Intermediate 2 (Ch. 22)

Swift Company purchased a machine on January 1, 2016, for $900,000. 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, 2019, 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 2019 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 2016, 2017, 2018, and 2019. What should be reported in Swift's income statement for the year ended December 31, 2019, as the cumulative effect on prior years of changing the estimated useful life of the machine? A. $0 B. $60,000 C. $90,000 D. $315,000

A. $0

On January 1, 2016, Hess Co. purchased a patent for $1,904,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2031. During 2019, 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, 2019? A. $1,305,600 B. $1,142,400 C. $1,344,000 D. $1,396,400

A. $1,305,600

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

A. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2017 Dec. 31, 2018 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 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 Langley's 2018 net income? A. Net income overstated by $75,000. B. Net income understated by $72,500. C. Net income overstated by $37,500. D. Net income overstated by $65,000.

A. Net income overstated by $75,000.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that no correcting entries were made at 12/31/17, or 12/31/18. Ignoring income taxes, by how much will retained earnings at 12/31/18 be overstated or understated? A. $80,000 overstatement B. $100,000 understatement C. $70,000 overstatement D. $30,000 understatement

B. $100,000 understatement

On December 31, 2018 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2018 beginning inventory to increase by $960,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/18, assuming a 40% tax rate, is A. $960,000. B. $576,000. C. $384,000. D. $0.

B. $576,000.

Equipment was purchased at the beginning of 2016 for $850,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $100,000. The equipment was depreciated using the straight-line method of depreciation through 2018. At the beginning of 2019, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $62,500. The amount to be recorded for depreciation for 2019, reflecting these changes in estimates, is A. $95,000. B. $82,500. C. $98,438. D. $51,562.

B. $82,500.

Accrued salaries payable of $102,000 were not recorded at December 31, 2017. Office supplies on hand of $58,000 at December 31, 2018 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. 2017 net income and December 31, 2017 retained earnings to be understated $102,000 each. B. 2018 net income to be understated $160,000 and December 31, 2018 retained earnings to be understated $58,000. C. 2017 net income to be overstated $44,000 and 2018 net income to be understated $58,000. D. 2018 net income and December 31, 2018 retained earnings to be understated $58,000 each.

B. 2018 net income to be understated $160,000 and December 31, 2018 retained earnings to be understated $58,000.

Which type of accounting change should always be accounted for in current and future periods? A. Change in reporting entity B. Change in accounting estimate C. Correction of an error D. Change in accounting principle

B. Change in accounting estimate

On December 31, 2018, 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, 2018 balance sheet? Accrued Liabilities/ Retained Earnings A. No effect No effect B. Understated No effect C. No effect Overstated D. Understated Overstated

B. Understated No effect

Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2017 Dec. 31, 2018 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 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, 2018? A. Working capital overstated by $7,500 B. Working capital understated by $22,500 C. Working capital understated by $60,000 D. Working capital overstated by $25,000

B. Working capital understated by $22,500

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. correction of an error. B. change in accounting estimate. C. change in accounting principle. D. prior period adjustment

B. change in accounting estimate.

On January 1, 2016, Nobel Corporation acquired machinery at a cost of $1,600,000. 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 2019, 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. $300,800. B. $179,200. C. $0. D. $210,560.

C. $0.

Ernst Company purchased equipment that cost $3,000,000 on January 1, 2017. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ernst is subject to a 40% tax rate. Ernst's net income for the year ended December 31, 2017, was understated by A. $1,800,000. B. $2,680,000. C. $1,608,000. D. $3,000,000.

C. $1,608,000.

Which of the following statements is correct? A. Prior statements should be restated for changes in accounting estimates. B. Changes in accounting principle are always handled in the current or prospective period. 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 should be reported as a prior period adjustment? Change in Estimated Lives of Depreciable Assets Change from Unaccepted Principle to Accepted Principle A. Yes No B. No No C. No Yes D. Yes Yes

C. No Yes

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method? 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

Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2017 Dec. 31, 2018 Ending inventory $37,500 understated $55,000 overstated Depreciation expense 10,000 understated An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 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, 2018? A. Retained earnings overstated by $17,500 B. Retained earnings understated by $50,000 C. Retained earnings understated by $12,500 D. Retained earnings understated by $22,500

C. Retained earnings understated by $12,500

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. in the service life of plant assets, based on changes in the economic environment. B. in the tax assessment related to a prior period. C. from the cash basis of accounting to the accrual basis of accounting. D. from the FIFO method of inventory valuation to the LIFO method.

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

In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should: A. be subtracted from the carrying value of the securities. B. be shown in the income statement. C. remain as a part of the carrying amount of the investment. D. be ignored.

C. remain as a part of the carrying amount of the investment.

On December 31, 2018, 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 $3,500,000 increase in the beginning inventory at January 1, 2018. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is A. $0. B. $1,050,000. C. $3,000,000. D. $2,450,000.

D. $2,450,000.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? A. $70,000 understatement B. $30,000 overstatement C. $30,000 understatement D. $70,000 overstatement

D. $70,000 overstatement

On January 1, 2016, Knapp Corporation acquired machinery at a cost of $1,250,000. 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 2019, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2019 would be A. $64,000. B. $178,570. C. $125,000. D. $91,429.

D. $91,429.

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.

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

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

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.

If, at the end of a period, a company using perpetual inventory 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. cost of goods sold and net income to be understated. C. the ending inventory, cost of goods sold, and retained earnings to be understated. D. no effect on net income, working capital, and retained earnings.

D. no effect on net income, working capital, and retained earnings.