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Exam 20: Accounting Changes

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Question 51

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On January 1, 2009, Randall Construction decided to change from the completed contract method of accounting for long-term construction contracts to the percentage-of-completion method. The company will continue to use the completed contract method for tax purposes. The tax rate is 30%. The following are all relevant data concerning the change. Required: (1.) Prepare the journal entry to record the accounting change. (2.) Determine the net income to be reported in the 2009-2008 comparative income statements. $\begin{array}{l}\begin{array} { l c c } &\text { Income Before Income Tax }\\\text { Year } & \text { \% of Completion } & \text { Completed Contract } \\\hline \text { Before 2008 } & \$ 500,000 & \$ 300,000 \\2008 & 400,000 & 250,000 \\2009 & 450,000 & 400,000\end{array}\end{array}$

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Question 52

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On January 1, 2009, Bubba Construction decided to change from the completed contract method of accounting for long-term construction contracts to the percentage-of-completion method. The company will continue to use the completed contract method for tax purposes. The tax rate is 30%. The following are all relevant data concerning the change. Required: Prepare the journal entry to record the accounting change. $\begin{array}{l}\begin{array} { l c c } &\text { Income Before Income Tax }\\\text { Year } & \text { \% of Completion } & \text { Completed Contract } \\\hline \text { Before 2008 } & \$ 500,000 & \$ 300,000 \\2008 & 400,000 & 250,000 \\2009 & 450,000 & 400,000\end{array}\end{array}$

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Question 53

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Regardless of the type of accounting change that occurs, the most important responsibility is:

National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:

Some inventory errors are described as "self-correcting" in that they have the opposite financial statement effect in the period following the errors, thereby "correcting" the original account balance errors. Required: Given this "self-correcting" feature, discuss why these errors should not be ignored and describe the steps needed to correct these errors.

A company failed to record unrealized gains of $20 million on its trading security investments. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:

When an accounting change is reported under the retrospective approach, prior years' financial statements are:

For 2008, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2008. Experience during 2009 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported

On January 2, 2009, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2009, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2009 earnings is:

Which of the following would not be accounted for using the prospective approach?

Gore Inc. recorded a liability in 2009 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.

The after-tax cumulative effect on income is no longer required for changes in accounting principles.

In December 2009, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2010 flagged this transaction.

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

In 2009, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2006. The machine's useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

Name and briefly describe the three categories of accounting changes.

When the retrospective approach is used for a change to the FIFO method, which of the following accounts is usually not adjusted?

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2009. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2009, would be:

Albatross Company purchased a piece of machinery for $60,000 on January 1, 2007, and has been depreciating the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no salvage value. On January 1, 2009, Albatross decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life did not change. Ignore income taxes. Required: (1.) Prepare the appropriate journal entry, if any, to record the accounting change. (2.) Prepare the journal entry to record depreciation for 2009.

B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2008, related to a temporary difference of $60 million. The tax rate was 40%. The temporary difference is expected to reverse in 2010 at which time the deferred tax liability will become payable. There are no other temporary differences in 2008-2010. Assume a new tax law is enacted in 2009 that causes the tax rate to change from 40% to 30% beginning in 2010. (The rate remains 40% for 2009 taxes.) Taxable income in 2009 is $90 million. Required: Determine the effect of the change and prepare the appropriate journal entry to record B's income tax expense in 2009. What adjustment, if any, is needed to revise retained earnings as a result of the change?