Question 1 (20 marks)

Randall Co. began operations on January 1, 2015. Financial statements for 2015 and 2016 contained the following errors:

Dec. 31, 2015 Dec. 31, 2016

Ending inventory $90,000 too high $114,000 too high

Depreciation expense 48,000 too low

Accumulated depreciation 48,000 too low 48,000 too low

Insurance expense 42,000 too high 42,000 too low

Prepaid insurance 36,000 too low

In addition, on December 26, 2016 fully depreciated equipment was sold for $58,000, but the sale was not recorded until 2017. No corrections have been made for any of the errors.

Instructions

Ignoring income taxes, show your calculation of the total effect of the errors on 2016 net income.

(10 marks)

B. The three types of accounting changes, including error correction, are:

Code

a. Change in accounting policy.

b. Change in accounting estimate.

c. Error correction.

Instructions

Following are a series of situations. You are to enter a code letter to the left to indicate the type of change. (10 marks)

_____ 1. Change due to understatement of inventory.

_____ 2. Change due to charging a new asset directly to an expense account.

_____ 3. Change from expensing to capitalizing certain costs, due to a change in periods benefited.

_____ 4. Change from FIFO to average-cost inventory procedures.

_____ 5. Change due to failure to recognize an accrued (uncollected) revenue.