Becker_Review_Problems_Week_5- Ch 22

Becker_Review_Problems_Week_5- Ch 22 - BECKER REVIEW...

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BECKER REVIEW PROBLEMS Week Five NEW QUESTION The following is taken from the Becker CPA Review with permission: During 2004, Wail 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, 2004 $71,000 $77,000 December 31, 2004 79,000 83,000 Wail’s income tax rate is 30%. In its 2004 financial statements, what amount should Wail report as the cumulative effect of this accounting change? a. $ 2,800 b. $ 4,000 c. $ 4,200 d. $ 6,000 Remember to show calculations! Taken from Becker CPA Review with permission -- company name and dates changed F1/66-CPA-00057 Solution: Choice “c” is correct. During 2004, when the change was made, only the beginning inventory amount requires adjustment. The cumulative effect of this accounting change equals the $4,200 net of tax difference in between accounting methods ($71,000-77,000) times 70% (1- 30% tax rate). This change is now applied retrospectively. Choice a is incorrect. Since the change occurred during 2004, only the beginning inventory balance requires adjustment. Choice b is incorrect. Since the change occurred during 2004, only the beginning inventory
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This note was uploaded on 11/11/2010 for the course AC AC557 taught by Professor Ellis during the Summer '10 term at DeVry Long Beach.

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Becker_Review_Problems_Week_5- Ch 22 - BECKER REVIEW...

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