51. Lanier Company began operations on January 1, 2017, 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 2017 2018
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 750,000
Based upon the above information, a change to the LIFO method in 2018 would result in net income for 2018 of
a. $690,000.
b. $750,000.
c. $770,000.
d. $810,000.
52. Equipment was purchased at the beginning of 2016 for $850,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $100,000. The equipment was depreciated using the straight-line method of depreciation through 2018. At the beginning of 2019, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $62,500. The amount to be recorded for depreciation for 2019, reflecting these changes in estimates, is
a. $51,562.
b. $82,500.
c. $95,000.
d. $98,438.
Swift Company purchased a machine on January 1, 2016, for $900,000. 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, 2019, 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 2019 to reflect this additional information.
53. 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 2016, 2017, 2018, and 2019. What should be reported in Swift's income statement for the year ended December 31, 2019, as the cumulative effect on prior years of changing the estimated useful life of the machine?
a. $0
b. $60,000
c. $90,000
d. $315,000
Swift Company purchased a machine on January 1, 2016, for $900,000. 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, 2019, 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 2019 to reflect this additional information.
54. 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, 2019?
a. $90,000
b. $112,500
c. $180,000
d. $225,000
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors:
2017 2018
Ending inventory $50,000 overstatement $80,000 understatement
Depreciation expense 20,000 understatement 40,000 overstatement
55. Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated?
a. $70,000 overstatement
b. $30,000 overstatement
c. $70,000 understatement
d. $30,000 understatement
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors:
2017 2018
Ending inventory $50,000 overstatement $80,000 understatement
Depreciation expense 20,000 understatement 40,000 overstatement
56. Assume that no correcting entries were made at 12/31/17, or 12/31/18. Ignoring income taxes, by how much will retained earnings at 12/31/18 be overstated or understated?
a. $80,000 overstatement
b. $70,000 overstatement
c. $100,000 understatement
d. $30,000 understatement
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $37,500 understated $55,000 overstated
Depreciation expense 10,000 understated
An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 and no corrections have been made for any of th e errors. Ignore income tax considerations.
57. What is the total net effect of the errors on Langley's 2018 net income?
a. Net income understated by $72,500.
b. Net income overstated by $37,500.
c. Net income overstated by $65,000.
d. Net income overstated by $75,000.
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $37,500 understated $55,000 overstated
Depreciation expense 10,000 understated
An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 and no corrections have been made for any of th e errors. Ignore income tax considerations.
58. What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2018?
a. Working capital overstated by $25,000
b. Working capital overstated by $7,500
c. Working capital understated by $22,500
d. Working capital understated by $60,000
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $37,500 understated $55,000 overstated
Depreciation expense 10,000 understated
An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 and no corrections have been made for any of th e errors. Ignore income tax considerations.
59. What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2018?
a. Retained earnings understated by $50,000
b. Retained earnings understated by $22,500
c. Retained earnings understated by $12,500
d. Retained earnings overstated by $17,500
60. Accrued salaries payable of $102,000 were not recorded at December 31, 2017. Office supplies on hand of $58,000 at December 31, 2018 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. 2018 net income to be understated $160,000 and December 31, 2018 retained earnings to be understated $58,000.
b. 2017 net income and December 31, 2017 retained earnings to be understated $102,000 each.
c. 2017 net income to be overstated $44,000 and 2018 net income to be understated $58,000.
d. 2018 net income and December 31, 2018 retained earnings to be understated $58,000 each.
Bishop Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 con- tained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $198,000 overstated $219,000 understated
Depreciation expense 126,000 overstated —
Insurance expense 90,000 understated 90,000 overstated
Prepaid insurance 90,000 overstated —
In addition, on December 31, 2018 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations.
61. The total effect of the errors on Bishop's 2018 net income is
a. understated by $550,200.
b. understated by $352,200.
c. overstated by $175,800.
d. overstated by $373,800.
Bishop Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 con- tained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $198,000 overstated $219,000 understated
Depreciation expense 126,000 overstated —
Insurance expense 90,000 understated 90,000 overstated
Prepaid insurance 90,000 overstated —
In addition, on December 31, 2018 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations.
62. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2018 is understated by
a. $478,200.
b. $388,200.
c. $262,200.
d. $190,200.
Bishop Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 con- tained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $198,000 overstated $219,000 understated
Depreciation expense 126,000 overstated —
Insurance expense 90,000 understated 90,000 overstated
Prepaid insurance 90,000 overstated —
In addition, on December 31, 2018 fully depreciated equipment was sold for $43,20 0, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations.
63. The total effect of the errors on the amount of Bishop's working capital at December 31, 2018 is understated by
a. $586,200.
b. $460,200.
c. $262,200.
d. $172,200.
Link Co. purchased machinery that cost $3,000,000 on January 4, 2016. The entire cost was recorded as an expense. The machinery has a nine-year life and a $200,000 residual value. The error was discovered on December 20, 2018. Ignore income tax considerations.
64. Link's income statement for the year ended December 31, 2018, should show the cumulative effect of this error in the amount of
a. $2,333,333.
b. $2,377,778.
c. $2,066,667.
d. $0.
Link Co. purchased machinery that cost $3,000,000 on January 4, 2016. The entire cost was recorded as an expense. The machinery has a nine-year life and a $200,000 residual value. The error was discovered on December 20, 2018. Ignore income tax considerations.
65. Before the correction was made, and before the books were closed on December 31, 2018, retained earnings was understated by
a. $3,000,000.
b. $2,333,333.
c. $2,377,778.
d. $2,066,667.
Ernst Company purchased equipment that cost $3,000,000 on January 1, 2017. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ernst is subject to a 40% tax rate.
66. Ernst’s net income for the year ended December 31, 2017, was understated by
a. $1,608,000.
b. $1,800,000.
c. $2,680,000.
d. $3,000,000.
Ernst Company purchased equipment that cost $3,000,000 on January 1, 2017. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ernst is subject to a 40% tax rate.
67. Before the correction was made and before the books were closed on December 31, 2019, retained earnings was understated by
a. $1,328,000.
b. $1,344,000.
c. $1,416,000.
d. $1,800,000.
MULTIPLE CHOICE—CPA Adapted
68. Which of the following should be reported as a prior period adjustment?
Change in Change from
Estimated Lives Unaccepted Principle
of Depreciable Assets to Accepted Principle
a. Yes Yes
b. No Yes
c. Yes No
d. No No
69. On December 31, 2018, 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 $3,500,000 increase in the beginning inventory at January 1, 2018. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $0.
b. $1,050,000.
c. $2,450,000.
d. $3,000,000.
70. On January 1, 2018, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $900,000 increase in the January 1, 2018 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 2018
a. retained earnings statement as a $630,000 addition to the beginning balance.
b. income statement as a $630,000 cumulative effect of accounting change.
c. retained earnings statement as a $900,000 addition to the beginning balance.
d. income statement as a $900,000 cumulative effect of accounting change.
71. On January 1, 2016, Lake Co. purchased a machine for $1,980,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2019, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $180,000. An accounting change was made in 2019 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2019 of
a. $1,095,000.
b. $1,155,000.
c. $1,200,000.
d. $1,320,000.
72. On January 1, 2016, Hess Co. purchased a patent for $1,904,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2031. During 2019, 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, 2019?
a. $1,142,400
b. $1,305,600
c. $1,344,000
d. $1,396,400
73. During 2017, 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.
• Royalty income of $243,000 was accrued at 12/31/17 for the period July-December 2017.
• Royalty income of $270,000 was received on 3/31/18, and $351,000 on 9/30/18.
• Mercer learned from Roark that sales subject to royalty were estimated at $4,860,000 for the last half of 2018.
In its income statement for 2018, Mercer should report royalty income at
a. $621,000.
b. $648,000.
c. $837,000.
d. $864,000.
74. On January 1, 2017, Janik Corp. acquired a machine at a cost of $900,000. 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 2017 financial statements. The oversight was discovered during the preparation of Janik's 2018 financial statements. Depreciation expense on this machine for 2018 should be
a. $0.
b. $180,000.
c. $225,000.
d. $360,000.
75. On December 31, 2018, 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, 2018 balance sheet?
Accrued Liabilities Retained Earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated
76. Black, Inc. is a calendar-year corporation whose financial statements for 2017 and 2018 included errors as follows:
Year Ending Inventory Depreciation Expense
2017 $324,000 overstated $270,000 overstated
2018 128,000 understated 90,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2017, or at December 31, 2018. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2019?
a. $308,000 increase
b. $92,000 increase
c. $38,000 decrease
d. $16,000 increase
