Chapter 22 Flashcards
On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,000. Lynn adopted the double-declining balance 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 2008, a decision was made to change to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, net of tax, is
$0, No cumulative effect; handle prospectively
On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,000. Foley 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 2008, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded for the machinery in 2008 is (round to the nearest dollar)
$250,000 – [($250,000 × .2) + ($200,000 × .2) + ($160,000 × .2)] = $128,000
128,000 ÷ 7 = $18,286
On January 1, 2005, Baden Co., purchased a machine (its only depreciable asset) for $300,000. 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, 2008, for financial statement reporting, Baden decided to change to the straight-line method for depreciation of the machine. Assume that Baden can justify the change. Baden’s income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2008, is $250,000. The income tax rate for 2008, as well as for the years 2005-2007, is 30%. What amount should Baden report as net income for the year ended December 31, 2008?
[(5/15 + 4/15 + 3/15) × $300,000] = $240,000 (AD)
($300,000 – $240,000) = $60,000 (BV)
[$250,000 – ($60,000 ÷ 2)] × (1 – .3) = $154,000
Waeglein Corporation purchased machinery on January 1, 2006 for $630,000. The company used the straight-line method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2008, Waeglein changed to the sum-of-the-years’-digits depreciation method for this asset. The following facts pertain:
- – 2006 – 2007
Straight Line – 105,000 – 105,000
Sum-of-the-years’ – 180,000 – 150,000
Waeglein is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
$0, No cumulative effect; handle prospectively
Waeglein Corporation purchased machinery on January 1, 2006 for $630,000. The company used the straight-line method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2008, Waeglein changed to the sum-of-the-years’-digits depreciation method for this asset. The following facts pertain:
- – 2006 – 2007
Straight Line – 105,000 – 105,000
Sum-of-the-years’ – 180,000 – 150,000
The amount that Waeglein should report for depreciation expense on its 2008 income statement is
[$630,000 – ($105,000 + $105,000)] = $420,000
420,000 × 4/10 = $168,000.
During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
- – Completed – Percentage
2006 – 475,000 – 800,000
2007 – 625,000 – 950,000
2008 – 700,000 – 1,050,000
- – 1,800,000 – 2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
[($800,000 + $950,000) – ($475,000 + $625,000)] × (1 – .40) = $390,000 on the 2008 retained earnings statement
On January 1, 2005, Wintz Corporation acquired machinery at a cost of $600,000. Wintz adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2008, a decision was made to change to the double-declining balance method of depreciation for this machine
Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is
$0, No cumulative effect; handle prospectively
On January 1, 2005, Wintz Corporation acquired machinery at a cost of $600,000. Wintz adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2008, a decision was made to change to the double-declining balance method of depreciation for this machine
The amount that Wintz should record as depreciation expense for 2008 is
{($600,000 – [($600,000 ÷ 10) × 3]} ÷ 7 × 2 = $120,000
On December 31, 2008 Kean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2008 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/08, assuming a 40% tax rate, is
420,000 × (1 – .40) = $252,000
Eaton Company began operations on January 1, 2007, 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 – 2007 – 2008
FIFO – 640,000 – 712,000
LIFO – 560,000 – 636,000
Net Income (FIFO) – 980,000 – 1,080,000
Based on the above information, a change to the LIFO method in 2008 would result in net income for 2008 of
1,080,000 – ($712,000 – $636,000) = $1,004,000
Hannah Company began operations on January 1, 2007, 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 – 2007 – 2008
FIFO – 320,000 – 360,000
LIFO – 240,000 – 300,000
Net Income (FIFO) – 500,000 – 600,000
Based upon the above information, a change to the LIFO method in 2008 would result in net income for 2008 of
600,000 – ($360,000 – $300,000) = $540,000
Equipment was purchased at the beginning of 2005 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 2008. At the beginning of 2008, 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 2008, reflecting these changes in estimates, is
204,000 – {[($204,000 – $24,000) ÷ 6] × 3} = $114,000
($114,000 – $15,000) ÷ (8 – 3) = $19,800
Carey Company purchased a machine on January 1, 2005, 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, 2008, Carey 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 2008 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 2005, 2006, 2007, and 2008. What should be reported in Carey’s income statement for the year ended December 31, 2008, as the cumulative effect on prior years of changing the estimated useful life of the machine?
$0, no cumulative effect, handle prospectively (change in estimate)
Carey Company purchased a machine on January 1, 2005, 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, 2008, Carey 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 2008 to reflect this additional information.
What is the amount of depreciation expense on this machine that should be charged in Carey’s income statement for the year ended December 31, 2008?
($300,000 ÷ 6) × 3 = $150,000
150,000 ÷ 5 = $30,000
Washington Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/08 and 12/31/09 contained the following errors:
- – 2008 – 2009
Ending inventory – 15,000 overstatement – 24,000 understatement
Depreciation expense – 6,000 understatement – 12,000 overstatement
Assume that the 2008 errors were not corrected and that no errors occurred in 2007. By what amount will 2008 income before income taxes be overstated or understated?
15,000 + $6,000 = $21,000 overstatement.
