Exercise 18- Accounting

PART 1	Which of the following is not a retrospective-type accounting change?
	A)	Completed-contract method to the percentage-of-completion method for long-term construction contracts
	B)	LIFO method to the FIFO method for inventory valuation
	C)	Sum-of-the-years'-digits method to the straight-line method
	D)	"Full cost" method to another method in the extractive industry

PART 2	Which type of accounting change should always be accounted for in current and future periods?
	A)	Change in accounting principle
	B)	Change in reporting entity
	C)	Change in accounting estimate
	D)	Correction of an error

PART 3	Which of the following describes a change in reporting entity?
	A)	A company acquires a subsidiary that is to be accounted for as a purchase.
	B)	A manufacturing company expands its market from regional to nationwide.
	C)	A company divests itself of a European branch sales office.
	D)	Changing the companies included in combined financial statements.

Use the following to answer part 4

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.

PART 4	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.

PART 5

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