Take Test: Mod 6 Mastery Exercise

Question 1

Ventura Corporation purchased machinery on January 1, 2012 for $840,000. The company used
the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two
years of its estimated six-year life. In 2013, Ventura changed to the straight-line depreciation
method for this asset. The following facts pertain:

2012 2013

Straight-line $140,000 $140,000

Sum-of-the-years -digits $240,000 $200,000

Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on
beginning retained earnings is _____.
$180,000.
$160,000.
$96,000.
$0.

Ans: $0

Question 2

Equipment was purchased at the beginning of 2010 for $340,000. At the time of its purchase, the
equipment was estimated to have a useful life of six years and a salvage value of $40,000. The
equipment was depreciated using the straight-line method of depreciation through 2012. At the
beginning of 2013, the estimate of useful life was revised to a total life of eight years and the
expected salvage value was changed to $25,000. The amount to be recorded for depreciation for
2013, reflecting these changes in estimates, is _____.
$20,625
$33,000
$38,000
$39,375

Ans: Initial Value to be depreciated = 340,000 – 40,000 = 300,000

After revision, annual depreciation value for 8 years = (340,000 – 25,000)/8 = 39,375

Excess depreciation recorded in the 1st three years = 150,000 -3*39,375 = 31,875

Depreciation to be recorded in 2013 = 39, 375 – (31,875/5) = 33,000

Question 3

Heinz Company began operations on January 1, 2012, and uses the FIFO method in costing its
raw material inventory. Management is contemplating a change to the LIFO method and is
interested in determining what effect such a change will have on net income. Accordingly, the
following information has been developed:

Final Inventory 2012 2013

FIFO $640,000 $ 712,000

LIFO 560,000 636,000

Net Income (computed under the FIFO method) 980,000 1,030,000

Based on the above information, a change to the LIFO method in 2013 would result in net
income for 2013 of _____.
$1,070,000
$1,030,000
$ 954,000
$ 950,000

Ans: 1,030,000 – (712,000 – 636,000) = 954,000

Question 4

Black, Inc. is a calendar-year corporation whose financial statements for 2012 and 2013 included
errors as follows:

Year Ending Inventory Depreciation Expense

2013 59,000 understated 45,000 understated

Assume that purchases were recorded correctly and that no correcting entries were made at
December 31, 2012, or at December 31, 2013. Ignoring income taxes, by how much should
Black's retained earnings be retroactively adjusted at January 1, 2014?
$149,000
increase
$41,000
increase
$14,000
decrease
$13,000
increase

Ans: 59,000 + 135,000 – 45,000 = 149,000 (increase)

Question 5

On January 1, 2010, Lake Co. purchased a machine for $1,056,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no salvage value. On
January 1, 2013, Lake determined that the machine had a useful life of six years from the date of
acquisition and will have a salvage value of $96,000. An accounting change was made in 2013 to
reflect these additional data. The accumulated depreciation for this machine should have a
balance at December 31, 2013 of _____.
$584,000
$616,000
$640,000
$704,000

Ans: 1,056,000*3/8 = 396,000

396,000 + (1,056,000 – 396,000 – 96,000)/3 = 584,000

Question 6

On January 1, 2013, Frost Corp. changed its inventory method to FIFO from LIFO for both
financial and income tax reporting purposes. The change resulted in a $900,000 increase in the
January 1, 2013 inventory. Assume that the income tax rate for all years is 30%. The cumulative
effect of the accounting change should be reported by Frost in its 2013 ____.
retained earnings statement as a $630,000 addition to the beginning
balance.
income statement as a $630,000 cumulative effect of accounting
change.
retained earnings statement as a $900,000 addition to the beginning
balance.
income statement as a $900,000 cumulative effect of accounting
change.

Ans: 900,000 * (1-0.3) = 630,000 addition to the beginning balance in retained earnings
statement.

Question 7

On January 1, 2010, Neal Corporation acquired equipment at a cost of $900,000. Neal adopted
the sum-of-the-years’-digits method of depreciation for this equipment and had been recording
depreciation over an estimated life of eight years, with no residual value. At the beginning of
2013, a decision was made to change to the straight-line method of depreciation for this
equipment. The depreciation expense for 2013 would be _____.
$46,875.
$75,000.
$112,500.
$180,000.

Ans: ((8+7+6)/36)*900,000 = 524,997

(900,000 – 524, 997)/5 = 75,000

Question 8

Accrued salaries payable of $51,000 were not recorded at December 31, 2012. Office supplies on
hand of $34,000 at December 31, 2013 were erroneously treated as expense instead of supplies
inventory. Neither of these errors was discovered nor corrected. The effect of these two errors
would cause _____.
2013 net income to be understated $85,000 and December 31, 2013 retained
earnings to be understated $34,000
2012 net income and December 31, 2012 retained earnings to be understated
$51,000 each
 2012 net income to be overstated $17,000 and 2013 net income to be understated
$34,000
2013 net income and December 31, 2013 retained earnings to be understated
$34,000 each

Ans: 2013 net income to be understated by 51,000 + 34,000 = 85,000.

Question 9

Ventura Corporation purchased machinery on January 1, 2012 for $840,000. The company used
the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two
years of its estimated six-year life. In 2013, Ventura changed to the straight-line depreciation
method for this asset. The following facts pertain:

2012 2013

Straight-line $140,000 $140,000

Sum-of-the-years -digits $240,000 $200,000

The amount that Ventura should report for depreciation expense on its 2014 income statement is
_____.
$160,000
$140,000
$100,000
none of the
above

Ans: (840,000 – (240,000+200,000))/4 = 100,000

Question 10

On December 31, 2013, Grantham, Inc. appropriately changed its inventory valuation method to
FIFO cost from weighted-average cost for financial statement and income tax purposes. The
change will result in a $2,000,000 increase in the beginning inventory at January 1, 2013.
Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning
retained earnings is _____.
$0
 $600,000
$1,400,000
$2,000,000

Ans: 2,000,000*(1-0.3) = 1,400,000

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