PROBLEM # 1 Choice Two Manufacturing, which began operations in 2011, changed from the completed contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.)

The appropriate information related to this change is as follows. Pretax income from Percentage-of-Completion Completed-Contract Difference 2011 $680,000 $500,000 $180,000 2012 600,000 560,000 40,000

Instructions (a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2012?

(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

PROBLEM # 2 Hearts Inc. acquired the following assets in January 2010. Equipment, estimated service life, 5 years; no salvage value $650,000 Building, estimated service life, 40 years; salvage value, $500,000 $5,500,000 The equipment has been depreciated using the double-declining balance method for the first 2 years for financial reporting purposes. In 2012, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 40 years to 35 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.

Instructions

(a) Prepare the general journal entry to record depreciation expense for the equipment in 2012.

(b) Prepare the journal entry to record depreciation expense for the building in 2012. (Round all computations to two decimal places.)

PROBLEM # 3 You have been engaged to review the financial statements of Water Sync Inc. In the course of your investigation you find a number of irregularities during the current year.

1. Insurance for a 6-month period purchased on October 1 of this year was charged to prepaid insurance in the amount of $5,000.

2. Year-end estimate of bonuses totaled $61,000 and was not recorded because the payment would not be made until next year.

3. Warranty expense averages 5% on current year sales of $5,000,000. Warranty expense is automatically debited for 5% of each sale. During the current year, the company also paid $225,000 in warranty related claims. The bookkeeper thought that the payments were an expense and debited warranty expense. 4. Office rent is paid quarterly in advance. The first quarter rent for next year ($25,000) was paid in December and rent expense was debited. Instructions Prepare the necessary correcting entries, assuming that Water Sync Inc. uses a calendar-year basis.

PROBLEM # 4 On January 1, 2012, GEO purchased 60,000 shares (a 15% interest) in Graphic Corp. for $2,700,000. At the time, the book value and the fair value of Graphic Corp.s net assets were $16,000,000. On July 1, 2013, GEO paid $3,000,000 for 60,000 additional shares of Graphic common stock, which represented a 15% investment in Graphic. The fair value of Graphics identifiable assets net of liabilities was equal to their carrying amount of $17,000,000. As a result of this transaction, GEO owns 30% of Graphic and can exercise significant influence over Graphics operating and financial policies. Any excess fair value is attributed to goodwill. Graphic reported the following net income and declared and paid the following dividends. Net Income Dividend per Share Year ended 12/31/12 $500,000 None Six months ended 6/30/13 425,000 None Six months ended 12/31/13 360,000 $0.60

Instructions Determine the ending balance that GEO should report as its investment in Graphic Corp. at the end of 2013.