1. Which of the following statements is correct?

A. A change in the estimated useful life of a depreciable asset is accounted for retrospectively.

B. A material error in last years published financial statements will self-correct this year so there is no need to go back and change the error.

C. A change from SYD to SL depreciation method is accounted for retrospectively.

D. If the estimated useful or economic life of a patent is changed, the revised annual amortization amount is recognized currently and in future years.

E. At least two of the above statements are correct.

2. Which of the following statements is correct?

A. Accounting estimate changes and changes in reporting entity are accounted for the same way.

B. A change in accounting estimate and an error are both accounted for by restating prior years statements.

C. A material error in last years ending inventory will automatically self-correct this year if nothing is done to correct the error, so this years net income and ending inventory will be correct. Nevertheless, GAAP requires that restatement of last years statements be completed.

D. Prior year financial statements are not restated for a change in accounting estimate.

E. Both C and D above are correct.

3. Stormy Clouds, Inc. paid $2,000,000 for new climatological radar equipment two years ago. The life of the equipment was six years, salvage value $200,000 and S-L depreciation was used. Now, in the third year of using the equipment company officials have re-estimated its total useful life at 4 years and decreased salvage value to $100,000. Current-year depreciation expense for this equipment should be:

A. $300,000.

B. $600,000.

C. $650,000.

D. $325,000.

E. None of the above is correct.

4. General Mechanixs ending inventory was understated by a material amount last year and the error was not discovered until the companys annual report had been published. Now that the error has been discovered, General Mechanix must:

A. Ignore the error because this error will self-correct in this years financial statements.

B. Make a correcting entry that debits inventory and credits expenses in the amount of the error.

C. Make a correcting entry that debits retained earnings and credits inventory in the amount of the error.

D. Make a correcting entry that debits inventory and credits retained earnings in the amount of the error.

E. Either answer B or D above is okay.

5. If a company has a change in accounting principle:

A. The prospective approach is always used to complete the change.

B. The change must be justified in a disclosure note.

C. The retrospective approach is almost never used to account for the change.

D. The change is accounted for the same way as a change in accounting estimate.

E. None of the above is correct.