, Knapp Corporation acquired machinery at a cost of $250,000. Knapp adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2011, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2011 would be
a. $12,800.
b. $18,286.
c. $25,000.
d. $35,714.

b {$250,000 - [($250,000 × .2) + ($200,000 × .2) + ($160,000 × .2)]} ÷ 7 = $18,286.

On January 1, 2008, Piper Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2011, for financial statement reporting, Piper decided to change to the straight-line method for depreciation of the machine. Assume that Piper can justify the change.
Piper's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2011, is $250,000. The income tax rate for 2011, as well as for the years 2008-2010, is 30%. What amount should Piper report as net income for the year ended December 31, 2011?
a. $60,000
b. $91,000
c. $154,000
d. $175,000

c [(5/15 + 4/15 + 3/15) × $300,000] = $240,000 (AD)
($300,000 - $240,000) = $60,000 (BV)
[$250,000 - ($60,000 ÷ 2)] × (1 - .3) = $154,000.

Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used the sum-of-the-years'-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2010, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain:
2009 2010
Straight-line $105,000 $105,000
Sum-of-the-years'-digits 180,000 150,000


Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $135,000.
b. $120,000.
c. $72,000.
d. $0.

d $0, No cumulative effect; handle prospectively.

Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used the sum-of-the-years'-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2010, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain:
2009 2010
Straight-line $105,000 $105,000
Sum-of-the-years'-digits 180,000 150,000


The amount that Ventura should report for depreciation expense on its 2011 income statement is
a. $120,000.
b. $105,000.
c. $75,000.
d. none of the above.

c [$630,000 - ($180,000 + $150,000)] ÷ 4 = $75,000.

During 2011, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
Completed-Contract Percentage-of-Completion
2009 $ 475,000 $ 800,000
2010 625,000 950,000
2011 700,000 1,050,000
$1,800,000 $2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
a. $600,000 on the 2011 income statement.
b. $390,000 on the 2011 income statement.
c. $600,000 on the 2011 retained earnings statement.
d. $390,000 on the 2011 retained earnings statement.

d [($800,000 + $950,000) - ($475,000 + $625,000)] × (1 - .40) = $390,000.

On January 1, 2008, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2011, a decision was made to change to the double-declining balance method of depreciation for this machine.


Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is
a. $67,200.
b. $0.
c. $78,960.
d. $112,800.

b $0, No cumulative effect; handle prospectively.

On January 1, 2008, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2011, a decision was made to change to the double-declining balance method of depreciation for this machine.


The amount that Nobel should record as depreciation expense for 2011 is
a. $60,000.
b. $84,000.
c. $120,000.
d. none of the above.

c {($600,000 - [($600,000 ÷ 10) × 3]} ÷ 7 × 2 = $120,000.

On December 31, 2011 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2011 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/11, assuming a 40% tax rate, is
a. $420,000.
b. $252,000.
c. $168,000.
d. $0.

b $420,000 × (1 - .40) = $252,000.

Heinz Company began operations on January 1, 2010, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $640,000 $ 712,000
LIFO 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,080,000
Based on the above information, a change to the LIFO method in 2011 would result in net income for 2011 of
a. $1,120,000.
b. $1,080,000.
c. $1,004,000.
d. $1,000,000.

c $1,080,000 - ($712,000 - $636,000) = $1,004,000.

Lanier Company began operations on January 1, 2010, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2011 would result in net income for 2011 of
a. $540,000.
b. $600,000.
c. $620,000.
d. $660,000.

a $600,000 - ($360,000 - $300,000) = $540,000.

Equipment was purchased at the beginning of 2008 for $204,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $24,000. The equipment was depreciated using the straight-line method of depreciation through 2010. At the beginning of 2011, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $15,000. The amount to be recorded for depreciation for 2011, reflecting these changes in estimates, is
a. $12,375.
b. $19,800.
c. $22,800.
d. $23,625.

b $204,000 - {[($204,000 - $24,000) ÷ 6] × 3} = $114,000
($114,000 - $15,000) ÷ (8 - 3) = $19,800.

Swift Company purchased a machine on January 1, 2008, for $300,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2011, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2011 to reflect this additional information.

Assume that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate was 30% in 2008, 2009, 2010, and 2011. What should be reported in Swift's income statement for the year ended December 31, 2011, as the cumulative effect on prior years of changing the estimated useful life of the machine?
a. $0
b. $20,000
c. $30,000
d. $105,000

a $0, no cumulative effect, handle prospectively (change in estimate).

Swift Company purchased a machine on January 1, 2008, for $300,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2011, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2011 to reflect this additional information.

What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2011?
a. $30,000
b. $37,500
c. $60,000
d. $75,000

a ($300,000 ÷ 6) × 3 = $150,000
$150,000 ÷ 5 = $30,000.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/10 and 12/31/11 contained the following errors:

2010 2011
Ending inventory $15,000 overstatement $24,000 understatement
Depreciation expense 6,000 understatement 12,000 overstatement


Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By what amount will 2010 income before income taxes be overstated or understated?
a. $21,000 overstatement
b. $9,000 overstatement
c. $21,000 understatement
d. $9,000 understatement

a $15,000 + $6,000 = $21,000 overstatement.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/10 and 12/31/11 contained the following errors:

2010 2011
Ending inventory $15,000 overstatement $24,000 understatement
Depreciation expense 6,000 understatement 12,000 overstatement


Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income taxes, by how much will retained earnings at 12/31/11 be overstated or understated?
a. $24,000 overstatement
b. $21,000 overstatement
c. $30,000 understatement
d. $9,000 understatement

c $24,000 + $6,000 = $30,000 understatement.

Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $7,500 understated $11,000 overstated
Depreciation expense 2,000 understated

An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012. There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors. Ignore income tax considerations.



57. What is the total net effect of the errors on Langley's 2011 net income?
a. Net income understated by $14,500.
b. Net income overstated by $7,500.
c. Net income overstated by $13,000.
d. Net income overstated by $15,000.

d $7,500 (o) + $11,000 (o) + $6,000 (o) - $9,500 (u) = $15,000 (o).

Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $7,500 understated $11,000 overstated
Depreciation expense 2,000 understated

An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012. There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors. Ignore income tax considerations.


What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2011?
a. Working capital overstated by $5,000
b. Working capital overstated by $1,500
c. Working capital understated by $4,500
d. Working capital understated by $12,000

c $11,000 (o) - $6,000 (u) - $9,500 (u) = $4,500 (u).

Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $7,500 understated $11,000 overstated
Depreciation expense 2,000 understated

An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012. There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors. Ignore income tax considerations.

What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2011?
a. Retained earnings understated by $10,000
b. Retained earnings understated by $4,500
c. Retained earnings understated by $2,500
d. Retained earnings overstated by $3,500

c $2,000 (o) + $11,000 (o) - $6,000 (u) - $9,500 (u) = $2,500 (u).

Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office supplies on hand of $24,000 at December 31, 2011 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause
a. 2011 net income to be understated $75,000 and December 31, 2011 retained earnings to be understated $24,000.
b. 2010 net income and December 31, 2010 retained earnings to be understated $51,000 each.
c. 2010 net income to be overstated $27,000 and 2011 net income to be understated $24,000.
d. 2011 net income and December 31, 2011 retained earnings to be understated $24,000 each.

a 2011 NI = $51,000 (u) + $24,000 (u) = $75,000 (u).
2011 RE = $24,000 (u) [The 2010 $51,000 (o) is offset by 2011 $51,000 (u)].

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore income tax considerations.


The total effect of the errors on Bishop's 2011 net income is
a. understated by $376,800.
b. understated by $244,800.
c. overstated by $115,200.
d. overstated by $199,200.

a $132,000 (u) + $156,000 (u) + $60,000 (u) + $28,800 (u) = $376,800 (u).

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore income tax considerations.


The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by
a. $328,800.
b. $268,800.
c. $184,800.
d. $136,800.

b $156,000 (u) + $84,000 (u) - $60,000 (o) + $60,000 (u) + $28,800 (u)
= $268,800 (u).

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore income tax considerations.


The total effect of the errors on the amount of Bishop's working capital at December 31, 2011 is understated by
a. $400,800.
b. $316,800.
c. $184,800.
d. $124,800.

c $156,000 (u) + $28,800 (u) = $184,800 (u).

Link Co. purchased machinery that cost $810,000 on January 4, 2009. The entire cost was recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The error was discovered on December 20, 2011. Ignore income tax considerations.


Link's income statement for the year ended December 31, 2011, should show the cumulative effect of this error in the amount of
a. $726,000.
b. $642,000.
c. $558,000.
d. $0.

d CE = $0, correction of error.

Link Co. purchased machinery that cost $810,000 on January 4, 2009. The entire cost was recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The error was discovered on December 20, 2011. Ignore income tax considerations.


Before the correction was made, and before the books were closed on December 31, 2011, retained earnings was understated by
a. $810,000.
b. $726,000.
c. $642,000.
d. $558,000.

c $810,000 - = $642,000

Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2012. Ernst is subject to a 40 % tax rate.


Ernst's net income for the year ended December 31, 2010, was understated by
a. $402,000.
b. $450,000.
c. $670,000.
d. $750,000.

a ($750,000 - [($750,000 - $30,000) ÷ 9]) × (1 - .40) = $402,000.

Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2012. Ernst is subject to a 40 % tax rate.


Before the correction was made and before the books were closed on December 31, 2012, retained earnings was understated by
a. $332,000.
b. $336,000.
c. $354,000.
d. $450,000.

c $750,000 - [($750,000 - $30,000) ÷ 9 × 2] = $590,000.
$590,000 × (1 - .40) = $354,000.

Which of the following should be reported as a prior period adjustment?
Change in Change from
Estimated Lives Unaccepted Principle
of Depreciable Assets to Accepted Principle
a. Yes Yes
b. No Yes
c. Yes No
d. No No

b

On December 31, 2011, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at January 1, 2011. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $0.
b. $450,000.
c. $1,050,000.
d. $1,500,000.

c $1,500,000 × (1 - .3) = $1,050,000.

On January 1, 2011, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2011 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its 2011
a. retained earnings statement as a $560,000 addition to the beginning balance.
b. income statement as a $560,000 cumulative effect of accounting change.
c. retained earnings statement as an $800,000 addition to the beginning balance.
d. income statement as an $800,000 cumulative effect of accounting change.

a $800,000 × (1 - .3) = $560,000.

On January 1, 2008, Lake Co. purchased a machine for $792,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2011, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $72,000. An accounting change was made in 2011 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2011 of
a. $438,000.
b. $462,000.
c. $480,000.
d. $528,000.

a $792,000 × 3/8 = $297,000
$297,000 + [($792,000 - $297,000 - $72,000) × 1/3] = $438,000.

On January 1, 2008, Hess Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2023. During 2011, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2011?
a. $357,000
b. $408,000
c. $420,000
d. $436,375

b $595,000 × 3/15 = $119,000
$595,000 - $119,000 - [($595,000 - $119,000) × 1/7] = $408,000.

During 2010, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year.
• Royalty income of $108,000 was accrued at 12/31/10 for the period July-December 2010.
• Royalty income of $120,000 was received on 3/31/11, and $156,000 on 9/30/11.
• Mercer learned from Roark that sales subject to royalty were estimated at $1,620,000 for the last half of 2011.
In its income statement for 2011, Mercer should report royalty income at
a. $276,000.
b. $288,000.
c. $318,000.
d. $330,000.

d ($120,000 - $108,000) + $156,000 + ($1,620,000 × .10) = $330,000.

On January 1, 2010, Janik Corp. acquired a machine at a cost of $500,000. It is to be depreciated on the straight-line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Janik's 2010 financial statements. The oversight was discovered during the preparation of Janik's 2011 financial statements. Depreciation expense on this machine for 2011 should be
a. $0.
b. $100,000.
c. $125,000.
d. $200,000.

b $500,000 ÷ 5 = $100,000.

On December 31, 2011, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2011 balance sheet?
Accrued Liabilities Retained Earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated

C

Black, Inc. is a calendar-year corporation whose financial statements for 2010 and 2011 included errors as follows:
Year Ending Inventory Depreciation Expense
2010 $162,000 overstated $135,000 overstated
2011 54,000 understated 45,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2010, or at December 31, 2011. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2012?
a. $144,000 increase
b. $36,000 increase
c. $18,000 decrease
d. $9,000 increase

a $54,000 (u) + $135,000 (u) - $45,000 (o) = $144,000 (u).

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