ACCOUNTING CHANGES MULTIPLE-CHOICE QUESTIONS (1-17) 1.

On January 1, 2008, Bray Company purchased for 240,000 a machine with a useful life of ten years and no salvage value. The machine was depreciated by the double declining balance method and the carrying amount of the machine was 153,600 on December 31, 2009. Bray changed retroactively to the straight-line method on January 1, 2010. Bray can justify the change. What should be the depreciation expense on this machine for the year ended December 31, 2010? a.15,360 b.19,200 c.24,000 d.30,720 Items 2 and 3 are based on the following: On January 1, 2008, Warren Co. purchased a 600,000 machine, with a five-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machines carrying amount was 240,000 on December 31, 2009. On January 1, 2010, Warren changed retroactively to the straight-line method for financial statement purposes. Warren can justify the change. Warrens income tax rate is 30%. 2. In its 2010 income statement, what amount should Warren report as the cumulative effect of this change? a.120,000 b.84,000 c.36,000 d.0 3. On January 1, 2010, what amount should Warren report as deferred income tax liability as a result of the change? a. 120,000 b. 72,000 c. 36,000 d.0

4. On January 2, 2010, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 2008, was 50,000, and its estimated life was ten years. Holly estimates that the machines total life is 50,000 machine hours. Machine hours usage was 8,500 during 2008 and 3,500 during 2009.Hollys income tax rate is 30%. Holly should report the accounting change in its 2010 financial statements as a(n) a. Cumulative effect of a change in accounting principle of 2,000 in its income statement. b. Adjustment to beginning retained earnings of 2,000. c. Cumulative effect of a change in accounting principle of 1,400 in its income statement. d. Adjustment to beginning retained earnings of 1,400. 5. The cumulative effect of a change in accounting principle should be recorded separately as a component of income after continuing operations, when the change is from the a. Cash basis of accounting for vacation pay to the accrual basis. b. Straight-line method of depreciation for previously recorded assets to the double declining balance method. c. Presentation of statements of individual companies to their inclusion in consolidated statements. d. Completed-contract method of accounting for long-term construction-type contracts to the percentage-of-completion method. 6. When a company changes from the straight-line method of depreciation for previously recorded assets to the double declining balance method, which of the following should be reported? Cumulative effects of change in accounting principle, Pro forma effects of retroactive application a. No No b. No Yes c. Yes Yes d. Yes No Items 7 and 8 are based on the following: During 2010, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows: FIFO Weighted-average January 1, 2010 71,000 77,000 December 31, 2010 79,000 83,000 Orcas income tax rate is 30%.

7. In its 2010 financial statements, what amount should Orca report as the cumulative effect of this accounting change? a.2,800 b.4,000 c.4,200 d.6,000 8. Orca should report the cumulative effect of this accounting change as a(n) a. Prior period adjustment. b. Component of income from continuing operations. c. Extraordinary item. d. Component of income after extraordinary items. 9. On January 1, 2010, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a 500,000 increase in the January 1, 2010 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Roem in its 2010 a. Retained earnings statement as a 350,000 addition to the beginning balance. b. Income statement as a 350,000 cumulative effect of accounting change. c. Retained earnings statement as a 500,000 addition to the beginning balance. d. Income statement as a 500,000 cumulative effect of accounting change. 10. Is the cumulative effect of an inventory pricing change on prior years earnings reported separately between extraordinary items and net income for a change from LIFO to FIFO to weighted-average weighted-average a. Yes Yes b. Yes No c. No No d. No Yes 11. On August 31, 2010, Harvey Co. decided to change from the FIFO periodic inventory system to the weightedaverage periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined a. As of January 1, 2010. b. As of August 31, 2010.

c. During the eight months ending August 31, 2010, by a weighted-average of the purchases. d. During 2010 by a weighted-average of the purchases. 12. In 2010, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brightons financial statements as a a. Prior period adjustment, with separate disclosure. b. Component of income from continuing operations, with separate disclosure. c. Component of income from continuing operations, without separate disclosure. d. Component of income after continuing operations, with separate disclosure. 13. On January 1, 2010, Poe Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting. Poe can justify this change in accounting principle. As of December 31, 2009, Poe compiled data showing that income under the completed-contract method aggregated 700,000. If the percentage-of-completion method had been used, the accumulated income through December 31, 2009, would have been 880,000. Assuming an income tax rate of 40% for all years, the cumulative effect of this accounting change should be reported by Poe in the 2010 a. Retained earnings statement as a 180,000 credit adjustment to the beginning balance. b. Income statement as a 180,000 credit. c. Retained earnings statement as a 108,000 credit adjustment to the beginning balance. d. Income statement as a 108,000 credit. 14. On January 1, 2007, Taft Co. purchased a patent for 714,000. The patent is being amortized over its remaining legal life of fifteen years expiring on January 1, 2022. During 2010, Taft determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2010? a.428,400 b.489,600 c.504,000 d.523,600 15. On January 1, 2007, Flax Co. purchased a machine for 528,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2010, Flax determined that the machine had a useful life of six years

from the date of acquisition and will have a salvage value of 48,000. An accounting change was made in 2010 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2010 of a.292,000 b.308,000 c.320,000 d.352,000 16. Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of 2010, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of 80,000 and 96,000 were reported in 2008 and 2009, respectively. Sales for 2010 were 5,000,000. What amount should be disclosed in Oaks 2010 financial statements as warranty expense? a. 50,000 b. 88,000 c. 100,000 d. 138,000

17. At December 31, 2010, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of 500,000 at December 31, 2009, 300,000 of which were to be written off in 2010 and the remainder in 2011. Off-Lines income tax rate is 30%. In its 2010 income statement, what amount should Off-Line report as cumulative effect of change in accounting principle? a. 140,000 b. 200,000 c. 350,000 d.500,000