Chapter 21 - Accounting Changes and Error Analysis (MC Computational)

69. On December 31, 2015, 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 $2,500,000 increase in the beginning inventory at January 1, 2015. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is a. $0. b. $750,000. c. $1,750,000. d. $2,500,000.

69. c $2,500,000 × (1 - .3) = $1,750,000.

70. On January 1, 2015, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $700,000 increase in the January 1, 2015 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 2015 a. retained earnings statement as a $490,000 addition to the beginning balance. b. income statement as a $490,000 cumulative effect of accounting change. c. retained earnings statement as a $700,000 addition to the beginning balance. d. income statement as a $700,000 cumulative effect of accounting change.

70. a $700,000 × (1 - .3) = $490,000

41. On January 1, 2012, Neal Corporation acquired equipment at a cost of $720,000. 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 2015, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2015 would be a. $37,500. b. $60,000. c. $90,000. d. $144,000.

41. b [(8 + 7 + 6) 36] × $720,000 = $420,000 (AD) ($720,000 $420,000) ÷ 5 = $60,000.

42. On January 1, 2012, Knapp Corporation acquired machinery at a cost of $750,000. 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 2015, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2015 would be a. $38,400. b. $54,858. c. $75,000. d. $107,142.

42. b {$750,000 - [($750,000 × .2) + ($600,000 × .2) + ($480,000 × .2)]} ÷ 7 = $54,858.

43. On January 1, 2012, Piper Co., purchased a machine (its only depreciable asset) for $600,000. 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, 2015, 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, 2015, is $500,000. The income tax rate for 2015, as well as for the years 2012-2014, is 30%. What amount should Piper report as net income for the year ended December 31, 2015? a. $120,000 b. $182,000 c. $308,000 d. $350,000

43. c [(5/15 + 4/15 + 3/15) × $600,000] = $480,000 (AD) ($600,000 - $480,000) = $120,000 (BV) [$500,000 - ($120,000 ÷ 2)] × (1 - .3) = $308,000

Use the following information for questions 44 and 45. 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. 44. 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 45. 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

44. a ($500,000 - $3000,000) + (*$250,000 - $200,000) $250,000 45. b [($200,000 x ($200,000 x .40)) + ($50,000 - ($50,000 x .40))] = $150,000

46. During 2015, 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: (See Photo) 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. $660,000 on the 2015 income statement. b. $450,000 on the 2015 income statement. c. $660,000 on the 2015 retained earnings statement. d. $450,000 on the 2015 retained earnings statement

46. d [($900,000 + $950,000) - ($475,000 + $625,000)] × (1 - .40) = $450,000.

Use the following information for questions 47 and 48. On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. 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 2015, a decision was made to change to the double-declining balance method of depreciation for this machine. 47. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is a. $134,400. b. $0. c. $157,920. d. $225,600. 48. The amount that Nobel should record as depreciation expense for 2015 is a. $120,000. b. $168,000. c. $240,000. d. none of these are correct.

47. b $0, No cumulative effect; handle prospectively 48. c {($1,200,000 - [($1,200,000 ÷ 10) × 3]} ÷ 7 × 2 = $240,000.

49. 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.

49. b $840,000 × (1 - .40) = $504,000

50. 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: PHOTO 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.

50. c $1,130,000 - ($712,000 - $636,000) = $1,054,000

51. Lanier 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 $320,000 $360,000 LIFO 240,000 300,000 Net Income (computed under the FIFO method) 500,000 650,000 Based upon the above information, a change to the LIFO method in 2015 would result in net income for 2015 of a. $590,000. b. $650,000. c. $670,000. d. $710,000.

51. a $650,000 - ($360,000 - $300,000) = $590,000

52. 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

52. b $680,000 - {[($680,000 - $80,000) ÷ 6] × 3} = $380,000 ($380,000 - $50,000) ÷ (8 - 3) = $66,000

Use the following information for questions 53 and 54. Swift Company purchased a machine on January 1, 2012, for $600,000. 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, 2015, 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 2015 to reflect this additional information. 53. 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 2012, 2013, 2014, and 2015. What should be reported in Swift's income statement for the year ended December 31, 2015, as the cumulative effect on prior years of changing the estimated useful life of the machine? a. $0 b. $40,000 c. $60,000 d. $210,000 54. 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, 2015? a. $ 60,000 b. $ 75,000 c. $120,000 d. $150,000

53. a $0, no cumulative effect, handle prospectively (change in estimate). 54. a ($600,000 ÷ 6) × 3 = $300,000 $300,000 ÷ 5 = $60,000.

Use the following information for questions 55 and 56. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors: 2014 2015 Ending inventory $25,000 overstatement $40,000 understatement Depreciation expense 10,000 understatement 20,000 overstatement 55. Assume that the 2014 errors were not corrected and that no errors occurred in 2013. By what amount will 2014 income before income taxes be overstated or understated? a. $35,000 overstatement b. $15,000 overstatement c. $35,000 understatement d. $15,000 understatement 56. Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated? a. $40,000 overstatement b. $35,000 overstatement c. $50,000 understatement d. $15,000 understatement

55. a $25,000 + $10,000 = $35,000 overstatement 56. c $40,000 + $10,000 = $50,000 understatement

Use the following information for questions 57 through 59. Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2014 Dec. 31, 2015 Ending inventory - $22,500 understated $33,000 overstated Depreciation expense 6,000 understated - none An insurance premium of $54,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2015, fully depreciated machinery was sold for $28,500 cash, but the sale was not recorded until 2016. There were no other errors during 2015 or 2016 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 2015 net income? a. Net income understated by $43,500. b. Net income overstated by $22,500. c. Net income overstated by $39,000. d. Net income overstated by $45,000. 58. What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2015? a. Working capital overstated by $15,000 b. Working capital overstated by $4,500 c. Working capital understated by $13,500 d. Working capital understated by $36,000 59. What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2015? a. Retained earnings understated by $30,000 b. Retained earnings understated by $13,500 c. Retained earnings understated by $7,500 d. Retained earnings overstated by $10,500

57. d $22,500 (o) + $33,000 (o) + $18,000 (o) - $28,500 (u) = $45,000 (o). 58. c $32,000 (o) - $18,000 (u) - $28,500 (u) = $13,500 (u). 59. c $6,000 (o) + $33,000 (o) - $18,000 (u) - $28,500 (u) = $7,500 (u).

60. Accrued salaries payable of $51,000 were not recorded at December 31, 2014. Office supplies on hand of $29,000 at December 31, 2015 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. 2015 net income to be understated $80,000 and December 31, 2015 retained earnings to be understated $29,000. b. 2014 net income and December 31, 2014 retained earnings to be understated $51,000 each. c. 2014 net income to be overstated $22,000 and 2015 net income to be understated $29,000. d. 2015 net income and December 31, 2015 retained earnings to be understated $29,000 each

60. a 2015 NI = $51,000 (u) + $29,000 (u) = $80,000 (u). 2015 RE = $29,000 (u) [The 2014 $51,000 (o) is offset by 2015 $51,000 (u)].

Use the following information for questions 61 through 63. Bishop Co. began operations on January 1, 2014. Financial statements for 2014 and 2015 con- tained the following errors: PHOTO In addition, on December 31, 2015 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2016. No corrections have been made for any of the errors. Ignore income tax considerations. 61. The total effect of the errors on Bishop's 2015 net income is a. understated by $366,800. b. understated by $234,800. c. overstated by $117,200. d. overstated by $249,200. 62. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2015 is understated by a. $318,800. b. $258,800. c. $174,800. d. $126,800. 63. The total effect of the errors on the amount of Bishop's working capital at December 31, 2015 is understated by a. $390,800. b. $306,800. c. $174,800. d. $114,800.

61. a $132,000 (u) + $146,000 (u) + $60,000 (u) + $28,800 (u) = $366,800 (u). 62. b $146,000 (u) + $84,000 (u) - $60,000 (o) + $60,000 (u) + $28,800 (u) = $258,800 (u). 63. c $146,000 (u) + $28,800 (u) = $174,800 (u).

Use the following information for questions 64 and 65. Link Co. purchased machinery that cost $1,800,000 on January 4, 2013. The entire cost was recorded as an expense. The machinery has a nine-year life and a $120,000 residual value. The error was discovered on December 20, 2015. Ignore income tax considerations. 64. Link's income statement for the year ended December 31, 2015, should show the cumulative effect of this error in the amount of a. $1,613,333. b. $1,426,667. c. $1,240,000. d. $0. 65. Before the correction was made, and before the books were closed on December 31, 2015, retained earnings was understated by a. $1,800,000. b. $1,613,333. c. $1,426,667. d. $1,240,000.

64. d CE = $0, correction of error 65. c $1,800,000 - [(1350000-90000)/9]x2 = $1,426,667

Use the following information for questions 66 and 67. Ernst Company purchased equipment that cost $2,250,000 on January 1, 2014. The entire cost was recorded as an expense. The equipment had a nine-year life and a $90,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2016. Ernst is subject to a 40% tax rate. 66. Ernst's net income for the year ended December 31, 2014, was understated by a. $1,206,000. b. $1,350,000. c. $2,010,000. d. $2,250,000. 67. Before the correction was made and before the books were closed on December 31, 2016, retained earnings was understated by a. $996,000. b. $1,008,000. c. $1,062,000. d. $1,350,000.

66. a ($2,250,000 - [($2,250,000 - $90,000) ÷ 9]) × (1 - .40) = $1,206,000 67. c $2,250,000 - [($2,250,000 - $90,000) ÷ 9 × 2] = $1,670,000. $1,670,000 × (1 - .40) = $1,062,000.

71. On January 1, 2012, Lake Co. purchased a machine for $1,320,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2015, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $120,000. An accounting change was made in 2015 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2015 of a. $912,500. b. $770,000. c. $800,000. d. $880,000

71. a $1,320,000 × 3/8 = $495,000 $495,000 + [($1,320,000 - $495,000 - $120,000) × 1/3] = $912,500

72. 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

72. b $952,000 × 3/15 = $190,400 $952,000 - $190,400 - [($952,000 - $190,400) × 1/7] = $652,800

73. During 2014, 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 $162,000 was accrued at 12/31/14 for the period July-December 2014. • Royalty income of $180,000 was received on 3/31/15, and $234,000 on 9/30/15. • Mercer learned from Roark that sales subject to royalty were estimated at $3,240,000 for the last half of 2015. In its income statement for 2015, Mercer should report royalty income at a. $414,000. b. $432,000. c. $558,000. d. $576,000

73. d ($180,000 - $162,000) + $234,000 + ($3,240,000 × .10) = $576,000.

74. On January 1, 2014, Janik Corp. acquired a machine at a cost of $700,000. 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 2014 financial statements. The oversight was discovered during the preparation of Janik's 2015 financial statements. Depreciation expense on this machine for 2015 should be a. $0. b. $140,000. c. $175,000. d. $280,000.

74. b $700,000 ÷ 5 = $140,000.

76. Black, Inc. is a calendar-year corporation whose financial statements for 2014 and 2015 included errors as follows: PHOTO Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2014, or at December 31, 2015. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2016? a. $154,000 increase b. $46,000 increase c. $19,000 decrease d. $8,000 increase

76. a $64,000 (u) + $135,000 (u) - $45,000 (o) = $154,000 (u).