ACCT 304 Ch. 21

In April, 2016, Norman Industries sold Available-for-Sale securities that cost $450,000 and received a check from its broker for $793,000. When the check was deposited, the accounting clerk debited cash and credited investments for the full amount. The CFO questioned the entry in December, 2016. If this is an error, what is the proper correcting entry? (Tax rate is 40%.) A) Account Debit Credit AFS Investments 343,000 Gain on Sale of Investments 343,000 B) Account Debit Credit AFS Investments 793,000 Gain on Sale of Investments 343,000 Retained Earnings-Prior Period Adj. 450,000 C) Account Debit Credit AFS Investments 343,000 Income Tax Expense 137,200 Retained Earnings 205,800 D) Account Debit Credit Gain on Sale of Investments 343,000 AFS Investments 343,000

A) Account Debit Credit AFS Investments 343,000 Gain on Sale of Investments 343,000

At the end of 2015, the payroll supervisor for Claro, Inc. failed to accrue $24,790 in commissions for the outside salespersons. The cost was recorded in 2016 when the commissions were paid and Commissions Expenses was debited and Cash credited for the full amount. The error was not discovered until late in 2016 while reconciling year-end expenses for 2016. What is the proper treatment to correct the error? (Ignore income taxes.) A) Do nothing, the error has counterbalanced. B) Accrue $24,790 in commission expense for 2016. C) Debit 2016 beginning retained earnings and credit commission expense for $24,790. D) There is no error in either year because the commissions are recorded when paid.

C) Debit 2016 beginning retained earnings and credit commission expense for $24,790.

On December 31, 2015, 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, 2015 balance sheet? Accrued Liabilities Retained Earnings A) No effect No effect B) No effect Overstated C) Understated No effect D) Understated Overstated

C) Understated No effect

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.

Which one of the following is a change in estimate effected by a change in an accounting principle? A) salvage value of an asset B) estimated life of an asset C) change from declining-balance to straight-line depreciation D) changes in pension plan asset revenues

C) change from declining-balance to straight-line depreciation

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.

In completing the adjusting entries for 2017 in early 2018, the internal auditor discovered that a patent, with an estimated eight year life that was registered in January, 2017 had not been amortized. The patent cost $360,000. The income tax rate is 40%. What is the journal entry to correct the error? A) Account Debit Credit Amortization Expense 45,000 Retained Earnings 45,000 B) Account Debit Credit Patent 45,000 Income Taxes Receivable 18,000 Retained Earnings 63,000 C) Account Debit Credit Amortization Expense 45,000 Income Taxes Payable 18,000 Retained Earnings 27,000 D) Account Debit Credit Amortization Expense 45,000 Patent 45,000

D) Account Debit Credit Amortization Expense 45,000 Patent 45,000

The auditor for Universal Tools, Inc. discovered in 2017 that the warranty liability account showed a $25,000 debit balance. She reasoned that the correct treatment of this discovery is to ________. A) conduct a fraud investigation to see if a fraud has occurred B) make engineering investigate to see if there is a production failure C) wait until next year to see if the trend continues D) investigate and increase the warranty expense and liability to an appropriate level

D) investigate and increase the warranty expense and liability to an appropriate level

At the end of 2015, the payroll supervisor for Claro, Inc. failed to accrue $24,800 in commissions for their outside salespersons. The cost was recorded in 2016 when the commissions were paid and Commissions Expenses was debited and Cash credited for the full amount. The error was not discovered until late in 2016 while reconciling year-end expenses for 2016. The tax rate for both years was 35%. What is the proper journal entry to correct the error for 2016? A) Account Debit Credit Retained Earnings-Prior Period Adj. 16,120 Taxes Receivable 8,680 Commission Expense 24,800 B) Account Debit Credit Retained Earnings Prior Period Adj. 24,800 Commission Expense 24,800 C) Account Debit Credit Commission Expense 24,800 Taxes Payable 8,680 Retained Earnings -Prior Period Adj. 16,120 D) No entry required. The error has self corrected.

A) Account Debit Credit Retained Earnings-Prior Period Adj. 16,120 Taxes Receivable 8,680 Commission Expense 24,800

Use the following information for questions 27 and 28. Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method. The company decided to use the same for income tax purposes. The tax rate enacted is 40%. Income before taxes under both the methods for the past three years appears below. 2013 2014 2015 Completed contract $300,000 $200,000 $100,000 Percentage-of-completion 500,000 250,000 180,000 What amount will be debited to Construction in Process account, to record the change at beginning of 2015? A) $250,000 B) $100,000 C) $150,000 D) $50,000

A) $250,000

Which one of the following is not a change in a reporting entity? A) the purchase of a new subsidiary B) presenting consolidated statement for the first time C) changing the subsidiaries that make up the group of entities presented in the financial statements D) changing the entities in combined financial statements

A) the purchase of a new subsidiary

The IRS is investigating Miller Productions tax returns for 2015 and 2016. Based on the IRS audit procedures, the company accrued a $50,000 loss additional assessment in 2016 for the 2015 tax year. At the end of 2016, Miller was able to settle with IRS for $62,000. What entry should Edwards make when it pays the deficiency in December, 2016? A) Account Debit Credit Income Taxes Payable 50,000 Retained Earnings 12,000 Cash 62,000 B) Account Debit Credit Income Taxes Payable 50,000 Income Tax Expense 12,000 Cash 62,000 C) Account Debit Credit Income Taxes Payable 50,000 Retained Earnings 12,000 Cash 38,000 D) Account Debit Credit Income Taxes Payable 62,000 Cash 62,000

B) Account Debit Credit Income Taxes Payable 50,000 Income Tax Expense 12,000 Cash 62,000

Anzelmo Corporation invested in Jones Manufacturing by purchasing a 10% interest in the company. Anzelmo had no significant influence in Jones. Over time, Anzelmo acquired more shares in Jones, and in 2016, Anzelmo's president became a member of the board of directors when its ownership interest reached 30% of Jones. The cost basis of their investment is $2,000,000. Under the equity method, the valuation of the investment would be $2,400,000. The fair value of the investment is $2,600,000. What is the proper journal entry to properly record the change in accounting principal, ignoring income taxes? A) No entry needed. B) Account Debit Credit Investment in Jones 2,400,000 Available for Sale -Jones 2,000,000 Retained Earnings-Prior Period Adj. 400,000 C) Account Debit Credit Investment in Jones 400,000 Retained Earnings-Prior Period Adj. 400,000 D) Account Debit Credit Investment in Jones 400,000 Gain on Investments 400,000

B) Account Debit Credit Investment in Jones 2,400,000 Available for Sale -Jones 2,000,000 Retained Earnings-Prior Period Adj. 400,000

Austin Motor Works declared a 5% stock dividend in 2016 when the stock was selling for $18 per share. There were 2,000,000 shares outstanding at the time of the dividend declaration. The controller recorded the distribution at par value ($1 per share) resulting in a debit to retained earnings and a credit to common stock for $100,000. Upon review in early 2017 when the 2016 books were still open, the CFO made which of the following correcting entries? A) He made no entry because the controller was correct. B) Account Debit Credit Retained Earnings-Prior Period Adj. 1,700,000 APIC-Common Stock 1,700,000 C) Account Debit Credit Retained Earnings-Prior Period Adj. 1,700,000 Common Stock 1,700,000 D) Account Debit Credit APIC-Common Stock 1,700,000 Common Stock 1,700,000

B) Account Debit Credit Retained Earnings-Prior Period Adj. 1,700,000 APIC-Common Stock 1,700,000

Energy, Inc began operations in 2015 using LIFO inventory methods. In 2016, management decided they should have chosen FIFO. The beginning inventory for 2016 using LIFO was $125,000. Under the FIFO method, the beginning inventory would have been $140,000. The adjustment to inventory for the change in accounting principle for 2016 would be ________. A) $0 B) $15,000 debit C) $15,000 credit D) $30,000 debit

B) $15,000 debit

On December 31, 2015 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2015 beginning inventory to increase by $840,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/15, assuming a 40% tax rate, is A) $840,000. B) $504,000. C) $336,000. D) $0.

B) $504,000

On January 1, 2012, Hess Co. purchased a patent for $952,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2027. During 2015, 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, 2015? A) $571,200 B) $652,800 C) $672,000 D) $698,200

B) $652,800

Equipment was purchased at the beginning of 2012 for $680,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $80,000. The equipment was depreciated using the straight-line method of depreciation through 2014. At the beginning of 2015, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $50,000. The amount to be recorded for depreciation for 2015, reflecting these changes in estimates, is A) $41,250. B) $66,000. C) $76,000. D) $78,750.

B) $66,000.

Tarleton Company discovered ending inventory errors in 2015 and 2016. The 2015 ending inventory was overstated by $205,000 whereas the 2016 ending inventory was understated by $75,000. Ignoring income tax effects, by what amount should the beginning retained earnings be adjusted on January 1, 2017? A) $75,000 debit B) $75,000 credit C) $130,000 debit D) $205,000 credit

B) $75,000 credit

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 of the following will be included in the journal entry made by Dream Home to record the income effect? A) A debit to Retained Earnings for $150,000 B) A credit to Retained Earnings for $150,000 C) A credit to Retained Earnings for $100,000 D) A debit to Retained Earnings for $100,000

B) A credit to Retained Earnings for $150,000

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) No Yes

When a material seven-year depreciable asset is recorded as an expense, which one of the following statements is correct? A) It is a self-correcting error and no adjustment is necessary. B) The error will eventually self-correct, but the financial statements will be in error for seven years. C) If the company uses a rapid depreciation method, the error will self-correct quickly so no adjustment is necessary. D) Since it affects only the income statement, no adjustment is required.

B) The error will eventually self-correct, but the financial statements will be in error for seven years.

Langley Corporation replaced an HVAC system for one of its warehouses in July, 2015, at a cost of $350,000. The accountant recording the purchase charged it to repairs and maintenance expense. The error was discovered early in 2017 while reconciling depreciation expense for 2016. The system should last about 7 years with no salvage value. What entry should be made before the 2016 books are closed if the company uses straight-line depreciation? A) Account Debit Credit HVAC System 350,000 Accumulated Depreciation 50,000 Retained Earnings-Prior Period Adj. 300,000 B) Account Debit Credit Retained Earnings-Prior Period Adj. 350,000 Depreciation Expense 50,000 HVAC System 400,000 C) Account Debit Credit HVAC System 350,000 Depreciation Expense (2016) 50,000 Accumulated Depreciation 75,000 Retained Earnings-Prior Period Adj. 325,000 D) Account Debit Credit HVAC System 350,000 Depreciation Expense 50,000 Retained Earnings-Prior Period Adj. 400,000

C) Account Debit Credit HVAC System 350,000 Depreciation Expense (2016) 50,000 Accumulated Depreciation 75,000 Retained Earnings-Prior Period Adj. 325,000

JAT Corp. loaned $375,000 for three years to a major supplier on July 1, 2015. The note stipulated 10% interest to be paid annually each June 30. Since this was an unusual transaction, no one billed the supplier for the interest in 2016 or recorded the accrued interest at the year end (December). On March 1, 2017, after the 2016 books were closed, the CFO found the error. Which one of the following is the correct journal entry to correct the errors thru March 1, 2017? (Ignore income taxes.) A) Since it has not been billed, no entry should be made until June 30, 2017. B) Account Debit Credit Interest Receivable 56,250 Retained Earnings-Prior Period Adjustment 56,250 C) Account Debit Credit Interest Receivable 62,500 Interest Revenue 6,250 Retained Earnings-Prior Period Adjustment 56,250 D) Account Debit Credit Interest Receivable 56,250 Interest Revenue 56,250

C) Account Debit Credit Interest Receivable 62,500 Interest Revenue 6,250 Retained Earnings-Prior Period Adjustment 56,250

Butler Products decided in 2016 to change inventory methods to more effectively report its results of operations. In the past, management has measured its ending inventories by the average-cost method and they now believe that FIFO is a better representation of its profitability. Year Ended FIFO Inventory Average-Cost Inventory December 31, 2014 $250,000 $195,000 December 31, 2015 375,000 320,000 December 31, 2016 240,000 190,000 Ignoring income tax, which one of the following journal entries correctly records the change in the accounting principle at January 1, 2016? A) No journal entry need for prospective application of the change in principle. B) Account Debit Credit Retained Earnings-Prior Period Adj. 55,000 Inventory 55,000 C) Account Debit Credit Inventory 55,000 Retained Earnings-Prior Period Adj. 55,000 D) Account Debit Credit Inventory 50,000 Retained Earnings-Prior Period Adj. 55,000

C) Account Debit Credit Inventory 55,000 Retained Earnings-Prior Period Adj. 55,000

The auditor for Universal Tools, Inc. discovered in 2017 that the warranty liability account showed a $25,000 debit balance. She investigated and discovered that the 2% estimate for warranty expense was recorded and understated, and it was more likely 3.5%. Sales for 2017 were $5,500,000. She should make which one of the following entries? A) Account Debit Credit Warranty Liability 25,000 Warranty Expense 25,000 B) Account Debit Credit Warranty Expense 82,500 Warranty Liability 82,500 C) Account Debit Credit Warranty Liability 82,500 Warranty Expense 82,500 D) Account Debit Credit Warranty Expense 192,500 Warranty Liability 192,500

C) Account Debit Credit Warranty Liability 82,500 Warranty Expense 82,500

Heinz Company began operations on January 1, 2014, 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 2014 2015 FIFO $640,000 $ 712,000 LIFO 560,000 636,000 Net Income (computed under the FIFO method) 980,000 1,130,000 Based on the above information, a change to the LIFO method in 2015 would result in net income for 2015 of A) $1,170,000. B) $1,130,000. C) $1,054,000. D) $1,050,000.

C) $1,054,000.