Deck 21: Accounting Corrections and Error Analysis

Question 1

Accounting changes detract from which one of the following enhancing qualitative characteristics of accounting information?

A) comparability
B) relevance
C) representational faithfulness
D) materiality

Answer 1

A

Question 2

A firm may choose to apply indirect effects of an accounting principle change either prospectively or retrospectively.

Answer 2

False

Question 3

Accounting changes are only permitted when ________.

A) the effect is material
B) adequate disclosures are made so financial statement users can restore comparability with prior-years financial statements
C) the method used is prospective
D) the company has not made prior changes

Answer 3

B

Question 4

Accounting principle changes are generally handled retrospectively.

Question 5

Describe the two methods for reporting accounting changes and how they differ.

Question 6

Retrospective changes require all but which of the following?

A) restatement of financial statements to reflect the effects of the change for each period presented
B) adjustments to assets and liabilities to reflect the cumulative effect of the change on periods prior to those presented
C) detailed numerical comparisons of all prior periods to restated statements
D) retained earnings restated for the cumulative effect of the change on income for periods prior to those presented

Question 7

Accounting estimate changes are handled prospectively.

Question 8

Direct effects of changes in an accounting principle are those necessary to implement the change and are applied retrospectively.

Question 9

Accounting entity changes are handled prospectively.

Question 10

Changes in accounting principles can be mandatory or voluntary.

Question 11

Prospective changes require changes be made to the current year and all future years affected.

Question 12

Explain why comparability and consistency are considerations for accounting changes.

Question 13

Indirect effects of changes in an accounting principle are those that change current or future cash flows and are applied prospectively.

Question 14

If a mandatory accounting change requires too much work for a firm to use the retrospective approach, then the firm can choose to use the prospective approach.

Question 15

There are four types of accounting changes - principles, estimates, entities and errors.

Question 16

When making a voluntary accounting change, a firm must explain the justification for the change on the basis that it more accurately portrays its financial position and performance.

Question 17

Retrospective changes require restatement of all periods reported in the annual report as if it had been used in those prior years.

Question 18

Mandatory accounting changes require retrospective application of the new accounting standard.

Question 19

Which one of the following would not be affected by a change in revenue recognition requiring a retrospective change?

A) cash
B) revenue
C) unearned revenue
D) deferred taxes

Question 20

Which one of the following changes is not an accounting change?

A) principle
B) estimate
C) error
D) entity

Question 21

For each of the following situations, determine the accounting method that should be employed.
$$\begin{array} { | l | l | } \hline \text { Type of Accounting Changes } & \text { Accounting Methods } \\\hline \text { Change in Principle } & \\\hline \text { Change in Estimate } & \\\hline \text { Change in Entities } & \\\hline \text { Change in Accounting Estimate } & \\\text { effected by a Change in } & \\\text { Accounting Principle } & \\\hline\end{array}$$

Question 22

Georgio, Inc. decided to move its business from its current location to another larger plant. Management should examine the salvage value of the building in the future and the change in the useful life to see if a change in the depreciation of the current building is warranted.

Question 23

A change in depreciation method is a change in estimate effected by a change in accounting principle, and is accounted for prospectively.

Question 24

Complete the following table by selecting the appropriate type of change and the accounting method appropriate for each event.
$$\begin{array} { | l | l | l | } \hline { \text { Event } } & \text { Type of Change } & \text { Accounting Method } \\\hline \text { Change from LIFO to FIFO. } & & \\\hline \text { Change in the warranty expense } & & \\\text { provision. } & & \\\hline \begin{array} { l } \text { Change from completed- } \\\text { contract to percentage-of- } \\\text { completion method. }\end{array} & & \\\hline \begin{array} { l } \text { Purchase of a new subsidiary } \\\text { with } 60 \% \text { ownership that is five } \\\text { years old. }\end{array} & & \\\hline \text { Change from reporting } & & \\\text { inventory from the aggregate } & & \\\text { method to the individual item } & & \\\text { method. } & & \\\hline \text { Change in the life and salvage } & & \\\text { value of a depreciable asset. } & & \\\hline \text { Change from straight-line to } & & \\\text { declining balance depreciation. } & & \\\hline\end{array}$$

Question 25

Butler Products decided to change inventory methods on January 1, 2020 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 financial position and profitability. Butler's tax rate is 35% for all years. $$\begin{array} { r c c } \underline{\text { Year Ended} } & \underline{ \text { FIFO Inventory} } & \underline{\text { Average-Cost Inventory }} \\\text { December 31, 2018 } & \$ 264,000 & 205,000 \\\text { December 31, 2019 } & 395,000 & 345,000 \\\text { December 31,2020 } & 240,000 & 190,000\end{array}$$
Which one of the following journal entries correctly records the change in the accounting principle?

A) No entry needed.
B) $\begin{array}{ll}\text { Retained Earnings } & 32,500 \\\text { Deferred Tax Asset } & 17,500 \\\text { Inventory } &&50,000\end{array}$
C) $\begin{array}{lrr} \text {Inventory } &50,000\\ \text {Deferred Tax Liability } &&17,500\\ \text { Retained Earnings} &&32,500\\\end{array}$

D) $\begin{array}{ll}\text { Deferred Tax Asset } & 32,500 \\\text { Retained Earrings } & 17,500 \\\quad \text { Inventory } &&50,000\end{array}$

Question 26

Butler Products decided in 2020 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. $$\begin{array} { c c c } \underline{\text { Year Ended } }& \underline{ \text { FIFO Inventory }} & \underline{ \text { Average-Cost Inventory} } \\\text { December 31,2018 } & \$ 250,000 & \$ 195,000 \\\text { December 31, 2019 } & 390,000 & 329,000 \\\text { December 31,2020 } & 240,000 & 190,000\end{array}$$
Ignoring income tax, which one of the following journal entries correctly records the change in the accounting principle at January 1, 2020?

A) No journal entry needed for a prospective application of the change in principle.
B) $\begin{array}{llcc} \text {Retained Earnings } &61,000 \\\text { Inventory }&&61,000 \\\end{array}$

C) $\begin{array}{llcc} \text { Inventory} &61,000 \\ \text {Retained Eamings }&&61,000 \\\end{array}$

D) $\begin{array} {ll} \text { Inventory }&56,000 \\\text { Retained Earnings }&&56,000\end{array}$

Question 27

Changes in accounting principle may be handled prospectively if insufficient information is available to properly account for the change.

Question 28

Changes in depreciation methods are changes in accounting principle that are accounted for retrospectively.

Question 29

When a company makes a change in an accounting principle, IFRS additionally requires a company to report ________.

A) three years of all financial statements
B) two years of all financial statements
C) two years of balance sheets and two years of income statements
D) three years of balance sheets and two years of other financial statements

Question 30

Johnston Controls began operation in 2017 using FIFO inventory methods. In 2018, management decided they should have chosen LIFO to more accurately portray financial position and performance. The beginning 2018 inventory using FIFO was $200,000. Under the LIFO method the beginning inventory would have been $240,000. The adjustment to inventory for the accounting principle change for 2017 would be ________.

A) $0
B) $20,000 debit
C) $40,000 credit
D) $40,000 debit

Question 31

Which one of the following might be affected by a change in revenue recognition requiring a prospective change?

A) retained earnings
B) management compensation
C) unearned revenue
D) deferred taxes

Question 32

Fields Construction decides to change from the completed-contract method to the percentage-of-completion method of recording construction projects. It also has a compensation plan for bonuses to supervisors for three percent of net income, which are retroactive for changes in prior years' net income. Discuss the direct and indirect effects of this change.

Question 33

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 2019, Anzelmo's president became a member of the board of directors when its ownership interest reached 30% of Jones. This change is ________.

A) an accounting principle change requiring retrospective adjustment
B) an accounting principle change requiring prospective adjustment
C) a correction of an error
D) a change in estimate

Question 34

Hampton's Construction, Inc. decided to change from the completed-contract method of accounting to the percentage-of-completion method. The following information is available for net income. Ignore income tax effects: Net Income
$\begin{array}{ccc} \underline{\text { Year Ended } }& \underline{\text { Percentage of Completion}}& \underline{\text { Completed Contract }}\\\text { December } 31,2018 & \$ 180,00 & \$ 125,000 \\\text { December } 31,2019 & 200,000 & 149,000 \\\text { December } 31,2020 & 201,000 & 180,000\end{array}$

What is the journal entry to record the change in accounting principle on January 1, 2020?

A) No entry needed.
B) $\begin{array}{llcc} \text {Construction in Progress } &106,000\\ \text { Deferred Tax Liability }&&106,000 \\\end{array}$

C) $$\begin{array} { l l } \text { Retained Earnings } & 127,000 \\\quad \text { Construction in Progress } &&127,000\end{array}$$
D) $\begin{array}{llcc} \text { Construction in Progress} &106,000 \\ \text { Retained Earnings } &&106,000\\\end{array}$

Question 35

Energy, Inc began operations in 2018 using LIFO inventory methods. In 2019, management decided they should have chosen FIFO. The beginning inventory for 2019 using LIFO was $128,000. Under the FIFO method, the beginning inventory would have been $157,000. The adjustment to inventory for the change in accounting principle for 2019 would be ________.

A) $0
B) $29,000 debit
C) $29,000 credit
D) $58,000 debit

Question 36

Which one of the following would not be a required disclosure for a change in accounting principle?

A) description of the nature of the change
B) management's justification for the change
C) the estimated effect on future earnings per share
D) cumulative effect of the change on retained earnings for the first year presented

Question 37

Johnston Controls began operations in 2018 using FIFO inventory methods. On January 1, 2019, management decided they should have chosen to use LIFO, as it more accurately reflects income. The beginning 2019 inventory using FIFO was $100,000. Under the LIFO method the beginning inventory would have been $120,000.
Required: Prepare the journal entry to record the change in accounting principle and discuss the required disclosures.

Question 38

Changes in amortization, depletion, and depreciation methods effected by a change in accounting principle are accounted for prospectively.

Question 39

On January 1, 2020, Hampton's Construction, Inc. decided to change from the completed-contract method of accounting to the percentage-of-completion method. Hampton will continue to use the completed-contract method for income tax purposes. The following information is available for net income. The income tax rate for all years is 35%. Net Income
$\begin{array}{ccc}\underline{ \text { Year Ended }} & \underline{\text { Percentage of Completion }} & \underline{\text { Completed Contract} } \\ \text { December } 31,2018 & \$ 149,000 & \$ 126,000 \\ \text { December } 31,2019 & 178,000 & 156,000 \\ \text { December } 31,2020 & 281,000 & 181,000 \\\end{array}$

What is the journal entry to record the change in accounting principle on January 1, 2020?

A) No entry needed.
B) $\begin{array}{llcc} \text { Construction in Progress} &45,000\\ \text { Retained Eamings} &&45,000\\\end{array}$

C) $\begin{array}{ll}\text { Retained Earnings } & 65,000 \\\text { Deferred Tax Asset } & 35,000 \\\text { Construction in Progress } &&100,000\end{array}$
D) $\begin{array}{l}\text { Construction in Progress }&45,000 \\\text { Deferred Tax Liability } &&15,750\\\text { Retained Earnings }&&29,250\end{array}$

Question 40

When a firm decides to change an accounting principle, but does not have sufficient information to use the retrospective approach, it may ________.

A) estimate the numbers to do so
B) declare the change to be impractical
C) be forced to abandon the change
D) use the prospective approach

Question 41

Peoples Corporation purchased a building on December 29, 2014 that cost $1,400,000 and occupied it on January 2, 2015. The owner estimated that the building would last 40 years with a salvage value of $150,000 using straight-line depreciation. In early 2018, Mr. Peoples learned that due to a permanent highway closure, the company needs to relocate at the end of 2020. He believes that the salvage value of the building at that time will be $800,000. Compute the amount of depreciation to record during 2018, and each of the two years thereafter. (Round your final answer to the nearest dollar.)

A) $31,250
B) $200,000
C) $168,750
D) $150,000

Question 42

Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in uncollectible accounts. In 2018, her sales were $3,200,000 and in 2019, sales were $3,800,000. Before 2019, she estimated that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. She has recorded bad debt expense of 2% for 2018. Does she need to make a retroactive correction for 2018, and should she add an additional adjustment to 2019? If so, write the journal entry for the year-end adjustment in 2019. She has already recorded 2% of sales for bad debts in 2019 for 2019 sales.

Question 43

Disclosures are required for all changes in accounting estimate made in normal operations.

Question 44

Which of the following is not an estimate that might be revised as a natural part of the accounting process?

A) salary expense
B) bad debt expense
C) depreciation expense
D) pension expense

Question 45

The IRS is investigating Miller Productions' tax returns for 2017 and 2018. Based on the IRS audit procedures, the company accrued a $46,000 loss for additional tax assessments in 2018 for the 2017 tax year. At the end of 2018, Miller was able to settle with IRS for $68,000. What entry should Miller make when it pays the deficiency in December, 2018?

A) $$\begin{array} { | l | r | r | } \hline \text { Income Taxes Payable } & 46,000 & \\\hline \text { Retained Earnings } & 22,000 & \\\hline \text { Cash } & & 68,000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Income Taxes Payable } & 46,000 & \\\hline \text { Income Tax Expense } & 22,000 & \\\hline \text { Cash } & & 68,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Income Taxes Payable } & 46,000 & \\\hline \text { Retained Earnings } & & 22,000 \\\hline \text { Cash } & & 24,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Income Taxes Payable } & 68,000 & \\\hline \text { Cash } & & 68,000 \\\hline\end{array}$$

Question 46

John Pickens writes mystery novels. His publisher pays him royalties for books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $52,000. On March 31, 2019, he received $59,000. Assuming that he recorded $52,000 at December 31, 2018, which one of the following is the correct journal entry on March 31, 2019? His tax rate is 35%.

A) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 59,000 & \\\hline \text { Royalties Receivable } & & 52,000 \\\hline \text { Royalty Revenue } & & 7000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 59,000 & \\\hline \text { Royalty Revenue } & & 59,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 59,000 & \\\hline \text { Royalties Receivable } & & 52,000 \\\hline \text { Retained Earnings } & & 7000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 59,000 & \\\hline \text { Royalties Receivable } & & 52,000 \\\hline \text { Retained Earnings } & & 4550 \\\hline \text { Income Taxes Payable } & & 2450 \\\hline\end{array}$$

Question 47

Brown Furniture Company decided to go after the younger market to create a newer customer base. In doing so, Ms. Brown offered a liberal credit policy and estimated she would have a 5% bad debt expense. In 2018, sales under this promotion were $600,000. Accordingly, she estimated a bad debt expense of $30,000. Her actual bad debt expenses were far less than expected, at about 3%, and this rate will be used for 2019. Her 2019 sales under the program are $860,000. How much bad debt expense should be reported on the comparative income statements based on this information?

A) 2018, $18,000; 2019, $25,800
B) 2018, $30,000; 2019, $30,000
C) 2018, $30,000; 2019, $25,800
D) 2018, $30,000; 2019, $43,000

Question 48

Highland Corporation has always used double-declining balance depreciation for its equipment. Beginning in 2018, the company has decided to use straight-line depreciation for all new equipment purchases. How should the company report this decision? Describe any journal entries and disclosures that need to be made for this change.

Question 49

If a company has recorded a liability for a lawsuit, and the amount of the settlement is more than the provision in the liability, it must consider this an error and retrospectively correct it.

Question 50

Humphrey Contractors purchased customized equipment in January, 2017 for $620,000. The manufacturer warranted the equipment for six years. Humphrey used double-declining balance depreciation with a useful life of eight years and no salvage value. After two full years, he now believes that the equipment will only last a total of five years. Compute his depreciation expense for 2019 if he switches to straight-line depreciation. (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)

A) $77,500
B) $93,000
C) $116,250
D) $124,000

Question 51

The State of Alabama filed suit against Edwards Chemical Company for violations of water pollution laws in 2018. During 2018, the company accrued a $300,000 loss for litigation. At the end of 2019, Edwards was able to settle with the State for $245,000. What entry should Edwards make when it pays the State in December, 2019?

A) $$\begin{array} { | l | r | r | } \hline \text { Litigation Liability } & 300,000 & \\\hline \text { Gain on Litigation } & & 55,000 \\\hline \text { Cash } & & 245,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Litigation Liability } & 245,000 & \\\hline \text { Cash } & & 245,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Litigation Liability } & 300,000 & \\\hline \text { Recovery of a Loss } & & 55,000 \\\hline \text { Cash } & & 245,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Litigation Liability } & 300,000 & \\\hline \text { Retained Earnings } & & 55,000 \\\hline \text { Cash } & & 245,000 \\\hline\end{array}$$

Question 52

Prior years' financial statements are restated for changes in material accounting estimates.

Question 53

Jenkins, Inc. builds custom machines for manufacturers using robotic equipment. In 2018, the company decided to change from straight-line to double-declining balance depreciation for its robotic equipment. It changed the life expectancy as follows: $$\begin{array} { | l | r | } \hline \text { Original cost of robotic equipment } & \$ 2,800,000 \\\hline \text { Accumulated depreciation thru } 2017 & 860,000 \\\hline \text { Original life in years } & 8 \\\hline \text { Remaining life in years } &4 \\\hline\end{array}$$ Determine the correct amount of depreciation to expense for 2018.

A) $350,000
B) $485,000
C) $430,000
D) $970,000

Question 54

Which one of the following is a change in estimate effected by a change in an accounting principle?

A) change in salvage value of an asset
B) change in estimated life of an asset
C) change from declining-balance to straight-line depreciation
D) changes in pension plan asset revenues

Question 55

The auditor for Universal Tools, Inc. discovered in 2019 that the warranty liability account showed a $25,000 debit balance. She investigated and discovered that the 2% estimate based on sales for warranty expense was recorded and understated, and it was more likely 3.5%. Sales for 2019 were $6,000,000. What is the appropriate journal entry as a result of this discovery?

A) $$\begin{array} { | c | r | r | } \hline \text { Warranty Liability } & 25,000 & \\\hline \text { Warranty Expense } & & 25,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Warranty Expense } & 90,000 & \\\hline \text { Warranty Liability } & & 90,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Warranty Liability } & 90,000 & \\\hline \text { Warranty Expense } & & 90,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Warranty Expense } & 210,000 & \\\hline \text { Warranty Liability } & & 210,000 \\\hline\end{array}$$

Question 56

Miller Manufacturing purchased a packaging machine for $300,000 on January 2, 2015. The seller assumed that the machine would be functional for at least five years with no salvage value. In 2018, Miller decided that the machine would last an additional five years with a salvage value of $25,000. The company uses straight-line depreciation for all assets. What amount of depreciation should Miller record in 2018 and following years?

A) $19,000
B) $55,000
C) $30,000
D) $60,000

Question 57

Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in uncollectible accounts. In 2018, her sales were $3,380,000 and in 2019, sales were $3,960,000. Before 2019, she estimated that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. What should be the bad debt expense for 2018 and 2019 in the comparative income statements for 2018 and 2019?

A) 2018, $101,400; 2019, $118,800
B) 2018, $67,600; 2019, $118,800
C) 2018, $67,600; 2019, $220,200
D) 2018, $101,400; 2019, $220,200

Question 58

In reconciling information to complete its financial statements, Flying High Corporation discovered the following situations:
$$\begin{array} { | l | r| } \hline \text { Income before taxes and the changes } & \$ 400,000 \\\hline \text { Income tax rate } & 35 \% \\\hline \text { Bad debt expense increased } & 1 \% \text { of sales } \\\hline \text { Sales } & \$ 900,000 \\\hline \text { Equipment original cost } & \$ 500,000 \\\hline \text { Equipment accumulated depreciation } & \$ 200,000 \\\hline \text { Method of depreciation unchanged } & \text { DDB } \\\hline \text { Remaining life changed from 5 years to } & 3 \text { years } \\\hline\end{array}$$
Required: Assuming that no depreciation had been recorded, recompute depreciation expense, bad debt expense, income before taxes, income tax expense, and net income.

Question 59

For which one of the following changes is it appropriate to use the prospective method?

A) change in principle
B) change in entity
C) correction of error
D) change in estimate

Question 60

John Pickens writes mystery novels. His publisher pays him royalties for the number of books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $53,000. On March 31, 2019, he received $57,500. Assuming that he recorded $53,000 in royalties at December 31, 2018, what kind of change does this represent?

A) not a change
B) change in estimate
C) prior period error correction
D) change in accounting principle

Question 61

Many errors are due to misapplication of accounting policies.

Question 62

A material error is one that, if not corrected, would impact a user's decisions.

Question 63

A change in the specific subsidiaries that make up the group of entities for which consolidated financial statements are presented is a change in a reporting entity.

Question 64

Describe a change in reporting entity and discuss its accounting treatment and its required disclosures.

Question 65

A financial statement can provide a faithful representation even if it is not perfectly accurate as long as the process used to produce the information is selected and applied with no errors and the description of the transaction is free from error.

Question 66

Fraud is a type of accounting error.

Question 67

A change in reporting entity must be treated retrospectively for a maximum of two prior years.

Question 68

When a firm has a change in reporting entity, it must disclose ________.

A) the individual financial statements for each component entity
B) the effect of the change on net income and EPS for each year presented
C) the reasons that the company chose to purchase a new business unit
D) the reasons for the lack of comparability to prior financial statements

Question 69

When accountants discover material errors, they must be corrected.

Question 70

Self-correcting errors do not require any journal entries regardless of the length of time involved.

Question 71

Changes in reporting entities are accounted for prospectively.

Question 72

Presenting consolidated statements instead of individual financial statements is a change in a reporting entity.

Question 73

A change in reporting entity must be treated retrospectively for all years presented in the financial statements.

Question 74

Which one of the following is not a required disclosure for a change in reporting entity?

A) the nature of the change and the reason for the change
B) the effect of the change on income from continuing operations
C) the effect of the change on operating expenses
D) the effect of the change on other comprehensive income

Question 75

Which one of the following is not a change in a reporting entity?

A) the purchase of a new subsidiary
B) presenting a consolidated statement for the first time
C) changing the specific subsidiaries that make up the group of entities presented in the financial statements
D) changing the entities in combined financial statements

Question 76

Balance sheet errors are typically the result of misclassification of accounts in the process of recording a transaction and require correction upon discovery.

Question 77

A self-correcting error must self-correct within two years.

Question 78

In reconciling information to complete its financial statements, Biltmore, Inc. discovered the following situations:
$\begin{array}{|l|r|}\hline \text { Income before taxes and the changes } & \$ 1,000,000 \\\hline \text { Income tax rate } & 40 \% \\\hline \text { Warranty expense decreased } & 1 \% \text { of sales } \\\hline \text { Sales } & \$ 6,000,000 \\\hline \text { Equipment original cost } & \$ 800,000 \\\hline \text { Equipment accumulated depreciation } & \$ 200,000 \\\hline \text { Method of depreciation unchanged } & \text { SL}\\\hline \text { Remaining life changed from 5 years to } & \text { 6 years }\\\hline\end{array}$
Required: Assuming that no depreciation had been recorded, recompute depreciation expense, warranty expense change, income before taxes, income tax expense, and net income.

Question 79

Material error corrections are retrospectively applied but do not require adjustments to retained earnings as prior-period adjustments.

Question 80

When a large corporation purchases a new business which is included in the consolidated statements for the year, it is not a change in a reporting entity, and it is accounted for prospectively.