1. A voluntary change in accounting policy must result in information that is
c. more relevant, but as reliable.
2. 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
3. Which of the following is not a change in accounting policy?
b. Using a different method of amortization for new plant assets
4. An example of a change in accounting policy that should be handled retroactively without restatement is a change from the
b. LIFO method to the FIFO method for inventory valuation when it is impractical to obtain financial data on prior years.
5. When a change in accounting policy is handled retroactively without restatement,
d. the cumulative effect of the use of the new method at the beginning of the year is calculated and beginning retained earnings is adjusted.
6. A change in accounting policy should be applied retroactively unless
b. another method is specifically allowed in the transition provisions.
7. Accounting for a retroactive change requires
d. adjusting the opening balance of retained earnings for the current year.
8. Retroactive application is required for all
a. errors and non-mandated policy changes.
9. Which of the following disclosures is not required for a change from double declining-balance to straight-line?
a. The cumulative effect on prior years, net of tax, in the current income statement
10. A company changes from straight-line to an accelerated method of calculating amortization which will be similar to the method used for tax purposes. The entry to record this change should include a
d. debit to Future Income Tax Liability.
11. 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
c. a debit to Retained Earnings in the amount of the difference on prior years, net of tax.
12. Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
d. A change in accounting policy for which the financial statements for prior periods included for comparative purposes should be restated.
13. Which of the following disclosures is required for a change from LIFO to FIFO?
b. The justification for the change
14. For accounting policy changes and errors, which of the following is not allowed?
c. To net accounting errors for disclosure purposes.
15. Which type of accounting change should always be accounted for in current and future periods?
c. Change in accounting estimate
16. 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
17. When a company decides to switch from capitalizing certain marketing costs to expensing these costs, this change should be handled similarly to a
b. change in accounting estimate.
18. The estimated life of a building that has been amortized 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
b. amortize the remaining book value over the remaining life of the asset.
19. Which of the following statements is correct?
c. A change from expensing certain marketing costs to capitalizing these costs should be handled as a change in accounting estimate.
20. An example of a correction of an error in previously issued financial statements is a change
c. from the cash basis of accounting to the accrual basis of accounting.
21. Counterbalancing errors do not include
b. errors that correct themselves in three years.
22. 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 shareholders' equity at year end and net income for the year?
Assets Liabilities Shareholders' Equity Net Income
c. Understate Understate No effect No effect.
23. 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
c. no effect on net income, working capital, and retained earnings.
24. On January 1, 2004, Lane Corporation acquired machinery at a cost of $400,000. Lane adopted the double declining-balance method of amortization for this equipment and had been recording amortization over an estimated life of eight years, with no residual value. At the beginning of 2007, a decision was made to change to the straight-line method of amortization for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change, net of tax, is
25. On January 1, 2004, Fargo Corporation acquired machinery at a cost of $500,000. Fargo adopted the double declining-balance method of amortization for this machinery and had been recording amortization over an estimated useful life of ten years, with no residual value. At the beginning of 2007, a decision was made to change to the straight-line method of amortization for the machinery. The cumulative effect of this accounting change, ignoring income tax considerations, is
26. On January 1, 2004, Bleeker Co., purchased a machine (its only amortizable asset) for $300,000. The machine has a five-year life, and no residual value. Double declining balance amortization has been used for financial statement reporting and the capital cost allowance for income tax reporting. Effective January 1, 2007, for financial statement reporting, Bleeker decided to change to the straight-line method for amortization of the machine. Assume that Bleeker can justify the change.
Bleeker's income before amortization, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2007, is $250,000. The income tax rate for 2007, as well as for the years 2004-2006, is 30%. What amount should Bleeker report as net income for the year ended December 31, 2007?
27. Arendt Company began operations on January 1, 2006, 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 2006 2007
FIFO $240,000 $270,000
LIFO 180,000 225,000
Net Income (calculated under the FIFO method) 375,000 450,000
Based upon the above information, a change to the LIFO method in 2007 would result in net income for 2007 of
Use the following information for questions 28 and 29.
Egoyan Company purchased a machine on January 1, 2004, for $600,000. At the date of acquisition, the machine had an estimated useful life of six years with no residual value. The machine is being amortized on a straight-line basis. On January 1, 2007, Egoyan 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 residual value. An accounting change was made in 2007 to reflect this additional information.
28. Assuming that the direct effects of this change are limited to the effect on amortization and the related tax provision, and that the income tax rate was 30% in 2004, 2005, 2006, and 2007, what should be reported in Egoyan's income statement for the year ended December 31, 2007, as the cumulative effect on prior years of changing the estimated useful life of the machine?
29. What is the amount of amortization expense on this machine that should be charged in Egoyan's income statement for the year ended December 31, 2007?
Use the following information for questions 30 through 32.
Marat Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2006 Dec. 31, 2007
Ending inventory $1,500 understated $2,200 overstated
Amortization expense $400 understated
An insurance premium of $3,600 was prepaid in 2006 covering the years 2006, 2007, and 2008. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2007, fully amortized machinery was sold for $1,900 cash, but the sale was not recorded until 2008. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors. Ignore income tax considerations.
30. What is the total net effect of the errors on Marat’s 2007 net income?
d. Net income overstated by $3,000.
31. What is the total net effect of the errors on the amount of Marat's working capital at December 31, 2007?
c. Working capital understated by $900.
32. What is the total effect of the errors on the balance of Marat's retained earnings at December 31, 2007?
c. Retained earnings understated by $500.
33. Accrued salaries payable of $11,000 were not recorded at December 31, 2006. Office supplies on hand of $5,000 at December 31, 2007 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. 2007 net income to be understated $16,000 and December 31, 2007 retained earnings to be understated $5,000.
Use the following information for questions 34 through 36.
Alton Co. began operations on January 1, 2006. Financial statements for 2006 and 2007 con- tained the following errors:
Dec. 31, 2006 Dec. 31, 2007
Ending inventory $33,000 too high $39,000 too low
Amortization expense 21,000 too high —
Insurance expense 15,000 too low 15,000 too high
Prepaid insurance 15,000 too high —
In addition, on December 31, 2007 fully amortized equipment was sold for $7,200, but the sale was not recorded until 2008. No corrections have been made for any of the errors. Ignore income tax considerations.
34. The total effect of the errors on Alton's 2007 net income is
a. understated by $94,200.
35. The total effect of the errors on the balance of Alton's retained earnings at December 31, 2007 is understated by
36. The total effect of the errors on the amount of Alton's working capital at December 31, 2007 is working capital is understated by
Use the following information for questions 37 and 38.
Beaver Co. purchased machinery that cost $135,000 on January 4, 2005. The entire cost was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value. The error was discovered on December 20, 2007. Ignore income tax considerations.
37. Beaver's income statement for the year ended December 31, 2007, should show the cumulative effect of this error in the amount of
38. Before the correction was made, and before the books were closed on December 31, 2007, retained earnings was understated by
DERIVATIONS — Computational
No. Answer Derivation
24. b ($400,000 × .25) + ($300,000 × .25) + ($225,000 × .25) = $231,250 (DDB)
($400,000 ÷ 8) × 3 = $150,000 (SL)
($231,250 – $150,000) (1 – .3) = $56,875.
25. b [$500,000 × .2) + ($400,000 × .2) + ($320,000 × .2)] – [($500,000 10) ÷ 3]
26. c $300,000 ÷ 5 = $60,000
($250,000 – $60,000) × .7 = $133,000.
27. a $450,000 – ($270,000 – $225,000) = $405,000.
28. a $0, no cumulative effect, handle prospectively (change in estimate).
29. a ($600,000 ÷ 6) × 3 = $300,000
$300,000 ÷ 5 = $60,000.
30. d $1,500 (o) + $2,200 (o) + $1,200 (o) – $1,900 (u) = $3,000 (o).
31. c $2,200 (o) – $1,200 (u) – $1,900 (u) = $900 (u).
32. c $400 (o) + $2,200 (o) – $1,200 (u) – $1,900 (u) = $500 (u).
33. a 2007 NI = $11,000 (u) + $5,000 (u) = $16,000 (u).
2007 RE = $5,000 (u) [The 2006 $11,000(o) is offset by 2007 $11,000(u)].
34. a $33,000 (u) + $39,000 (u) + $15,000 (u) + $7,200 (u) = $94,200 (u).
35. b $39,000 (u) + $21,000 (u) – $15,000 (o) + $15,000 (u) + $7,200 (u)
= $67,200 (u).
36. c $39,000 (u) + $7,200 (u) = $46,200 (u).
37. d CE = $0, correction of error.