Question

1. On January 1, 2015, Reno Inc. purchased a machine for $150,000. The machine has an estimated five year life, and no residual value. Double declining balance depreciation has been used for financial statement reporting and CCA for income tax reporting. Effective January 1, 2018, Reno decided to change to straight-line depreciation for this machine, and treated the change as a change in accounting policy. For calendar 2018, Reno’s pre-tax income before depreciation on this asset is $125,000. Their income tax rate has been 30% for many years. What net income should Reno report for calendar 2018? a 95000 b 85820 c 66500 d 45500

2. On January 2, 2015, Beaver Corp. purchased machinery for $135,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $9,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2017, and the appropriate corrections were made. Ignore income tax considerations. Before the corrections were made, retained earnings was understated by a. 135000 b. 121000 c. 107000 d. 93000

3. Minor Corp. purchased a machine on January 1, 2014, for $600,000. The machine is being depreciated on a straight-line basis, using an estimated useful life of six years and no residual value. On January 1, 2017, Minor determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no residual value. An accounting change was made in 2017 to reflect this additional information. What is the amount of depreciation expense on this machine that should be reported in Minor's income statement for calendar 2017? a.150000 b.120000 c. 75000 c. 60000

4. Fairfax Inc. began operations on January 1, 2016. Financial statements for 2016 and 2017 contained the following errors:

i Ending Inventory Dec 31, 2016 : 33000 too high 2017 39000 too low ii Depreciation Expense 2016 21000 too high iii Insurance Expense 2016 15000 too low ; 2017 15000 too high iv Prepaid Insurance 2016 15000 too high

In addition, on December 31, 2017 fully depreciated equipment was sold for $7,200, but the sale was not recorded until 2018. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Fairfax's 2017 net income is a.Understated by $94200 b.Understated by $61200 c.Overstated by 28800 d.Overstated by 49800

Answer 1

1.

Pretax income before depreciation = 125000

(- depreciation)= 30000

pre tax income after depreciation =95000

(-) tax@30%= 28500

net income after tax =66500

Since the change in depreciation method is treated as a change in accounting policy, the financial statements are restated with retrospective effect. The depreciation expense should have been 30000 per year as per straight line method ( 150000÷5). Hence in the year 2018 the depreciation expense to be recorded equals 30000.

There is a difference in book value of asset as per double declining method of depreciation ( 32400) and straight line method, if were in effect from the beginning ( 60000). There has been an excess depreciation charged by the amount 27600 earlier. The excess depreciation should be effected as revaluation gain on the asset and to recorded as other comprehensive income in the income statement.

So, the answer will be option C ) 66500

2. The answer is option C ) 107000. Retained earnings understated = purchase price of the asset - depreciation for two years

= 135000 - 28000 = 107000

3. The answer is option D) 60000. Depreciation for calendar year 2017

= (remaining book value - residual value) / remaining useful life of the asset . Please find the answer attached with photo given below.

4. The answer is option A) understated by $94200

The total effect of the errors on Fairfax's 2017 net income =33000+39000+7200+150000= 94200 understated

The opening inventory of 2017 has been over stated by 33000 so the income would be understated by 33000

The ending inventory was understated by 39000, this make the income to be understated by 39000.

There is an unrecorded gain on selling of asset of 7200 which understates net income.

The insurance expense recorded in 2017 was too high by 15000 makes the net income understate by 15000.

The depreciation expense flows to accumulated depreciation as contra asset account in the balance sheet which do not directly affect net income reported.

Hence the net income in year 2017 has been understated by a total amount of 94200.