ACC 313 - Ch 20 Problems

Vance Company reported net incomes for a three-year period as follows: 2009, $186,000; 2010, $189,000; 2011, $180,000. In reviewing the accounts in 2012 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities: 2009 2010 2011 1. O of End. Inv: $42,000 $51,000 $24,000 2. U of accrued 6,600. 12,000 7,200 Advert. Exp.: Instructions (a) Determine corrected net incomes for 2009, 2010, and 2011. (b) Give the entry to bring the books of the company up to date in 2012, assuming that the books have been closed for 2011.

(a) '09 '10 '11 N/I (unadjusted) $186K $189K $180K O of End. Inv. —2009 (42K) 42K O of End. Inv.—2010 (51K) 51K O of End. Inv.—2011 (24K) U of Advert. Exp.—2009 (6.6K) 6.6K U of Advert. Exp.—2010 (12K) 12K U of Advert. Exp.—2011 (7,200) N/I (adjusted) $137.4K $174.6 $211.8K (b) (d) Retained Earnings 31,200 (c) Advertising Expense 7,200 (c) Inventory 24,000

The controller for Haley Corporation is concerned about certain business transactions that the company experienced during 2011. The controller, after discussing these matters with various individuals, has come to you for advice. The transactions at issue are presented below. 1. The company has decided to switch from the direct write-off method in accounting for bad debt expense to the percentage-of-sales approach. Assume that Haley Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way: 2010 2011 From 2010 sales 31,800 12,000 From 2011 sales 45,000 The controller estimates that an additional $65,400 will be charged off in 2012: $11,400 applicable to 2010 sales and $54,000 to 2011 sales. Pr. 22-88 (cont.) 2. Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such on account. At December 31, 2011, inventory billed and in the hands of consignees amounted to $400,000. The percentage markup on selling price is 20%. Assume that consigned inventory is sold the following year. The company uses the perpetual inventory system. 3. During the current year, the company sold $600,000 of goods on the installment basis. The cost of sales associated with these goods sold is $420,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $172,000, including a down payment of $60,000, was collected on these installment sales during the current year. Due to questionable collectibility, the installment method was considered appropriate. Instructions (a) Assume that Haley Corporation reported net income of $1,000,000 for 2011. Present a schedule showing the corrected net income after reviewing the above transactions. (b) Prepare the journal entries necessary at December 31, 2011, assuming that the books have been closed.

(a) Reported net income $1,000,000 1.Additional charge for bad debts 2010 debts written off in '11 $ 12,000 2011 debts to be written off in '12 (54,000) (42,000) 2.Consignment—(20% × $400,000) (80,000) 3.Gross profit—Recognized 180,000 Should be (30% × $172,000) (51,600) (128,400) Corrected net income =$749,600 (b) 1. (d) Retained Earnings 65,400 (c)Allowance/Doubt. Accts. 65,400 2. (d) Consignment Out (Inv.) 320,000 (d) Retained Earnings 80,000 (c) Accounts Receivable 400,000 3. (d) Retained Earnings 128,400 (c)Deferred Gross Profit 128,400

In 2011, Fischer Corporation changed its method of inventory pricing from LIFO to FIFO. Net income computed on a LIFO as compared to a FIFO basis for the four years involved is: (Ignore income taxes.) LIFO FIFO 2008 $78,200 $83,700 2009 84,500 88,100 2010 87,000 91,400 2011 92,500 94,700 Instructions (a) Indicate the net income that would be shown on comparative financial statements issued at 12/31/11 for each of the four years, assuming that the company changed to the FIFO method in 2011. (b) Assume that the company had switched from the average cost method to the FIFO method with net income on an average cost basis for the four years as follows: 2008, $80,400; 2009, $86,120; 2010, $90,300; and 2011, $93,600. Indicate the net income that would be shown on comparative financial statements issued at 12/31/11 for each of the four years under these conditions. (c) Assuming that the company switched from the FIFO to the LIFO method, what would be the net income reported on comparative financial statements issued at 12/31/11 for 2008, 2009, and 2010?

(a) 2008, $83,700; 2009, $88,100; 2010, $91,400; 2011, $94,700, (Retrospective restatement). (b) 2008, $83,700; 2009, $88,100; 2011, $91,400; 2011, $94,700, (Retrospective restatement). (c) 2008, $83,700; 2009, $88,100; 2010, $91,400. (retrospective application impractical)

Quigley Co. bought a machine on January 1, 2009 for $875,000. It had a $75,000 estimated residual value and a ten-year life. An expense account was debited on the purchase date. Quigley uses straight-line depreciation. This was discovered in 2011. Instructions Prepare the entry or entries related to the machine for 2011.

(d) Machine 875,000 (c) Retained Earnings 715,000 (c) Accum. Dep. (2 × $80,000) 160,000 (d)Depreciation Expense 80,000 (c) Accum. Depreciation 80,000

Show how the following independent errors will affect net income on the Income Statement and the stockholders' equity section of the Balance Sheet using the symbol O for overstated, U for understated, and NE for no effect. 1.Ending inventory in 2010 overstated. 2. Failed to accrue 2010 interest revenue. 3. A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to maintenance expense in 2010. 4. Failed to count office supplies on hand at 12/31/10. Cash expenditures have been charged to an office supplies expense account during the year 2010. 5. Failed to accrue 2010 wages. 6. Ending inventory in 2010 understated. 7. Overstated 2010 depreciation expense; 2011 expense correct.

2010 I/S; B/S | 2011 I/S; B/S 1. O; O | U; NE 2. U; U | O; NE 3. U; U | O; U 4. U; U | O; NE 5. O; O | U; NE 6. U; U | O; NE 7. U; U | NE; U

Joseph Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 contained the following errors: 2010 2011 End. Inv $90,000 high $114,000 high Dep. expense 48,000 low — Accum. depreciation 48,000 low 48,000 low Insurance exp. 42,000 high 42,000 low Prepaid Ins. 36,000 low In addition, on December 26, 2011 fully depreciated equipment was sold for $58,000, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Instructions Ignoring income taxes, show your calculation of the total effect of the errors on 2011 net income.

2010 ending inventory $ (90,000) 2011 ending inventory 114,000 Insurance expense 42,000 Unrecorded gain (58,000) Overstatement of 2011 income $ 8,000 Note: The error in depreciation expense has no effect on 2011 income. The error in prepaid insurance is related to the error in insurance expense.

On January 1, 2006, Powell Company purchased a building and machinery that have the following useful lives, salvage value, and costs. Building, 25-year estimated useful life, $4,000,000 cost, $400,000 salvage value Machinery, 10-year estimated useful life, $500,000 cost, no salvage value The building has been depreciated under the straight-line method through 2010. In 2011, the company decided to switch to the double-declining balance method of depreciation for the building. Powell also decided to change the total useful life of the machinery to 8 years, with a salvage value of $25,000 at the end of that time. The machinery is depreciated using the straight-line method. Instructions (a) Prepare the journal entry necessary to record the depreciation expense on the building in 2011. (b) Compute depreciation expense on the machinery for 2011.

Computation of 2011 depreciation expense on the building: Cost of building $4,000,000 Accumulated depreciation [($4M - $400K) ÷ 25] × 5yrs 720,000 BV, 1/1/11 =$3,280,000 2011 Depreciation expense: $3,280,000 × 10% = $328,000 J/E: (d)Dep. Expense 328,000 (cr)Acum. Dep.—Building 328,000 Computation of 2011 depreciation expense on machinery: Cost of machinery $500,000 Accumulated depreciation [($500K - $0) ÷ 10] × 5yrs 250,000 Book value, 1/1/11 =$250,000 2011 Depreciation expense: ($250,000 - $25,000) ÷ (8 - 5) = $225,000 ÷ 3 = $75,000

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)

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors: 2010 2011 Ending inventory $132,000 high $156,000 low Depreciation expense 84,000 high — Insurance expense 60,000 low 60,000 high Prepaid insurance 60,000 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).

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 O $24,000 U Depreciation expense 6,000 U 12,000 O 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

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 500,000 600,000 (computed under the FIFO method) 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.

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

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

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)].

Dyke Company's net incomes for the past three years are presented below: 2012 2011 2010 $480,000 $450,000 $360,000 During the 2012 year-end audit, the following items come to your attention: 1. Dyke bought a truck on January 1, 2009 for $196,000 with a $16,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method) 2. During 2012, Dyke changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases: 2012 2011 2010 Straight-line 36,000 36,000 36,000 Double-declining 46,080 57,600 72,000 The net income for 2012 was computed using the double-declining balance method, on the January 1, 2012 book value, over the useful life remaining at that time. The depreciation recorded in 2012 was $72,000. 3. Dyke, in reviewing its provision for uncollectibles during 2012, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2011 and 2012 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2012. The company would have recorded $6,000 less of bad debt expense on December 31, 2012 under the old rate. Instructions (a) Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year. (b) Compute the net income to be reported each year 2010 through 2012. (c) Assume that the beginning retained earnings balance (unadjusted) for 2010 was $1,260,000. At what adjusted amount should this beginning retained earnings balance for 2010 be stated, assuming that comparative financial statements were prepared? (d) Assume that the beginning retained earnings balance (unadjusted) for 2012 is $1,800,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?

a) Equipment 196,000 Dep. Expense 30,000 Accum. Dep. (4yrs, 09-12) 120,000 Retained Earnings 106,000 (b) 2010: $360,000 - $30,000 = $330,000. 2011: $450,000 - $30,000 = $420,000. 2012: $480,000 - $30,000 = $450,000. (c) Retained earnings (unadjusted) $1,260,000 Correction '09 error ($196K - $30K) 166,000 Retained earnings (adjusted) $1,426,000 (d) Retained earnings (unadjusted) $1,800,000 Correction error ($196K - $90K) 106,000 Retained earnings (adjusted) $1,906,000

Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2011 for $980,000. During the year ended December 31, 2011, Hallmark, Inc. reported the following: Dividends declared and paid $ 400,000 Net income 2,400,000 Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2011. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.'s balance sheet at December 31, 2011 assuming Haystack, Inc. follows U.S. GAAP for its external financial reporting? a. $1,925,000 b. $1,580,000 c. $1,685,000 d. $1,475,000

b

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, 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.

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors: 2010 2011 Ending inventory $132,000 high $156,000 low Depreciation expense 84,000 high — Insurance expense 60,000 low 60,000 high Prepaid insurance 60,000 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).

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

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

Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2011 for $980,000. During the year ended December 31, 2011, Hallmark, Inc. reported the following: Dividends declared and paid $ 400,000 Net income 2,400,000 Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2011. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.'s balance sheet at December 31, 2011 assuming Haystack, Inc. follows iGAAP for its external financial reporting? a. $1,925,000 b. $1,580,000 c. $1,685,000 d. $1,475,000

c

Mars, Inc. follows iGAAP for its external financial reporting. On January 1, 2011, Mars, Inc. purchased 25% of the outstanding stock of Jerome Company (which uses U.S. GAAP for its external financial reporting) for $640,000, and appropriately uses the equity method to account for its investment. Jerome Company reports the following activity for the year ended December 31, 2011: Net loss $60,000 Dividends declared and paid 20,000 Jerome Company uses the completed-contract method for revenue recognition related to its long-term construction contracts, while Mars, Inc. uses the percentage-of-completion method. Mars, Inc. determines that if Jerome Company had used the percentage-of-completion method, its income would have been $100,000 higher during 2011. What is the balance in the Investment in Jerome Company that will be reported on Mars, Inc.'s balance sheet at December 31, 2011? a. $675,000 b. $620,000 c. $640,000 d. $635,000

c

Ridge, Inc. follows iGAAP for its external financial reporting, and Cannon Company follows U.S. GAAP for its external financial reporting. During 2011, both companies changed depreciation methods, from double-declining balance to straight-line. Compared to double-declining balance, for Ridge, Inc. the change resulted in a decrease in reported depreciation expense of $48,000, and for Cannon Company the change resulted in a reported decrease in depreciation expense of $56,000. The remaining useful lives of the assets impacted by the change in depreciation method is 10 years for both companies. How would this change impact the net income reported by Ridge, Inc. and Cannon Company for the year ended December 31, 2011? Ridge, Inc. Cannon Company a. Decrease $48,000 Decrease $56,000 b. Increase $4,800 Increase $5,600 c. Increase $48,000 Increase $56,000 d. Increase $48,000 Increase $5,600

c

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.

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 980,000 1,080,000 (computed under the FIFO method) 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

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

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors: 2010 2011 Ending inventory $132,000 high $156,000 low Depreciation expense 84,000 high — Insurance expense 60,000 low 60,000 high Prepaid insurance 60,000 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)

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

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 O $24,000 U Depreciation expense 6,000 U 12,000 O 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.

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

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 -[($810,000 - $54,000/9)x2] = $642,000

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 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

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

Mars, Inc. follows iGAAP for its external financial reporting, while Jerome Company uses U.S. GAAP for its external financial reporting. During the year ended December 31, 2011, both companies changed from using the completed-contract method of revenue recognition for long-term construction contracts to the percentage-of-completion method. Both companies experienced an indirect effect, related to increased profit-sharing payments in 2011, of $24,000. As a result of this change, how much expense related to the profit-sharing payment must be recognized by each company on the income statement for the year ended December 31, 2011? Mars, Inc. Jerome Company a. $24,000 $24,000 b. $24,000 $-0- c. $-0- $-0- d. $-0- $24,000

d

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.

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

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.

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 Total. $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