53) Red Corp. constructed a machine at a total cost of $70 million. Construction was
completed at the end of 2014 and the machine was placed in service at the beginning of 2015.
The machine was being depreciated over a 10-year life using the straight-line method. The
residual value is expected to be $4 million. At the beginning of 2018, Red decided to change to
the sum-of-the-years’-digits method. Ignoring income taxes, what will be Red’s depreciation
expense for 2018?
A) $4.80 million.
B) $5.40 million.
C) $6.60 million.
D) $11.55 million.
54) Mobic Inc. acquired some manufacturing equipment in January 2015 for $400,000 and
depreciated it $40,000 each year for three years on a straight-line basis. During 2018, the
manufacturer announced a new technology for this type of equipment that will make the old
models obsolete by the end of 2021. As a result, Mobic will plan to replace the equipment at
that time, effectively reducing the asset’s life from ten to seven years. In its financial
statements for 2018, Mobic should:
A) Charge $280,000 in depreciation expense.
B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.
C) Make an adjustment to retained earnings for the error in measuring depreciation during
2015-2017.
D) None of these answer choices are correct.
55) Which of the following is not a change in accounting principle that usually is accounted
for by retrospectively revising prior financial statements?
A) Change from FIFO to the average method of inventory costing.
B) Change from SYD to DDB depreciation.
C) Change from the average method of inventory costing to FIFO.
D) Change from the LIFO to the FIFO method of inventory costing.
56) Venice Company purchased a gondola for $440,000 (no residual value) at the beginning of
2015. The gondola was being depreciated over a 10-year life using the sum-of-the-years’-digits
method. At the beginning of 2018, it was decided to change to straight-line. Ignoring taxes, the
2018 adjusting entry will include a debit to depreciation expense of:
A) $76,000
B) $44,000
C) $32,000
D) $22,000
57) SkiPark Company purchased a gondola for $440,000 (no residual value) at the beginning
of 2015. The gondola was being depreciated over a 10-year life using the double-declining
method. At the beginning of 2018, it was decided to change to straight-line. An accompanying
disclosure note would include each of the following except:
A) The effect of a change on any financial statement line items affected for all periods
reported.
B) Justification that the change is preferable.
C) The cumulative effect of the change.
D) The effect of a change on per share amounts affected for all periods reported.
58) Which of the following is accounted for prospectively?
A) Changes from the weighted-average method of inventory costing to FIFO.
B) Change in reporting entity.
C) Change in the percentage used to determine warranty expense.
D) Correction of an error.
59) The prospective approach usually is required for:
A) A change in accounting principle.
B) A change in reporting entity.
C) A change in estimate.
D) A correction of an error.
60) FIFA Footballs acquired a patent in 2015 at a cost of $150 million and amortizes the patent
on a straight-line basis. During 2018 management decided that the benefits from the patent
would be received over a total period of 8 years rather than the 20-year legal life being used to
amortize the cost. FIFA’s 2018 financial statements should include:
A) A patent balance of $150 million.
B) A patent balance of $102 million.
C) Patent amortization expense of $15 million.
D) Patent amortization expense of $7.5 million.
61) Prior to 2018, Trapper John Inc. used sum-of-the-years’-digits depreciation on its store
equipment. Beginning in 2018, Trapper John decided to use straight-line depreciation for these
assets. The equipment cost $3 million when it was purchased at the beginning of 2016, had an
estimated useful life of five years and no estimated residual value. To account for the change
in 2018, Trapper John:
A) Would retrospectively report $600,000 in depreciation expense annually for 2016 and
2017, and report $600,000 in depreciation expense for 2018.
B) Would adjust accumulated depreciation and retained earnings for the excess charges made
in 2016 and 2017.
C) Would report depreciation expense of $400,000 in its 2018 income statement.
D) None of these answer choices is correct.
62) Hepburn Company bought a copyright for $90,000 on January 1, 2015, at which time the
copyright had an estimated useful life of 15 years. On January 5, 2018, the company
determined that the copyright would expire at the end of 2021. How much should Hepburn
record as amortization expense for this copyright for 2018?
A) $14,400.
B) $7,200.
C) $8,000.
D) $18,000.
63) Goosen Company bought a copyright for $90,000 on January 1, 2015, at which time the
copyright had an estimated useful life of 15 years. On January 5, 2018, the company
determined that the copyright would expire at the end of 2021. How much should Goosen
record retrospectively as the effect of change?
A) $0.
B) $12,000.
C) $8,000.
D) $14,400.
64) Lundholm Company purchased a machine for $100,000 on January 1, 2016. Lundholm
depreciates machines of this type by the straight-line method over a 10-year period using no
salvage value. Due to a change in sales patterns, on January 1, 2018, management determines
the useful life of the machine to be a total of five years. What amount should Lundholm record
for depreciation expense for 2018? The tax rate is 40%.
A) $20,000.
B) $16,000.
C) $17,778.
D) $26,667.
65) Diversified Systems, Inc., reports consolidated financial statements this year in place of
statements of individual companies reported in previous years. This results in:
A) An accounting change that should be reported prospectively.
B) An accounting change that should be reported by restating the financial statements of all
prior periods presented.
C) A correction of an error.
D) Neither an accounting change nor a correction of an error.
66) Z Company acquired a subsidiary several years ago that was appropriately excluded from
consolidation last year. This year Z has consolidated the subsidiary in its financial statements.
This results in:
A) An accounting change that should be reported prospectively.
B) A correction of an error.
C) An accounting change that should be reported by restating the financial statements of all
prior periods presented.
D) Neither an accounting change nor a correction of an error.
67) Which of the following is a change in reporting entity?
A) A change to the full cost method in the extractive industries.
B) Discontinuing a segment of operations.
C) A change from the cost to the equity method.
D) Consolidating a subsidiary not previously included in consolidated financial statements.
68) Which of the following is not a change in reporting entity?
A) Reporting using comparative financial statements for the first time.
B) Changing the companies that comprise a consolidated group.
C) Presenting consolidated financial statements for the first time.
D) All are changes in reporting entity.
69) In 2018, internal auditors discovered that Fay, Inc., had debited an expense account for the
$700,000 cost of a machine purchased on January 1, 2015. The machine’s useful life was
expected to be five years with no residual value. Straight-line depreciation is used by Fay. The
journal entry to correct the error will include a credit to accumulated depreciation of:
A) $140,000.
B) $280,000.
C) $420,000.
D) $700,000.
During the three-year period, accumulated depreciation was understated, and continues to be
understated by $420,000.
To correct incorrect accounts.
Equipment
700,000
Accumulated depreciation ($140,000 × 3 years)
420,000
Retained earnings ($700,000 – 420,000)
280,000
Difficulty: 3 Hard
Topic: Error correction
Learning Objective: 20–06 Understand and apply the four-step process of correcting and reporting errors,
regardless of the type of error or the timing of its discovery.
Bloom’s: Apply
AACSB: Knowledge Application
Accessible/AICPA: FN Measurement
70) An item that should be reported as a prior period adjustment is the:
A) Correction of an error in depreciation from last year.
B) Payment of taxes due to a tax audit of last year’s tax return.
C) Payment of a previously recorded warranty expense.
D) Receipt of the proceeds of a note receivable that was due last year.
71) Cooper Inc. took physical inventory at the end of 2017. Purchases that were acquired FOB
destination were in transit, so they were not included in the physical count.
A) Cooper needs to correct an accounting error.
B) Cooper has made a change in accounting principle, requiring retrospective adjustment.
C) Cooper is required to adjust a change in accounting estimate prospectively.
D) Cooper is not required to make any accounting adjustments.
72) Washburn Co. spent $10 million to purchase a new patented technology, debiting an
intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets
and plans to amortize the intangible asset on a straight-line basis. The appropriate accounting
treatment is that:
A) Washburn is not required to make any accounting adjustments.
B) Washburn is required to adjust a change in accounting estimate prospectively.
C) Washburn has made a change in accounting principle, requiring retrospective adjustment.
D) Washburn needs to correct an accounting error.
73) In December 2018, Kojak Insurance Co. received $500,000 in premiums for a two-year
property insurance policy. The company recorded the transaction by debiting cash and
crediting insurance premium revenue for the full amount. An internal audit conducted in early
2019 flagged this transaction. The appropriate accounting treatment is that:
A) Kojak needs to correct an accounting error.
B) Kojak has made a change in accounting principle, requiring retrospective adjustment.
C) Kojak is required to adjust a change in accounting estimate prospectively.
D) Kojak is not required to make any accounting adjustments.
74) During 2018, P Company discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:
2016
$
120,000
understated
2017
$
150,000
overstated
P uses the periodic inventory system to ascertain year-end quantities that are converted to
dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and
ignoring income taxes, P’s retained earnings at January 1, 2018, would be:
A) Correct.
B) $30,000 overstated.
C) $150,000 overstated.
D) $270,000 overstated.
75) C Co. reported a retained earnings balance of $200,000 at December 31, 2017. In
September 2018, C determined that insurance premiums of $30,000 for the three-year period
beginning January 1, 2017, had been paid and fully expensed in 2017. C has a 30% income tax
rate. What amount should C report as adjusted beginning retained earnings in its 2018
statement of retained earnings?
A) $210,000.
B) $214,000.
C) $220,000.
D) $221,000.
76) Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting
some inventory items, resulting in an inventory understatement by $600,000. Assume that
Berkshire has a 30% income tax rate and that this was the only error it made.
If undetected, what is the effect of this error on Berkshire’s December 31,2017 balance sheet?
A) Assets understated by $600,000 and shareholders’ equity understated by $600,000.
B) Assets understated by $420,000 and shareholders’ equity understated by $420,000.
C) Assets understated by $600,000, liabilities understated by $180,000, and shareholders’
equity understated by $420,000.
D) None of these answer choices are correct.
77) Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting
some inventory items, resulting in an inventory understatement by $600,000. Assume that
Berkshire has a 30% income tax rate and that this was the only error it made.
What is the effect of the error on Berkshire’s 2018 income statement?
A) Net income is understated by $420,000.
B) Cost of goods sold is understated by $420,000.
C) There are no errors in the 2018 income statement.
D) None of these answer choices is correct.
78) Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting
some inventory items, resulting in an inventory understatement by $600,000. Assume that
Berkshire has a 30% income tax rate and that this was the only error it made. What is the
effect of the error on Berkshire’s December 31,2018 balance sheet?
A) There are no errors in the December 31,2018 balance sheet.
B) Assets understated by $600,000 and shareholders’ equity understated by $600,000.
C) Assets understated by $420,000 and shareholders’ equity understated by $420,000.
D) Liabilities understated by $180,000 and shareholders’ equity overstated by $420,000.
79) Moonland Company’s income statement contained the following errors:
Ending inventory, December 31, 2018, understated by $6,000
Depreciation expense for 2018 overstated by $1,000
What is the effect of the errors on 2018 net income before taxes?
A) Overstated by $5,000.
B) Understated by $5,000.
C) Understated by $7,000.
D) Overstated by $7,000.
80) Popeye Company purchased a machine for $300,000 on January 1, 2017. Popeye
depreciates machines of this type by the straight-line method over a five-year period using no
salvage value. Due to an error, no depreciation was taken on this machine in 2017. Popeye
discovered the error in 2018. What amount should Popeye record as depreciation expense for
2018? The tax rate is 40%.
A) $120,000.
B) $60,000.
C) $36,000.
D) $72,000.
81) Powell Company had the following errors over the last two years:
2016: Ending inventory was overstated by $30,000 while depreciation expense was overstated
by $24,000.
2017: Ending inventory was understated by $5,000 while depreciation expense was
understated by $4,000.
By how much should retained earnings be adjusted on January 1, 2018? (Ignore taxes)
A) Increase by $15,000.
B) Decrease by $25,000.
C) Decrease by $6,000.
D) Increase by $25,000.
82) Due to an error in computing depreciation expense, Prewitt Corporation overstated
accumulated depreciation by $20 million as of December 31, 2018. Prewitt has a tax rate of
30%. Prewitt’s retained earnings as of December 31, 2018, would be:
A) Overstated by $14 million.
B) Understated by $14 million.
C) Overstated by $6 million.
D) Understated by $6 million.
83) Due to an error in computing depreciation expense, Crote Corporation understated
accumulated depreciation by $60 million as of December 31, 2018. Crote has a tax rate of
40%. Crote’s retained earnings as of December 31, 2018, would be:
A) Overstated by $36 million.
B) Understated by $36 million.
C) Overstated by $24 million.
D) Understated by $24 million.
84) In 2018, due to a change in marketing forecasts, Barney Corporation reduced the projected
life of its patent for producing round dice. The cumulative patent amortization prior to 2018
would have been $10 million higher had the new life been used. Barney’s tax rate is 30%.
Barney’s retained earnings as of December 31, 2018, would be:
A) Overstated by $7 million.
B) Overstated by $3 million.
C) Overstated by $10 million.
D) Unaffected.
85) A company failed to record unrealized gains of $20 million on its available for sale debt
security investments. Its tax rate is 30%. As a result of this error, comprehensive income
would be:
A) Understated by $14 million.
B) Understated by $6 million.
C) Understated by $20 million.
D) Unaffected.
86) A company failed to record unrealized gains of $20 million on its debt investments
classified as trading securities. Its tax rate is 30%. As a result of this error, total shareholders’
equity would be:
A) Understated by $14 million.
B) Understated by $7 million.
C) Understated by $20 million.
D) Unaffected.
87) After issuing its financial statements, a company discovered that its beginning inventory
was overstated by $100,000. Its tax rate is 30%. As a result of this error, net income was:
A) Understated by $70,000.
B) Overstated by $70,000.
C) Understated by $30,000.
D) Overstated by $30,000.
88) Patterson Company failed to adjust for a $600,000 actual loss on pension plan assets in
2018, resulting in an underfunded pension plan. Patterson’s tax rate is 30%. As result of this
error, retained earnings would be:
A) Unaffected.
B) Overstated by $60,000.
C) Overstated by $42,000.
D) Overstated by $18,000.
89) A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a
result of this error, income tax expense is:
A) Unaffected.
B) Overstated by $60,000.
C) Understated by $60,000.
D) Understated by $140,000.
90) A company switched from the cash basis to the accrual basis for recognizing warranty
expense. The unrecorded liability for warranties was $2 million at the beginning of the year.
Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a
result of this change, the firm would:
A) Report a prior period adjustment decreasing retained earnings by $600,000.
B) Report a prior period adjustment decreasing retained earnings by $1,400,000.
C) Report a current period charge decreasing net income by $600,000.
D) Report a current period charge decreasing net income by $1,400,000.
91) At the end of the current year, a company overstated prepaid insurance by $80,000 and
understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this
error, net income is:
A) Overstated by $108,000.
B) Overstated by $12,000.
C) Understated by $108,000.
D) Understated by $12,000.
92) At the end of the current year, a company failed to accrue interest of $500,000 on its
investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:
A) Unaffected.
B) Understated by $350,000.
C) Understated by $500,000.
D) Understated by $150,000.