Multiple Choice
Identify the choice that best completes the
statement or answers the question.
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1.
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On January 1, 2009, Miller Company purchased for $275,000 a machine with an
estimated useful life of 10 years and no salvage value. The machine was depreciated using the
sum-of-the-years' digits method. On January 1, 2012, Miller changed to the straight-line
method of depreciation. Miller can justify the change. What should be the cumulative
effect of this change in accounting for the year ended December 31, 2012?
a. | $40,000 | b. | $52,500 | c. | $60,000 | d. | 0 |
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2.
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From inception of operations, Essex Corporation recognized income in its
financial statements and for income tax reporting under the completed-contract method of reporting
income from long-term construction contracts. On January 1, 20X9, Essex changed to the
percentage-of-completion method of income recognition for financial statement reporting but not for
income tax reporting. Essex can justify the change.
As of December 31, 20X8, Essex compiled data
showing that income under the completed-contract method aggregated $350,000. If the
percentage-of-completion method had been used, the accumulated income for these contracts through
December 31, 20X8, would have been $440,000. Assume that the income tax rate for all years is 50%.
The cumulative effect of changing from the completed-contract method to the percentage-of-completion
method must be reported by Essex in the 20X9
a. | Retained earnings statement as a $45,000 credit adjustment to the beginning
balance. | b. | Income statement as a $45,000 credit. | c. | Retained earnings statement as a $90,000 credit
adjustment to the beginning balance. | d. | Income statement as a $90,000
credit. |
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3.
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On December 31, 20X6, King Company appropriately changed to the weighted-average
cost inventory valuation method for financial statement and income tax purposes. The change
will result in a $350,000 increase in the beginning inventory at January 1, 20X6. Assuming a
40% income tax rate, the retroactive effect of this accounting change that should be reported in
King’s 20X6 financial statements, is
a. | $350,000 | b. | $210,000 | c. | $140,000 | d. | $0 |
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Tim Mattke Company began operations in 20X5 and for simplicity reasons, adopted
weighted average pricing for inventory. In 20X7, in accordance with other companies in its
industry, Mattke changed its inventory pricing to FIFO. The pretax income data is
reported below. | Year | Weighted Average | FIFO | | | 20X5 | $370,000 | $395,000 | | | 20X6 | 390,000 | 430,000 | | | 20X7 | 410,000 | 450,000 | | | | | |
Assume a 30% tax rate in all years.
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4.
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In a comparative income statement for the year 20X7, what would be the Income
before taxes for the year 20X6, as presented on the 2007 income statement?
a. | $301,000 | b. | $273,000 | c. | $390,000 | d. | $430,000 |
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5.
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What is Mattke’s net income in 20X7?
a. | $410,000 | b. | $450,000 | c. | $287,000 | d. | $315,000 |
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On December 31, 20X0, Rapp Co. changed inventory cost methods to FIFO from LIFO
for financial statement and income tax purposes. The change will result in a $175,000 increase in the
beginning inventory at January 1, 20X0. Assume a 30% income tax rate.
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6.
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Refer to Rapp: The effect of this accounting change should be reported in
the financial statements for the year ended December 31, 20X0, as
a. | an adjustment to opening balance of retained earnings | b. | prospectively in
future periods | c. | a cumulative effect adjustment in the income statement | d. | a pro-forma
effect |
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7.
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Refer to Rapp: The amount of the adjustment appearing in the 20X0 financial
statements should be:
a. | $175,000 | b. | $122,500 | c. | $
52,500 | d. | $0 |
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8.
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Which of the following items would not require either retrospective or
retroactive application to all prior periods ? A change
a. | From using the percentage-of-completion method of accounting for long-term
construction contracts to the completed contract method. | b. | In the salvage value
of a depreciable asset. | c. | From the direct write-off method to the
allowance method of accounting for bad debts. | d. | From reporting revenues on a cash basis to
reporting on an accrual basis. |
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9.
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During 20X2, Zale Corporation made the following accounting
changes: Method used in 20X1 | | Method used in 20X2 | | After tax effect | | Sum of the years digits depreciation | | Straight-line
Depreciation | | $30,000 | | Weighted average for inventory valuation | | First-in, First-out for inventory
valuation | | 98,000 | | | | | |
What amount should be reported in 20X2 as an adjustment of the
beginning retained earnings account? a. | $98,000 | b. | $30,000 | c. | $0 | d. | $128,000 |
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10.
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Goddard has used the FIFO method of inventory valuation since it began
operations in 20X6. Goddard decided to change to the weighted-average method for determining
inventory costs at the beginning of 20X9. The following schedule shows year-end inventory
balances under the FIFO and weighted-average methods: Year | | FIFO | | Weighted-average | | 20X6 | | $45,000 | | $54,000 | | 20X7 | | 78,000 | | 71,000 | | 20X8 | | 83,000 | | 78,000 | | | | | |
What amount, before
income taxes, should be reported in the 20X9 income statement as the cumulative effect of the change
in accounting principle? a. | $5,000 decrease. | b. | $3,000 decrease. | c. | $2,000
increase. | d. | $0 |
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