ACCT 305 FINAL EXAM QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026

ACCT 305 FINAL EXAM QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026 Which of the following is not accounted for as a change in accounting principle? - Answers A change to a different method of depreciation for plant assets Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method? - Answers Recomputation of current and future years' depreciation Which type of accounting change should always be accounted for in current and future periods? - Answers Change in accounting estimate Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? - Answers Current period and prospectively When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a - Answers change in accounting estimate The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should - Answers depreciate the remaining book value over the remaining life of the asset An example of a correction of an error in previously issued financial statements is a change - Answers from the cash basis of accounting to the accrual basis of accounting Counterbalancing errors do not include - Answers errors that correct themselves in three years Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2018. In 2018, it changed to the percentage-of-completion method.The company decided to use the same for income tax purposes. The tax rate enacted is 40%.Income before taxes under both the methods for the past three years appears below.Completed contract $450,000 $300,000 $150,000 Percentage-of-completion 750,000 375,000 270,000 What amount will be debited to Construction in Process account, to record the change at beginning of 2018? - Answers ($750,000 - $450,000) + ($375,000 - $300,000) = $375,000. Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2018. In 2018, it changed to the percentage-of-completion method.The company decided to use the same for income tax purposes. The tax rate enacted is 40%.Income before taxes under both the methods for the past three years appears below. Completed contract $450,000 $300,000 $150,000 Percentage-of-completion 750,000 375,000 270,000 Which of the following will be included in the journal entry made by Dream Home to record the income effect? - Answers A credit to Retained Earnings for $225,000 [($300,000 − ($300,000 × .40)) + ($75,000 − ($75,000 × .40))] = $225,000. Swift Company purchased a machine on January 1, 2016, for $900,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2019, Swift 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 salvage. An accounting change was made in 2019 to reflect this additional information. Assume that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate was 30% in 2016, 2017, 2018, and 2019. What should be reported in Swift's income statement for the year ended December 31, 2019, as the cumulative effect on prior years of changing the estimated useful life of the machine? - Answers $0, no cumulative effect, handle prospectively (change in estimate) Swift Company purchased a machine on January 1, 2016, for $900,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2019, Swift 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 salvage. An accounting change was made in 2019 to reflect this additional information. What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2019? - Answers ($900,000 ÷ 6) × 3 = $450,000; $450,000 ÷ 5 = $90,000. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? - Answers $50,000 + $20,000 = $70,000 overstatement Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: Ending inventory $50,000 overstatement $80,000 understatement Depreciation expense 20,000 understatement 40,000 overstatement Assume that no correcting entries were made at 12/31/17, or 12/31/18. Ignoring income taxes, by how much will retained earnings at 12/31/18 be overstated or understated? - Answers $100,000 understatement Co. purchased machinery that cost $3,000,000 on January 4, 2016. The entire cost was recorded as an expense. The machinery has a nine-year life and a $200,000 residual value. The error was discovered on December 20, 2018. Link Co. typically uses straight-line depreciation. Ignore income tax considerations. Before the correction was made, and before the books were closed on December 31, 2018, retained earnings was understated by - Answers RE fix needed Increase $3,000,000 [add back erroneous 2016 expense] Decrease: $311,111 [recognize 2016 depreciation expense needed Decrease : $311,111 [recognize 2017 depreciation expense needed RE fix: $2,377,778 Ernst Company purchased equipment that cost $3,000,000 on January 1, 2017. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ernst is subject to a 40% tax rate. Ernst's net income for the year ended December 31, 2017, was understated by - Answers NINC DEPR 3,000,000 over [erroneous expense] DEPR 320,000 under [actual depreciation] DEPR 2,680,000 net overstated Pretax Inc. 2,680,000 under Tax effect 1,072,000 N.INC 1,608,000 understated An objective of the statement of cash flows is to - Answers provide information about the operating, investing, and financing activities of an entity during a period Of the following questions, which one would not be answered by the statement of cash flows? - Answers Were all the cash expenditures of benefit to the company during the period? A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n) - Answers cash inflow from financing activities. Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? - Answers Three items During 2018, Stout Inc. had the following activities related to its financial operations: Carrying value of convertible preferred stock in Stout, converted into common shares of Stout ......$ 540,000