On January 2, 1989, Union Co. purchased a machine for $264,000 and depreciated it by the straight- line method using an estimated useful life of eight years with no salvage value. On January 2, 1992, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in 1992 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 1992,of:
Answer(s): D
Choice "d" is correct, $146,000 accumulated depreciation balance at DeC. 31, 1992.
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey's 1992 financial statements?
Answer(s): C
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in accounting principle" is only used for changes in "accounting principle."
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:
Answer(s): A
Choice "a" is correct, as of January 1, 1992, the beginning of the year. Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods, assuming comparative financial statements are not presented. If comparative statements are presented, then beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change. We are assuming, based on the answer options given, that Harvey is not presenting comparative financial statements.Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average.
In 1992, hail damaged several of Toncan Co.'s vans. Hailstorms had frequently inflicted similar damage to Toncan's vans. Over the years, Toncan had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. In 1992, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's 1992 financial statements?
Answer(s): B
Choice "b" is correct. Actual hail damage must be reported. Since the hailstorms are frequent, the damage is not considered an extraordinary gain/loss. Thus, the damages would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence.Choice "a" is incorrect. Hailstorms are not unusual and infrequent so the loss could not be classified as extraordinary. APB 30 para. 20Choice "c" is incorrect. Actual hail damage must be reported. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations. Choice "d" is incorrect. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations.
A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:
Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses should be included.Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations.Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations.Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date.All 1992 operating losses should be included.
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