Multiple Choice
1. During 2007 White Company determined that machinery previously depreciated over a seven-year life had a total estimated useful life of only five years. An accounting change was made in 2007 to reflect the change in estimate. If the change had been made in 2006, accumulated depreciation at December 31, 2006 would have been $1,600,000 instead of $1,200,000. As a result of this change the 2007depreciation expense was $100,000 greater. The income tax rate was 30% in both years. What should be reported in White’s retained earnings statement for the year ended December 31, 2007 as the cumulative effect on prior years of changing the estimated useful life of the machinery?
a. $0
b. $280,000
c. $300,000
d. $400,000
Items 2 and 3 are based on the following information: The Shannon Corporation began operations on January 1, 2007. Financial statements for the years ended December 31, 2007 and 2008 contained the following errors:


.:.
In addition, on December 31, 2008 fully depreciated machinery was sold for $10,800 cash, but the sale was not recorded until 2009. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors.

2. Ignoring income taxes, what is the total effect of the errors on 2008 net income?
a. Net income understated by $1,800
b. Net income overstated by $5,800
c. Net income overstated by $11,000
d. Net income overstated by $30,200

3. Ignoring income taxes, what is the total effect of the errors on the amount of working capital at December 31, 2008?
a. Working capital overstated by $4,200
b. Working capital understated by $5,800
c. Working capital understated by $6,000
d. Working capital understated by $9,800

4. A change in the expected service life of an asset arising because additional information has been obtained is
a. An accounting change that should be reported by restating the financial statements of all prior periods represented
b. An accounting change that should be reported in the period of change and future periods if the change affects both
c. A correction of an error
d. Not an accounting change

5. The cumulative effect of an accounting change on the amount of retained earnings at the beginning of the period in which the change is made should generally be included in the retained earnings statement for the period of the change for a
Change in Change in
Accounting Principle Accounting Estimate
a. Yes ............Yes
b. No ............Yes
c. Yes ............No
d. No ............No

6. On January 1, 2007 Belmont Company changed its inventory cost flow method to the FIFO cost method from the LIFO cost method. Belmont can justify the change, which was made for both financial statement and income tax reporting purposes. Belmont’s inventories aggregated $4,000,000 on the LIFO basis at December 31, 2006. Supplementary records maintained by Belmont showed that the inventories would have totaled $4,800,000 at December 31, 2006 on the FIFO basis. Ignoring income taxes, the adjustment for the effect of changing to the FIFO method from the LIFO method should be reported by
Belmont in the 2007
a. Income statement as an $800,000 debit
b. Retained earnings statement as an $800,000 debit adjustment to the beginning balance
c. Income statement as an $800,000 credit
d. Retained earnings statement as an $800,000 credit adjustment to the beginning balance

7. When a cumulative effect-type change in accounting principle is made during the year, the cumulative effect on retained earnings is determined
a. During the year using the weighted average method
b. As of the date of the change
c. As of the beginning of the year in which the change is made
d. As of the end of the year in which the change is made

8. Generally, how should a change in accounting principle that is affected by a change in accounting estimate be reported?
Change in Change in
Accounting Estimate Accounting Principle
a. No ..............No
b. Yes ..............Yes
c. No ..............Yes
d. Yes ..............No

9. On January 2, 2005 Garr Company acquired machinery at a cost of $320,000. This machinery was being depreciated by the double-declining-balance method over an estimated useful life of eight years, with no residual value. At the beginning of 2007 it was decided to change to the straight-line method of depreciation. Ignoring income tax considerations, the retrospective effect of this accounting change is
a. $0
b. $60,000
c. $65,000
d. $140,000

10. A company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in
a. An accounting change that should be reported prospectively
b. An accounting change that should be reported by retrospectively restating the financial statements of all prior periods presented
c. Neither an accounting change nor a correction of an error
d. A correction of an error