1. On December 31, 2013, Gifts Galore, Inc. appropriately changed its inventory valuation method from weighted-average cost to FIFO method for financial statement and income tax purposes. The change will result in a $3,600,000 increase in the beginning inventory at January 1, 2013. Assume a 35% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is (Points : 5)
a) $0.
b) $1,260,000.
c) $3,600,000.
d) $2,340,000.XXXXXX
2. As of January 1, 2011, Survival Industries, Inc. purchased a boat at a cost of $400,000.
When purchased, the company was using the double-declining depreciation method.
Key info on the asset at time of purchase is the following.
Estimated useful life is 8 years.
Residual Value is $0.
At the beginning of 2014, the CFO decided to change to straight-line depreciation method.
Compute the depreciation expense for 2014. (Points : 5)
a) $50,000
b) $80,750XXXXXX
c) $33,750
d) $16,875
3. (TCO E) Mystical Corporation found the following errors in their year-end financial statements.
As of Dec. 2012 As of Dec. 2013
Ending Inventory $32,000 understated $46,000 overstated
Depreciation Exp. $7,000 understated
On December 31, 2013, a fully depreciated machine was sold for $35,000 but the sale was not recorded until January 15, 2014 when the cash was received. In 2012, a three-year insurance premium was prepaid for $45,000 of which the entire amount was expensed in the first year.
There were no other errors or corrections. Ignore any tax considerations.
What is the total net effect of errors on Mystical’s 2013 net income? (Points : 5)
a) Retained earnings understated by $29,000
b) Retained earnings understated by $4,000
c) Retained earnings understated by $-3,000XXXXXX
d) Retained earnings overstated by $18,000
4. (The four types of accounting changes, including error correction, are
I. change in accounting principle;
II. change in accounting estimate;
III. change in reporting entity; and
IV. error correction.
Required:
The following are a series of situations. Indicate the type of change.
1 Change from presenting nonconsolidated to consolidated financial statements
2 Change in expected recovery of an account receivable
3 Change due to charging a new asset directly to an expense account
4 Change from expensing to capitalizing certain costs, due to a change in periods benefited
5 Change in both estimate and acceptable accounting principles
6 Change from FIFO to LIFO inventory procedures
7 Change due to failure to recognize an accrued (uncollected) revenue
8 Change in amortization period for an intangible asset
9 Change from straight-line to sum-of-the-years’-digits method of depreciation
10 Changing the companies included in combined financial statements
11 Change in the loss rate on warranty costs
12 Change due to failure to recognize and accrue income
13 Change in residual value of a depreciable plant asset
14 Change in life of a depreciable plant asset
15 Change due to understatement of inventory (Points : 15)
1. change in reporting entity
2 Change in Accounting estimate
3. Error correction
4. Change in accounting estimate8.
5. Change in accounting estimate
6. Change in accounting principle
7. Error correction
8. Change in accounting estimate
9. Change in accounting estimate
10. Change in reporting entity
11. Change in the accounting estimate
12. Error Correction
13. Change in accounting estimate
14 Change in accounting estimate
15 Error correction