1.
On December 31, 2011 Dean Company changed its method of accounting for inventory
from weighted average cost method to the FIFO method. This change caused the 2011
beginning inventory to increase by $420,000. The cumulative effect of this accounting
change to be reported for the year ended 12/31/11, assuming a 40% tax rate, is
__________ 420,000 x (1-40%) = 252,000
2. Heinz Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $640,000 $712,000
LIFO 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,080,000
Based on the above information, a change to the LIFO method in 2011 would result in
net income for 2011 of ________________ 1,080,00 - (712,000,- 636,000) = 1,004,000
3. Lanier Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2011 would result in
net income for 2011 of ___________ 600,000 - (360,000-300,000) = 540,000
4. Equipment was purchased at the beginning of 2008 for $204,000. At the time of its
purchase, the equipment was estimated to have a useful life of six years and a salvage
value of $24,000. The equipment was depreciated using the straight-line method of
depreciation through 2010. At the beginning of 2011, the estimate of useful life was
revised to a total life of eight years and the expected salvage value was changed to
$15,000. The amount to be recorded for depreciation for 2011, reflecting these changes
in estimates, is ________
Annual depreciation (204,000 - 24,000) / 6 yrs = 30,000
Cost 204,000
Less: Accum depn (2008 to 2010) 90,000 3 yrs
Carrying value as of 12/10/2010 114,000
Change in depreciation: 114,000 - 15,000= Depreciable cost of 99,000 / 5 yrs remaining
life based on 8 yrs. = 19,800
Use the following information for questions 5 and 6.
Swift Company purchased a machine on January 1, 2008, for $300,000. 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, 2011, 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 2011 to reflect this
additional information.
5. 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 2008, 2009, 2010, and
2011. What should be reported in Swift's income statement for the year ended
December 31, 2011, as the cumulative effect on prior years of changing the estimated
useful life of the machine? ZERO, handle prospectively
6. 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, 2011?
Annual depn- old 300,000 / 6 = 50,000
Carrying value as of 12/31/2010 = 300,000 - (50,000 x 3 yrs) = 150,000
Annual depn - new = 150,000 / 5 = 30,000
Use the following information for questions 7 and 8.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended
12/31/10 and 12/31/11 contained the following errors:
2010 2011
Ending inventory $15,000 overstatement $24,000 understatement
Depreciation expense 6,000 understatement 12,000 overstatement
7. Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By
what amount will 2010 income before income taxes be overstated or understated?
Overstated by (15,000 + 6,000) = 21,000
8. Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income
taxes, by how much will retained earnings at 12/31/11 be overstated or understated?
2010 income overstated (21,000)
2011- beg invty 15,000
Ending invty 24,000
Depn. 12,000
R/E is understated by 30,000
Use the following information for questions 9 through 11.
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $7,500 understated $11,000 overstated
Depreciation expense 2,000 understated
An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and
2012. The prepayment was recorded with a debit to insurance expense. In addition, on
December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not
recorded until 2012. There were no other errors during 2011 or 2012 and no corrections have
been made for any of the errors. Ignore income tax considerations.
9. What is the total net effect of the errors on Langley's 2011 net income?
ANSWER:
NET INCOME IS OVERSTATED BY P15,000
*7,500 (o) + 11,000 (o) + 6,000 (o) - 9,500 (u) = 15,000 (o)
10. What is the total net effect of the errors on the amount of Langley's working capital at
December 31, 2011?
ANSWER:
WORKING CAPITAL IS UNDERSTATED BY P4,500
*11,000 (o) - 6,000 (u) - 9,500 (u) = 4,500
11. What is the total effect of the errors on the balance of Langley's retained earnings at
December 31, 2011?
ANSWER:
RETAINED EARNIGS IS UNDERSTATED BY P2,500
*2,000 (o) + 11,000 (o) - 6,000 (u) - 9,500 (u) = 2,500 (u)
12. Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office
supplies on hand of $24,000 at December 31, 2011 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. 2011 net income to be understated $75,000 and December 31, 2011 retained
earnings to be understated $24,000.
b. 2010 net income and December 31, 2010 retained earnings to be understated
$51,000 each.
c. 2010 net income to be overstated $27,000 and 2011 net income to be
understated $24,000.
d. 2011 net income and December 31, 2011 retained earnings to be understated
$24,000 each.
ANSWER:
a. 2011 net income to be understated $75,000 and December 31, 2011 retained
earnings to be understated $24,000.
Use the following information for questions 13 through 15.
Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con-
tained the following errors:
Dec. 31, 2010 Dec. 31, 2011
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the
sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore
income tax considerations.
13. The total effect of the errors on Bishop's 2011 net income is ________.
ANSWER:
NET INCOME IS UNDERSTATED BY P376,800
*132,000 (o) + 156,000 (u) + 60,000 (u) + 28,800 (u) = 376,800
14. The total effect of the errors on the balance of Bishop's retained earnings at December
31, 2011 is understated by ________________
ANSWER:
RETAINED EARNINGS IS UNDERSTATED BY P268,800
*156,000 (u) + 84,000 (u) - 60,000 (o) + 60,000 (u) + 28,800 (u)= 268,800 (u)
15. The total effect of the errors on the amount of Bishop's working capital at December 31,
2011 is understated by _____________
ANSWER:
WORKING CAPITAL IS UNDERSTATED BY P184,800
*156,000 (u) + 28,800 (u) = 184,800 (u)
