Bakersfield College

ACG 2021

1)Which of the following is not a change in estimate?

1. 1. A change in the useful life of a depreciable asset.
   2. A change in the mortality rate used for pension computations.
   3. A change from the cost to the equity method in accounting for investments.
   4. A change in the warranty expense percentage.

2. A change in the residual value of equipment is accounted for:
   1. As a prior period adjustment.
   2. Prospectively.
   3. Retrospectively.
   4. None of these answer choices is correct.

3. Gore Inc. recorded a liability in 2016 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.
   1. Gore has made a change in accounting principle, requiring retrospective adjustment.
   2. Gore needs to correct an accounting error.
   3. Gore is required to adjust a change in accounting estimate prospectively.
   4. Gore is not required to make any accounting adjustments.

4. Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2016, Red decided to change to the sum-of-the- years’-digits method. Ignoring income taxes, what will be Red’s depreciation expense for 2016?

1. 1. $     4.8 million.
   2. $     5.4 million.
   3. $     6.6 million.
   4. $11.55 million.

5. Mobic Inc. acquired some manufacturing equipment in January 2013 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2016, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2019. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2016, Mobic should:
   1. Charge $280,000 in depreciation expense.
   2. Report the book value of the equipment in its12/31/2016 balance sheet at $210,000.
   3. Make an adjustment to retained earnings for the error in measuring depreciation during 2013- 2015.
   4. None of these answer choices is correct.

6. Which of the following is not a change in accounting principle that usually is accounted for by retrospectively revising prior financial statements?
   1. Change from FIFO to the average method of inventory costing.
   2. Change from SYD to DDB depreciation.
   3. Change from the average method of inventory costing to FIFO.
   4. Change from the LIFO to the FIFO method of inventory costing.

7. Venice Company purchased a gondola for $440,000 (no residual value) at the beginning of 2013. The gondola was being depreciated over a 10-year life using the sum-of-the-years'- digits method. At the beginning of 2016, it was decided to change to straight-line. Ignoring taxes, the 2016 adjusting entry will include a debit to depreciation expense of:

a.    $76,000

b.   $44,000

c.     $32,000

d.   $22,000

8. SkiPark Company purchased a gondola for $440,000 (no residual value) at the beginning of 2013. The gondola was being depreciated over a 10-year life using the sum-of-the-years'- digits method. At the beginning of 2016, it was decided to change to straight-line. An accompanying disclosure note would include each of the following except:
   1. The effect of a change on any financial statement line items affected for all periods reported.
   2. Justification that the change is preferable.
   3. The cumulative effect of the change.
   4. The effect of a change on per share amounts affected for all periods reported.

9. Which of the following is accounted for prospectively?
   1. Changes from the average method of inventory costing to FIFO.
   2. Change in reporting entity.
   3. Change in the percentage used to determine warranty expense.
   4. Correction of an error.

10. The prospective approach usually is required for:
    1. A change in accounting principle.
    2. A change in reporting entity.
    3. A change in estimate.
    4. A correction of an error.

11. FIFA Footballs acquired a patent in 2013 at a cost of $150 million and amortizes the patent on a straight-line basis. During 2016 management decided that the benefits from the patent

would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. FIFA’s 2016 financial statements should include:

1. 1. A patent balance of $150 million.
   2. A patent balance of $102 million.
   3. Patent amortization expense of $15 million.
   4. Patent amortization expense of $7.5 million.

at the end of 2016 is $48 million: 3 year’s amortization at $7.5 million per year ($150 / 20 years) plus one year’s amortization at $25.5 million [($150 – 22.5) / (8 – 3) years].  $150 – 48 = $102.

12. Prior to 2016, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2016, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2014, had an estimated useful life of five years and no estimated residual value. To account for the change in 2016, Trapper John:
    1. Would retrospectively report $600,000 in depreciation expense annually for 2014 and 2015, and report $600,000 in depreciation expense for 2016.
    2. Would adjust accumulated depreciation and retained earnings for the excess charges made in 2014 and 2015.
    3. Would report depreciation expense of $400,000 in its 2016 income statement.
    4. None of these answer choices is correct.

13. Hepburn Company bought a copyright for $90,000 on January 1, 2013, at which time the copyright had an estimated useful life of 15 years. On January 5, 2016, the company determined that the copyright would expire at the end of 2021. How much should Hepburn record as amortization expense for this copyright for 2016?

a.     $14,400.

b.     $ 7,200.

c.     $ 8,000.

d.     $12,000.

14. Goosen Company bought a copyright for $90,000 on January 1, 2013, at which time the copyright had an estimated useful life of 15 years. On January 5, 2016, the company determined that the copyright would expire at the end of 2021. How much should Goosen record retrospectively as the effect of change?

a.     $         0.

b.     $12,000.

c.     $ 8,000.

d.     $14,400.

15. Lundholm Company purchased a machine for $100,000 on January 1, 2014. Lundholm depreciates machines of this type by the straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2016, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2016? The tax rate is 40%.

a.     $20,000.

b.     $16,000.