Chapter 22 Intermediate Accounting: Review

15. The Chalet Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: 2017/2018 Ending inventory: $11,000 understatement/$14,000 overstatement Advertising expense: 9,500 overstatement/11,500 understatement 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? (LO 4) (a)$20,500 understatement (b)$5,000 understatement (c)$9,500 overstatement (d)$2,000 overstatement

(a) $20,500 understatement $11,000 + $9,500 = $20,500 understatement.

20. All of the following involve counterbalancing errors except the: (LO 4) (a)failure to record prepaid expenses. (b)failure to record depreciation. (c)overstatement of ending inventory. (d)understatement of purchases.

(b) failure to record depreciation. All of the options involve counterbalancing errors except the failure to record depreciation.

7. On December 31, 2017, Dodd, 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 $2,300,000 increase in the beginning inventory at January 1, 2017. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. (b)$690,000. (c)$1,610,000. (d)$2,300,000.

(c) $1,610,000. $2,300,000 × (100% − 30%) = $1,610,000.

6. On December 31, 2017, Paiva, Inc. appropriately changed its inventory valuation method to weighted-average cost from FIFO cost for financial statement and income tax purposes. The change will result in a $1,480,000 increase in the beginning inventory at January 1, 2017. Assume a 35% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (LO 1) (a)$0. (b)$518,000. (c)$962,000. (d)$1,480,000.

(c) $962,000. $1,480,000 × (100% − 35%) = $962,000.

9. Which type of accounting change should always be accounted for in current and future periods? (LO 2) (a)Change in accounting principle (b)Change in reporting entity (c)Change in accounting estimate (d)Correction of an error

(c) Change in accounting estimate. A change in an accounting estimate should always be accounted for in current and future periods.

13. In 2016, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2017, it will be accounted for: (LO 3) (a)using pro forma data. (b)prospectively. (c)as a prior period adjustment. (d)All of these answer choices are correct.

(c) as a prior period adjustment. Error correction is recorded as a prior period adjustment.

Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost was recorded as an expense. The machinery has a nineyear life and a $12,000 residual value. Kielty uses the straightline method to account for depreciation expense. The error was discovered on December 10, 2017. Ignore income tax considerations. 24. (L.O. 4) Kielty's income statement for the year ended December 31, 2017, should show that cumulative effect of this error in the amount of: A. $236,000. B. $224,000. C. $221,333. D. $ 0.

24. (D) The profession requires that corrections of errors be treated as prior period of adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. Therefore, Kielty's income statement for the year ended December 31, 2017 will not be affected.

14. Koppernaes Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: 2017/2018 Ending inventory: $23,000 overstatement/$52,000 understatement Depreciation expense: 19,000 understatement/42,000 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? (LO 4) (a)$42,000 overstatement (b)$3,000 overstatement (c)$32,000 understatement (d)$19,000 understatement

(a) $42,000 overstatement $23,000 + $19,000 = $42,000 overstatement.

17. Which of the following is a reason why companies prefer certain accounting methods? (LO 3) (a)Bonus payments. (b)Asset structure. (c)Comparability. (d)Asset allocation.

(a) Bonus payments. Companies prefer certain accounting methods for bonus payments among other issues not listed here.

16. On July 1, 2016, Elberta Corp. acquired equipment at a cost of $1,020,000. It is to be depreciated on the straight-line method over a four-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Elberta's 2016 financial statements. The oversight was discovered during the preparation of Elberta-s 2017 financial statements. Which of the following accounts will not be affected by correcting the error that occurred in 2016, assuming comparative financial statements are not prepared? (LO 3) (a)Depreciation Expense. (b)Accumulated Depreciation. (c)Retained Earnings. (d)All of these accounts will be affected.

(a) Depreciation Expense. Only depreciation expense will be unaffected by the correction.

5. On January 1, 2017, Columbia Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $2,320,000 increase in the January 1, 2017 inventory. Assume that the income tax rate for all years is 25%. The cumulative effect of the accounting change should be reported by Columbia in its 2017 (LO 1) (a)retained earnings statement as a $1,740,000 addition to the beginning balance. (b)income statement as a $2,320,000 cumulative effect of accounting change. (c)retained earnings statement as a $638,000 addition to the beginning balance. (d)income statement as a $1,740,000 cumulative effect of accounting change.

(a) retained earnings statement as a $1,740,000 addition to the beginning balance. $2,320,000 × (100% − 25%) = $1,740,000.

18. Which of the following is not a counterbalancing error? (LO 4) (a)Failure to record accrued wages. (b)Failure to record depreciation. (c)Failure to record prepaid expenses. (d)Understatement of unearned revenue.

(b) Failure to record depreciation. Errors that are not offset in the next accounting period are noncounterbalancing errors.

3. What approach does the FASB require when accounting for changes in accounting principle? (LO 1) (a)Cumulative. (b)Retrospective. (c)Prospective. (d)Allowance.

(b) Retrospective. The FASB requires the use of the retrospective approach.

10. When a company changes from an accelerated method to the straight-line method of depreciation, this change should be handled as a (LO 2) (a)change in accounting principle. (b)change in accounting estimate. (c)prior period adjustment. (d)correction of an error.

(b) change in accounting estimate. When a company changes from an accelerated balance method to the straight-line method of depreciation, this change should be handled as a change in accounting estimate.

1. 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 (LO 1) (a)materiality. (b)consistency. (c)faithful representation. (d)objectivity.

(b) consistency. In theory, this may be a violation of the accounting concept of consistency.

8. A change to LIFO inventory valuation from any other acceptable inventory valuation method: (LO 4) (a)requires restatement of all prior years' income. (b)does not require restatement of prior years' income. (c)is not allowed by FASB. (d)is accounted for as an adjustment to beginning retained earnings.

(b) does not require restatement of prior years' income. No restatement is required because it would be too difficult and therefore impractical.

19. All of the following involve counterbalancing errors except the (LO 4) (a)failure to record prepaid expenses. (b)failure to adjust for bad debts. (c)understatement of inventory. (d)overstatement of purchases.

(b) failure to adjust for bad debts. Failure to adjust for bad debts is a noncounterbalancing error.

11. Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a: (LO 2) (a)change in principle. (b)correction of an error. (c)change in estimate. (d)counterbalancing error.

(c) change in estimate. Whenever it is impossible to determine the type of change that has occurred, it is to be considered a change in estimate.

12. Which of the following describes a change in reporting entity? (LO 2) (a)A company acquires a subsidiary that is to be accounted for as a purchase. (b)A manufacturing company expands its market from regional to nationwide. (c)A company divests itself of a European branch sales office. (d)Changing the companies included in combined financial statements.

(d) Changing the companies included in combined financial statements. Changing the companies included in combined financial statements describes a change in reporting entity.

2. Which of the following is not one of the three types of accounting changes? (LO 1) (a)Change from LIFO to FIFO. (b)Change in reporting entity. (c)Change in the estimated useful life of an asset. (d)Correction of understated depreciation expense in a prior period.

(d) Correction of understated depreciation expense in a prior period. Errors in financial statements are not considered an accounting change.

4. All of the following are examples of a change in accounting principle except a change from: (LO 2) (a)average cost to LIFO inventory pricing. (b)FIFO to average cost. (c)the completed-contract to percentage-of-completion method of accounting for construction contracts. (d)the double-declining balance method to the straight-line method of depreciation.

(d) the double-declining balance method to the straight-line method of depreciation. All of the options are examples of a change in accounting principle except a change from the double-declining balance method to the straight-line method of depreciation.

1. (L.O. 1) Which of the following financial statement characteristics is adversely affected by accounting changes? A. Usefulness. B. Consistency. C. Timeliness. D. Relevance.

1. (B) While the characteristics of usefulness and relevance may be enhanced by changes in accounting, the characteristic of consistency is adversely affected. Consistent financial statements and historical 5 and 10 year summaries particularly can be distorted by changes in accounting. When changes in accounting occur, proper treatment and full disclosure should enable readers of financial statements to comprehend and assess the effects of such changes. The timeliness of financial statements should be unaffected by accounting changes.

10. (L.O. 1) Which of the following is not considered a direct effect of a change in accounting principle? A. An employee profitsharing plan based on net income when a company uses the percentageofcompletion method. B. The inventory balance as a result of a change in the inventory valuation method. C. An impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance. D. Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-ormarket-test to the adjusted inventory balance.

10. (A) An employee profit sharing plan based on net income when a company uses the percentage-of-completion method is considered an indirect effect of a change in accounting principle. All the other answers are considered direct effects.

11. (L.O. 1) Weaver Company changes from the LIFO method to the FIFO method in 2018. The increase in pretax income as a result of the difference in the two methods prior to 2016 is $ 100,000 and for the year 2016 is $40,000 and for the year 2017 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2017 should include. A. A debit to Deferred Tax Liability of $68,000. B. A credit to Deferred Tax Liability of $68,000. C. A debit to Deferred Tax Liability of $56,000. D. A credit to Deferred Tax Liability of $56,000.

11. (D) The change in accounting principle from LIFO to FIFO would result in a direct effect adjustment to deferred taxes. Because income increased, there would be a 40% increase in Deferred Tax Liability which is done with a credit entry. The amount is calculated based on the sum of the prior years of $100,000 and $40,000 multiplied by 40%.

12. (L.O. 1) In 2017 the Flynn Company has changed from the percentage-of-completion method to the completed-contract method for long-term construction contracts. The difference in pretax income prior to 2017 is a decrease of $60,000 and for 2017 is a decrease of $20,000. The estimated tax effect is 40%. The journal entry made by Flynn Company should include a: A. Debit to Deferred Tax Liability of $24,000. B. Credit to Deferred Tax Liability of $32,000. C. Debit to Deferred Tax Liability of $32,000. D. Credit to Deferred Tax Liability of $24,000.

12. (A) The change in accounting principles from percentage-of-completion method to completed-contract method for long-term construction contracts would result in a direct effect adjustment to deferred taxes. Because income decreased, there would be a 40% decrease in Deferred Tax Liability which is done with a debit entry. The amount is calculated by multiplying the difference in pretax income prior to 2017 by 40%.

13. (L.O. 1) Which of the following is a condition in which retrospective application is not impracticable? A. The company cannot determine the effects of retrospective application. B. Retrospective application requires assumptions about management's intent in a prior period. C. The company has changed auditors. D. Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.

13. (C) Retrospective application is still practicable even though a company has changed auditors. All the other answers would make retrospective application impracticable.

14. (L.O. 2) Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate? A. Report current and future financial statements on a new basis. B. Restate prior period financial statements. C. Disclose in the year of change the effect on net income and earnings per share data for that period only. D. Make no adjustments to current period opening balances for purposes of catchup.

14. (B) Restating prior period financial statements is a part of the application of the retrospective approach. That approach is not appropriate for changes in accounting estimates. Alternatives A, C, and D represent the appropriate treatment for the current and prospective approach as applied to accounting for a change in an estimate.

15. (L.O. 2) Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of a: A. change in accounting estimate. B. change in accounting principle. C. change in segment reporting. D. change in reporting entity.

15. (D) This is an example of a change in the reporting entity. This occurs when a company makes a change from reporting as one type of entity to another type of entity. This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods.

16. (L.O. 2) Tang Corporation has a change in accounting that requires Tang to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. This change is most likely the result of a: A. change in depreciation methods. B. change in accounting estimate. C. change in reporting entity. D. change in estimated recoverable mineral reserves.

16. (C) The question describes most closely the accounting and disclosure requirements necessary for a change in reporting entity. Alternatives A, B and D are all changes in according estimates and do not require the disclosures indicated in the question.

17. (L.O. 3) Julie Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year they changed to the FIFO inventory method at the insistence of their public accountant. The effect of this change should be reported, net of applicable income taxes, in the current: A. income statement after income from continuing operations and before discontinued operations. B. retained earnings statement after net income but before dividends. C. income statement after discontinued operations. D. retained earnings statement as an adjustment of the opening balance.

17. (D) When a company changes from an accounting principle that is not generally accepted (NIFO) to one that is generally accepted (FIFO), the change should be handled as a correction of an error. In considering this change as a correction of an error, it should be handled as a prior period adjustment. Thus, the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings.

18. (L.O. 3) The general rule for differentiating between a change in an estimate and a correction of an error is: A. based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate. B. if a generally accepted accounting principle is involved, it's usually a change in an estimate. C. if a generally accepted accounting principle is involved, it's usually a correction of an error. D. a careful estimate that later proves to be incorrect should be considered a change in an estimate.

18. (D) Distinguishing between a change in an estimate and a correction of an error is not necessarily determined by a GAAP being involved. Also, materiality is not one of the criteria to be used in differentiating between a change in an estimate and a correction of an error. The best basis for differentiating between a change in one estimate and a correction of an error is to follow the general rule that "careful estimates that later prove to be incorrect should be considered a change in an estimate."

Martin Marty, 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: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 19. (L.O. 3) 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. $3,000 overstatement. B. $7,000 overstatement. C. $3,000 understatement. D. $7,000 understatement.

19. (B) Effect on 2017 Income: Ending inventory $5,000 overstatement ................... $5,000 over Depreciation expense $2,000 understatement ........ 2,000 over Net effect .............................................................. $7,000 over

2. (L.O. 1) A change in accounting principle is evidenced by: A. a change from the historical cost principle to current value accounting. B. adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted. C. changing the basis of inventory pricing from weightedaverage cost to LIFO. D. a change from current value accounting to the historical cost principle.

2. (C) Because current value accounting is not GAAP, alternatives A and D cannot be correct. A change in accounting principle is defined as a change from one GAAP to another GAAP. Alternative B is incorrect because adopting a principle for a new transaction does not constitute a change in accounting principle.

Martin Marty, 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: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 20. (L.O. 3) 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. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

20. (D) Effect on 2018 Retained Earnings 2017 Ending inventory ...................................... $5,000 overstatement ................................. 0* 2018 Ending inventory ...................................... $8,000 understatement ............................... 8,000 under 2017 Depreciation expense .............................. $2,000 understatement ............................... 2,000 over 2018 Depreciation expense .............................. $4,000 overstatement ................................. 4,000 under Net effect ................................................ $10,000 under *This is an example of a counterbalancing error. This error overstates income by $5,000 in 2017 and understates income by $5,000 in 2018. Thus, at the end of 2018, there is no effect on retained earnings. If the $8,000 inventory error is not corrected, it will correct itself at the end of 2019. The depreciation errors are noncounterbalancing and will cause retained earnings to be in error until specifically corrected.

Martin Marty, 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: 2017-$5,000 overstatement 2018-$8,000 understatement Depreciation expense: 2017-$2,000 understatement 2018-$4,000 overstatement 21. (L.O. 3) Assume that no correcting entries were made at 12/31/17 or 12/31/18 and that no additional errors occurred in 2019. By how much will 2019 income before income taxes be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

21. (B) Net Income: 2018 Ending inventory .............................................. $8,000 understatement .................................... $8,000 over Net effect ....................................................... $8,000 over The 2017 and 2018 depreciation expense errors do not affect 2019 net income.

22. (L.O. 4) On December 31, 2017, accrued wages in the amount of $6,500 were not recognized by Shwenk Company. What effect would this error have on the following account balances at 12/31/17? Expenses...Retained Earnings...Liabilities...Assets A. No Effect Overstate Overstate No Effect B. Overstate Understate No Effect Overstate C. Understate Overstate Understate No Effect D. No Effect Overstate No Effect Understate

22. (C) A failure to record accrued wages is a failure to make the following journal entry: Wages Expense 6,500 Wages Payable 6,500 Thus, the expenses would be understated and the liabilities would be understated. The retained earnings would be overstated because the expense was not recorded. Assets would be unaffected by the failure to record this entry.

23. (L.O. 4) The December 31, 2017, physical inventory of Dunn Company appropriately included $4,500 of merchandise inventory that was not recorded as a purchase until January, 2018. What effect will this error have on the following account balances at 12/31/17? COGS...Liabilities...Retained Earnings...Assets A. Overstate Overstate Understate Understate B. No Effect Understate Understate Understate C. Understate No Effect Overstate Overstate D. Understate Understate Overstate No Effect

23. (D) The merchandise was correctly counted in the physical inventory and thus ending inventory and total assets are properly stated. The fact that the purchase was not recorded understates liabilities because accounts payable was not credited. Also, with the purchase not being recorded, the amount of merchandise available for sale is understated and results in an understatement of cost of goods sold. The understatement of cost of goods sold causes both net income and retained earnings to be overstated.

Kielty Company purchased machinery that cost $300,000 on January 1, 2015. The entire cost was recorded as an expense. The machinery has a nineyear life and a $12,000 residual value. Kielty uses the straightline method to account for depreciation expense. The error was discovered on December 10, 2017. Ignore income tax considerations. 25. (L.O. 4) Before the correction was made and before the books were closed on December 31, 2017, retained earnings was understated by: A. $300,000. B. $236,000. C. $224,000. D. $221,333.

25. (B) Corrections of errors are treated as prior period adjustments and are reported in the financial statements as an adjustment to the beginning balance of retained earnings. The company should have taken $32,000 for each year [($300,000 $12,000)/9 = $32,000]. Therefore, $64,000 ($32,000 × 2) should have been taken as depreciation expense and $300,000 should not have been recorded as an expense; therefore, the net effect is that retained earnings was understated by $236,000 ($300,000 $64,000).

3. (L.O. 1) Which of the following is not a change in accounting principle? A. A change from completedcontract to percentage-ofcompletion. B. A change from FIFO to average cost. C. Using a different method of depreciation for new plant assets. D. A change from LIFO to FIFO for inventory valuation.

3. (C) When a company uses a different method of depreciation for new plant assets, this is not considered a change in accounting principle. A, B, and D are all considered changes in accounting principle.

4. (L.O. 1) Schoen Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change is known as handling the change: A. prospectively. B. currently. C. retrospectively. D. haphazardly.

4. (A) The company has handled its accounting change prospectively. This method is required to be used for changes in accounting estimates. When a change is handled currently, the cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed. This adjustment is then reported in the current year's income statement as an irregular item. A retrospective adjustment of the financial statements is made by recasting the financial statements of prior years on a basis consistent with the newly adopted principle and any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. There is no haphazard treatment advocated for accounting changes.

5. (L.O. 1) A company that reports changes retrospectively would: A. report the cumulative effect in the current year's income statement as an irregular item. B. not change any prioryear financial statements. C. make changes prospectively. D. show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

5. (D) A company that reports changes retrospectively would adjust prior years' statements on a basis consistent with the newly adopted principle. In addition the company should show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

6. (L.O. 1) According to the FASB, which approach is required for reporting changes in an accounting principle? A. Currently B. Retrospectively C. Prospectively D. Futuristically

6. (B) The FASB requires that companies use the retrospective approach for reporting changes in accounting principles.

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 7. (L.O. 1) What journal entry should Skaggs report at the beginning of 2015? A. No entry is necessary B. Inventory 2,000 .....Retained Earnings 2,000 C. Retained Earnings 2,000 .....Inventory 2,000 D. Retained Earnings 4,000 .....Inventory 4,000

7. (A) A journal entry is necessary only for the current year to update the accounts to their corrected status. No journal entries are made in the books for previous years.

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 8. (L.O. 1) What journal entry should Skaggs report at the beginning of 2018? A. Retained Earnings 3,000 .....Inventory 3,000 B. Retained Earnings 4,500 .....Inventory 4,500 C. Inventory 3,000 .....Retained Earnings 3,000 D. Inventory 4,500 .....Retained Earnings 4,500

8. (C) To adjust the financial records for the change from FIFO to average cost, previous year differences are accumulated as follows: Net Income Year...FIFO...Average Cost...Difference in Income 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 2016 79,000 78,000 (1,000) 2017 93,000 94,000 1,000 Total at beginning of 2018 $ 3,000 Therefore the journal entry for Skaggs should be as follows: Inventory 3,000 .....Retained Earnings 3,000

In 2018, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2013 35,000 33,000 2014 63,000 67,000 2015 74,000 75,000 2016 79,000 78,000 2017 93,000 94,000 2018 87,500 89,000 9. (L.O. 1) If Skaggs presents comparative statements for 2016, 2017 and 2018, then it should: A. Change the beginning balance of retained earnings at January 1, 2013 by showing a decrease of $2,000. B. Change the beginning balance of retained earnings at January 1, 2014 by showing a decrease of $2,000. C. Change the beginning balance of retained earnings at January 1, 2015 by showing an increase of $2,000. D. Change the beginning balance of retained earnings at January 1, 2016 by showing an increase of $3,000.

9. (D) If a company changes accounting principles it must change the beginning balance of retained earnings of the earliest year presented. Since Skaggs is presenting comparative statements for 2016, 2017 and 2018, it must change the beginning balance of retained earnings at January 1, 2016. The cumulative effect of the prior years is calculated as follows: Net Income Year FIFO Average Cost Difference in Cost 2013 $35,000 $33,000 $(2,000) 2014 63,000 67,000 4,000 2015 74,000 75,000 1,000 Total at beginning of 2016 $3,000