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Exam 20: Accounting Changes

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Question 61

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During 2009, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.

A) Hoffman is not required to make any accounting adjustments.
B) Hoffman has made a change in accounting principle requiring retrospective adjustment.
C) Hoffman has made a change in accounting principle requiring prospective application.
D) Hoffman needs to correct an accounting error.

E) A) and D)
F) A) and C)

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Question 62

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Johnson Company receives royalties on a patent it developed several years ago. Royalties are 5% of net sales, receivable on September 30 for sales from January through June and receivable on March 31 for sales from July through December. The patent rights were distributed on July 1, 2008, and Johnson accrued royalty revenue of $50,000 on December 31, 2008, as follows: Johnson received royalties of $65,000 on March 31, 2009, and $90,000 on September 30, 2009. The patent user indicated to Johnson that sales subject to royalties for the second half of 2009 should be $600,000. Required: Prepare any journal entries Johnson should record during 2009 related to the royalty revenue. $\begin{array}{lll}\text { Receivable - royalty revenue }& 50,000 \\\text { Royalty revenue }&& 50,000 \end{array}$

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Question 63

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Pinnacle Corporation has been using the straight-line depreciation method to depreciate some office equipment that was acquired at the beginning of 2006. At the beginning of 2009, Pinnacle decided to change to the sum-of-the-years'-digits method. The equipment cost $120,000 and is expected to have no salvage value. The estimated useful life of the equipment is 5 years. The tax rate is 30%. Required: Prepare the journal entry, if any, to record the accounting change at the beginning of 2009.

Z Company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in

If undetected, what is the effect of this error on Berkshire's 12/31/08 balance sheet?

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2005, when it was acquired at a cost of $36 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of 6 years rather than the 9-year life being used to amortize its cost. The decision was made at the end of 2009 (before adjusting and closing entries) . What is the appropriate patent amortization expense in 2009?

A company failed to report the $600,000 additional liability for its underfunded pension plan. Its tax rate is 30%. As result of this error, retained earnings would be:

A change in reporting entity requires footnote disclosure in all subsequent financial statements prepared for the new entity.

Which of the following is a change in estimate?

An accounting change that is reported by the prospective approach is reflected in the financial statements of:

Which of the following changes should be accounted for using the retrospective approach?

Lundholm Company purchased a machine for $100,000 on January 1, 2007. Lundholm depreciates machines of this type by the straight-line method over a ten-year period using no salvage value. Due to a change in sales patterns, on January 1, 2009, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2009? The tax rate is 40%.

Moonland Company's income statement contained the following errors: Ending inventory, December 31, 2009, understated by $6,000 Depreciation expense for 2009 overstated by $1,000 What is the effect of the errors on 2009 net income before taxes?