Solution to Chapter 23 Example Questions

Multiple Choice Circle the best Answer

1. Which of the following disclosures is NOT required for a change from sum-of-
the-years-digits to straight-line?

a. The cumulative effect on prior years, net of tax, in the current income
statement
b. The justification for the change
c. Pro forma data on income and earnings per share
d. All of the above are required.

2. Which of the following is not considered to be an accounting principle change

under APB Opinion No. 20?

a. A change from FIFO to LIFO for inventory valuation.

b. Using a different method of depreciation for new plant assets.
c. A change from full-cost to successful efforts in the extractive industry.
d. Switching from the direct write-off to the allowance method of accounting for
bad debts (note: the direct write-off method was never acceptable in this
case).
e. Both b and d.

3. Accrued salaries payable of $8,750 were not recorded at Dec. 31, 1993.
Office supplies on hand of $3,750 at Dec. 31, 1994, were erroneously treated
as expense instead of supplies inventory. Neither of these errors was
discovered or corrected. The effect of these two errors would cause

a. 1994 net income to be understated $8,750 December 31, 1994 retained

earnings to be understated $3,750.
b. 1993 net income and December 31, 1993 retained earnings to both be
understated by $8,750 each.
c. 1993 net income to be overstated $8,750 and 1994 net income to be
understated $12,500.
d. 1994 net income and December 31, 1994 retained earnings to both be
understated by $3,750 each.

4. Counterbalancing errors do NOT include

a. errors that correct themselves in two years.

b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.
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Accounting changes

Osborne Company's net income for its first three years of operations (using
straight-line depreciation method and estimating sales returns at 1% of credit
sales) are presented below:

1999 1998 1997

$160,000 $150,000 $120,000

During 1999, Osborne decided to change from the straight-line method of

depreciating its cement plant to the double-declining balance method and change
its estimate of sales returns to 2% of credit sales, for book purposes only. The
following presents information regarding differences in pre-tax expense and
contra-revenue resulting from these changes:

1999 1998 1997

(DDB Depr. Exp. - St. line Depr Exp.) (5,000) 4,000 12,000
(Sales Returns 2% -Sales Returns 1%) 25,000 N/A N/A

Required:

a. Assuming an income tax rate of 30% for all periods, prepare the necessary
1999 entry to record the past cumulative effect of the depreciation change.
(4pts)

Past cumulative effect of acct. chg. 11,200

Deferred taxes 4,800
Accumulated depreciation 16,000

Complete the following comparative income statement data for the years 1999
and 1998 in accordance with generally accepted accounting principles starting
with income before cumulative effect of accounting changes. (8 pts)
1999 1998

Income before cumulative effect of accounting changes $146,000 $150,000

Cumulative effect on prior years of retroactive

application of new depreciation method, net of tax (11,200) ______0

Net income $134,800 $150,000

Pro-forma Net Income (assuming retroactive application

of new depreciation method): $146,000 $147,200