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 (Points : 2)
$0.

$750,000.

$1,750,000.

$2,500,000.

Question 2.2. Which of the following describes a change in reporting entity? (Points : 2)

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A company acquires a subsidiary that is to be accounted for as a purchase.

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A manufacturing company expands its market from regional to nationwide.

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A company divests itself of a European branch sales office.

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Changing the companies included in combined financial statements.
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Question 3.3. Which of the following is accounted for as a change in accounting principle? (Points : 2)
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A change in the estimated useful life of plant assets.

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A change from the cash basis of accounting to the accrual basis of accounting.
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A change from expensing immaterial expenditures to deferring and amortizing them as they
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become material.
A change in inventory valuation from average cost to FIFO.
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Question 4.4. 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 (Points : 2)
$840,000.

$504,000.

$336,000.

$0.

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 Question 5.5. 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.
2013 2014 2015
Completed contract $300,000 $200,000 $100,000
Percentage-of-completion 500,000 250,000 180,000

What amount will be debited to Construction in Process account, to record the change at beginning of
2015? (Points : 2)
$250,000

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$100,000

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$150,000

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$50,000
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Question 6.6. Bishop Co. began operations on January 1, 2014. Financial statements for 2014 and 2015
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con- tained the following errors:

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Dec. 31, 2014 Dec. 31, 2015

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Ending inventory $132,000 too high $146,000 too low

Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
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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.
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The total effect of the errors on Bishop's 2015 net income is (Points : 2)
understated by $366,800.
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understated by $234,800.

overstated by $117,200.

overstated by $249,200.

Question 7.7. 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

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 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? (Points : 2)
$0

$40,000

$60,000

$210,000

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Question 8.8. 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

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depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a
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decision was made to change to the double-declining balance method of depreciation for this machine.
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The amount that Nobel should record as depreciation expense for 2015 is (Points : 2)
$120,000.
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$168,000.
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$240,000.

none of these are correct.

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Question 9.9. 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 (Points : 2)
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continue to depreciate the building over the original 50-year life.

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depreciate the remaining book value over the remaining life of the asset.

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.
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.

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 Question 10.10. Which of the following disclosures is required for a change from LIFO to FIFO? (Points :
2)
The cumulative effect on prior years, net of tax, in the current retained earnings statement

The justification for the change

Restated prior year income statements

All of these are required.

Question 11.11. 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

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depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a

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decision was made to change to the double-declining balance method of depreciation for this machine.

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Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained
earnings, is (Points : 2)

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$134,400.
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$0.

$157,920.
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$225,600.
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Question 12.12. Link Co. purchased machinery that cost $1,800,000 on January 4, 2013. The entire cost
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was recorded as an expense. The machinery has a nine-year life and a $120,000 residual value. The
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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 (Points : 2)
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$1,800,000.
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$1,613,333.

$1,426,667.

$1,240,000.

Question 13.13. 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.

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 The depreciation expense for 2015 would be (Points : 2)
$38,400.

$54,858.

$75,000.

$107,142.

Question 14.14. 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 (Points : 2)
the ending inventory and retained earnings to be understated.

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the ending inventory, cost of goods sold, and retained earnings to be understated.

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no effect on net income, working capital, and retained earnings.

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cost of goods sold and net income to be understated.
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Question 15.15. 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
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$80,000. The equipment was depreciated using the straight-line method of depreciation through 2014.
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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 (Points : 2)
$41,250.
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$66,000.

$76,000.
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$78,750.
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Question 16.16. When a company decides to switch from the double-declining balance method to the
straight-line method, this change should be handled as a (Points : 2)
change in accounting principle.

change in accounting estimate.

prior period adjustment.

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 correction of an error.

Question 17.17. 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:

Final Inventory 2014 2015

FIFO $640,000 $ 712,000
LIFO 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,130,000

Based on the above information, a change to the LIFO method in 2015 would result in net income for

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2015 of (Points : 2)

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$1,170,000.

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$1,130,000.

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$1,054,000.
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$1,050,000.
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Question 18.18. On January 1, 2012, Piper Co., purchased a machine (its only depreciable asset) for
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$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.
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Piper's income before depreciation, before income taxes, and before the cumulative effect of the
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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? (Points : 2)
$120,000
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$182,000

$308,000

$350,000

Question 19.19. 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

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 depreciation expense for 2015 would be (Points : 2)
$37,500.

$60,000.

$90,000.

$144,000.

Question 20.20. Langley Company's December 31 year-end financial statements contained the following
errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory $22,500 understated $33,000 overstated

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Depreciation expense 6,000 understated

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An insurance premium of $54,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The

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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

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no other errors during 2015 or 2016 and no corrections have been made for any of the errors. Ignore
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income tax considerations.
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What is the total effect of the errors on the balance of Langley's retained earnings at December 31,
2015? (Points : 2)
Retained earnings understated by $30,000
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Retained earnings understated by $13,500

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Retained earnings understated by $7,500

Retained earnings overstated by $10,500

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Question 21.21. 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
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concept of (Points : 2)
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materiality.

consistency.

conservatism.

objectivity.

Question 22.22. Which of the following should be reported as a prior period adjustment?

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 Change in Change from
Estimated Lives Unaccepted Principle
of Depreciable Assets to Accepted Principle (Points : 2)
Yes Yes

No Yes

Yes No

No No

Question 23.23. Bishop Co. began operations on January 1, 2014. Financial statements for 2014 and
2015 con- tained the following errors:

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Dec. 31, 2014 Dec. 31, 2015

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Ending inventory $132,000 too high $146,000 too low

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Depreciation expense 84,000 too high —

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Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —

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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.
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The total effect of the errors on the amount of Bishop's working capital at December 31, 2015 is
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understated by (Points : 2)
$390,800.
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$306,800.
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$174,800.
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$114,800.
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Question 24.24. Ernst Company purchased equipment that cost $2,250,000 on January 1, 2014. The
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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 (Points : 2)
$996,000.

$1,008,000.

$1,062,000.

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 $1,350,000.

Question 25.25. Langley Company's December 31 year-end financial statements contained the following
errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory $22,500 understated $33,000 overstated
Depreciation expense 6,000 understated

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? (Points : 2)

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Net income understated by $43,500.

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Net income overstated by $22,500.

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Net income overstated by $39,000.

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Net income overstated by $45,000.
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