Deck 22: Accounting Changes and Error Analysis

Question 1

An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.

Answer 1

True

Question 2

A change in accounting principle is a change that occurs as the result of new information or additional experience.

Answer 2

False

Question 3

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

Answer 3

True

Question 4

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

Question 5

Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.

Question 6

When changing from the equity method to the fair value method, a company must eliminate the balance in Unrealized Holding Gain or Loss.

Question 7

If an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.

Question 8

Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements-as if the new principle had always been used.

Question 9

Companies report changes in accounting estimates retrospectively.

Question 10

When companies make changes that result in different reporting entities, the change is reported prospectively.

Question 11

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

Question 12

One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

Question 13

When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

Question 14

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

Question 15

When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year's income statement.

Question 16

Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.

Question 17

Counterbalancing errors are those errors that take longer than two periods to correct themselves.

Question 18

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

Question 19

Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

Question 20

Companies account for a change in depreciation methods as a change in accounting principle.

Question 21

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.

Question 22

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

A) continue to depreciate the building over the original 50-year life.
B) depreciate the remaining book value over the remaining life of the asset.
C) adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
D) adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

Question 23

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

A) change in accounting principle.
B) change in accounting estimate.
C) prior period adjustment.
D) correction of an error.

Question 24

Which of the following is not accounted for a change in accounting principle?

A) A change from LIFO to FIFO for inventory valuation
B) A change to a different method of depreciation for plant assets
C) A change from full-cost to successful efforts in the extractive industry
D) A change from the completed-contract to the percentage-of-completion method

Question 25

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.

Question 26

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?

A) The cumulative effect on prior years, net of tax, in the current retained earnings statement
B) Restatement of prior years' income statements
C) Recomputation of current and future years' depreciation
D) All of these are required.

Question 27

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.

Question 28

Which of the following is not a retrospective-type accounting change?

A) Completed-contract method to the percentage-of-completion method for long-term construction contracts
B) LIFO method to the FIFO method for inventory valuation
C) Sum-of-the-years'-digits method to the straight-line method
D) "Full cost" method to another method in the extractive industry

Question 29

Which of the following statements is correct?

A) Changes in accounting principle are always handled in the current or prospective period.
B) Prior statements should be restated for changes in accounting estimates.
C) A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
D) Correction of an error related to a prior period should be considered as an adjustment to current year net income.

Question 30

In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should:

A) be ignored.
B) be subtracted from the carrying value of the securities.
C) remain as a part of the carrying amount of the investment.
D) be shown in the income statement.

Question 31

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?

A) Current period and prospectively
B) Current period and retrospectively
C) Retrospectively only
D) Current period only

Question 32

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

A) materiality.
B) consistency.
C) conservatism.
D) objectivity.

Question 33

Which type of accounting change should always be accounted for in current and future periods?

A) Change in accounting principle
B) Change in reporting entity
C) Change in accounting estimate
D) Correction of an error

Question 34

Counterbalancing errors do not include

A) errors that correct themselves in two years.
B) errors that correct themselves in three years.
C) an understatement of purchases.
D) an overstatement of unearned revenue.

Question 35

Which of the following describes a change in reporting entity?

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.

Question 36

Which of the following disclosures is required for a change from LIFO to FIFO?

A) The cumulative effect on prior years, net of tax, in the current retained earnings statement
B) The justification for the change
C) Restated prior year income statements
D) All of these are required.

Question 37

Which of the following is accounted for as a change in accounting principle?

A) A change in the estimated useful life of plant assets.
B) A change from the cash basis of accounting to the accrual basis of accounting.
C) A change from expensing immaterial expenditures to deferring and amortizing them as they become material.
D) A change in inventory valuation from average cost to FIFO.

Question 38

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause

A) the ending inventory and retained earnings to be understated.
B) the ending inventory, cost of goods sold, and retained earnings to be understated.
C) no effect on net income, working capital, and retained earnings.
D) cost of goods sold and net income to be understated.

Question 39

A company changes from the straight-line method to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change will include a

A) credit to Accumulated Depreciation.
B) debit to Retained Earnings in the amount of the difference on prior years.
C) debit to Deferred Tax Asset.
D) credit to Deferred Tax Liability.

Question 40

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a

A) debit to Construction in Process.
B) debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
C) debit to Retained Earnings in the amount of the difference on prior years, net of tax.
D) credit to Deferred Tax Liability.

Question 41

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

Question 42

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: 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.

Question 43

Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors: 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.
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

Question 44

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.
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

Question 45

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.
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

Question 46

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.
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

Question 47

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.
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.

Question 48

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.

Question 49

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.

Question 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: 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.

Question 51

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.
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.

Question 52

Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors: 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.
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.

Question 53

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:
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

Question 54

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.

Question 55

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.

Question 56

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: 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.

Question 57

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.

Question 58

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.
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

Question 59

Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors: 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.
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

Question 60

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:
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

Question 61

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.
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.

Question 62

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.

Question 63

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

Question 64

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.
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.

Question 65

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.

Question 66

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.
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.

Question 67

In 2015, 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.)
Instructions
(a) Indicate the net income that would be shown on comparative financial statements issued at 12/31/15 for each of the four years, assuming that the company changed to the FIFO method in 2015.
(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: 2012, $80,400; 2013, $86,120; 2014, $90,300; and 2015, $93,600. Indicate the net income that would be shown on comparative financial statements issued at 12/31/15 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 12/31/15 for 2012, 2013, and 2014?

Question 68

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?

Question 69

Matching accounting changes to situations.The four types of accounting changes, including error correction, are:Code
a. Change in accounting principle.
b. Change in accounting estimate.
c. Change in reporting entity.
d. Error correction.

Instructions
Following are a series of situations. You are to enter a code letter to the left to indicate the type of change.
1. Change from presenting nonconsolidated to consolidated financial statements.
2. Change due to charging a new asset directly to an expense account.
3. Change from expensing to capitalizing certain costs, due to a change in periods benefited.
4. Change from FIFO to LIFO inventory procedures.
5. Change due to failure to recognize an accrued (uncollected) revenue.
6. Change in amortization period for an intangible asset.
7. Changing the companies included in combined financial statements.
8. Change in the loss rate on warranty costs.
9. Change due to failure to recognize and accrue income.
10. Change in residual value of a depreciable plant asset.
11. Change from an unacceptable to an acceptable accounting principle.
12. Change in both estimate and acceptable accounting principles.
13. Change due to failure to recognize a prepaid asset.
14. Change from straight-line to sum-of-the-years'-digits method of depreciation.
15. Change in life of a depreciable plant asset.
16. Change from one acceptable principle to another acceptable principle.
17. Change due to understatement of inventory.
18. Change in expected recovery of an account receivable.

Question 70

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.
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.

Question 71

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.
$\bullet$ Royalty income of $162,000 was accrued at 12/31/14 for the period July-December 2014.
$\bullet$ Royalty income of $180,000 was received on 3/31/15, and $234,000 on 9/30/15.
$\bullet$ 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.

Question 72

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.

Question 73

For each of the following items, indicate the type of accounting change and how each is recognized in the accounting records in the current year.(a) Change from straight-line method of depreciation to sum-of-the-years'-digits(b) Change from the cash basis to accrual basis of accounting(c) Change from FIFO to LIFO method for inventory valuation purposes (retrospective application impractical)(d) Change from presentation of statements of individual companies to presentation of consolidated statements(e) Change due to failure to record depreciation in a previous period(f) Change in the realizability of certain receivables(g) Change from LIFO to FIFO method for inventory valuation purposes

Question 75

Which of the following should be reported as a prior period adjustment?

Question 76

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: 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.
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.

Question 77

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: 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.
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.

Question 78

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: 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.
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.

Question 79

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.

Question 80

Black, Inc. is a calendar-year corporation whose financial statements for 2014 and 2015 included errors as follows: 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