ACCOUNTING CHANGE answer key[1]

ACCOUNTING CHANGE answer key[1] - ACCOUNTING CHANGES...

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ACCOUNTING CHANGES MULTIPLE-CHOICE ANSWERS 1. c __ __ 6. c __ __ 11. a __ __ 16. d __ __ 21. b __ __ 2. b __ __ 7. c __ __ 12. d __ __ 17. c __ __ 22. d __ __ 3. c __ __ 8. d __ __ 13. c __ __ 18. a __ __ 23. c __ __ 4. c __ __ 9. a __ __ 14. b __ __ 19. a __ __ 5. b __ __ 10. d __ __ 15. a __ __ 20. c __ __ MULTIPLE-CHOICE ANSWER EXPLANATIONS C.1. Changes in Accounting Principles 1. ( c ) when a change in principle is made, generally the current or catch-up approach is used. The cumulative effect of the adjustment of prior years is reported in the current income statement, and the new method is used in the current year. Do not be misled by the statement in the question that says Bray changed retroactively. The term retroactive is being used in this question to refer to the way in which the catch-up or cumulative amount is computed, not the manner of reporting it. In comparative financial statements, no changes are made to the previously published financial statements for catch-up adjustments as an accounted for catch-up or cumulative type change. In this case the cumulative effect is 38,400 (86,400 double-declining balance accumulated depreciation – 48,000 straight-line accumulated depreciation). The journal entry to reflect this cumulative effect would be Accumulated depreciation 38,400 Retained Earnings 38,400 In 2010, depreciation expense would be computed using straight-line depreciation, computed as follows: Depreciation exp. is 24,000 (240,000 ÷ 10). Depreciation expense 24,000 Accumulated depreciation 24,000 2. ( b ) a change in principle is generally recorded using the current approach. The cumulative effect of the adjustment on prior years is reported in the current income statement net of the related tax effect. In this case, the accumulated depreciation account must be decreased by 120,000 [360,000 – (600,000 x 2/5)], the excess of accelerated depreciation over straight-line. The tax effect is 36,000 (30% x 120,000), so the cumulative effect reported is 84,000 (120,000 – 36,000). 3. ( c ) a change in principle is generally recorded using the current approach. The cumulative effect of the adjustment on prior years is reported in the current income statement net of the related tax effect. The cause of the tax effect is that while before the change , the tax basis and accounting book value of the asset were both 240,000, and after the change , the tax basis remains at 240,000 but the accounting book value is now 360,000 [600,000 – (2/5 x 600,000)]. When the book value of an asset is greater than its tax basis due to a temporary difference, the result is future taxable amounts for which a deferred tax liability must be recorded. The deferred tax liability is the future tax rate times the future taxable amounts [30% x (360,000 – 240,000) = 36,000] 4. ( c ) when a change in principle is made, generally, the current approach is used. The cumulative effect of the change on prior years, net of tax, is reported in the current income
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This note was uploaded on 12/14/2011 for the course ACCO 101 taught by Professor Various during the Spring '11 term at Binghamton University.

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ACCOUNTING CHANGE answer key[1] - ACCOUNTING CHANGES...

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