Exam 18: Additional Reporting Issues

If a change in an accounting estimate affects current net income by an amount equal to or greater than 1% of net income, the change should be handled retroactively.

A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial.

When a company changes an accounting principle, it should not adjust any assets or liabilities.

A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable should be treated as an accounting error.

Hoffman Corporation had net income for the year of $480,000 and a weighted-average number of common shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are

On January 2, 2008, Ramos Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 shares of Ramos's common stock. No bonds were converted during 2008. Throughout 2008, Ramos had 1,000 shares of common stock outstanding. Ramos's 2008 net income was $3,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2008. Ramos's diluted earnings per share for 2008 would be (rounded to the nearest penny)

During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below: Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of

Eller, Inc., had 560,000 shares of common stock issued and outstanding at December 31, 2006. On July 1, 2007, an additional 40,000 shares of common stock were issued for cash. Eller also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2007. The average market price of Eller's common stock was $20 during 2007. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2007?

If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new accounting principle.

At December 31, 2008, Norbett Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2008. Net income for the year ended December 31, 2008, was $1,020,000. What should be Norbett's 2008 earnings per common share, rounded to the nearest penny?

At December 31, 2007, Pratt Company had 500,000 shares of common stock outstanding. On October 1, 2008, an additional 100,000 shares of common stock were issued. In addition, Pratt had $10,000,000 of 6% convertible bonds outstanding at December 31, 2007, which are convertible into 225,000 shares of common stock. No bonds were converted into common stock in 2008. The net income for the year ended December 31, 2008, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2008, should be (rounded to the nearest penny)

A corporation's capital structure is simple if it includes securities that could have a dilutive effect on earnings per common share.

Antidilutive securities should be ignored in all calculations and should not be considered in computing diluted earnings per share.

When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

On January 1, 2006, Baden Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2009, for financial statement reporting, Baden decided to change to the straight-line method for depreciation of the machine. Assume that Baden can justify the change. Baden's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2009, is $250,000. The income tax rate for 2009, as well as for the years 2006-2008, is 30%. What amount should Baden report as net income for the year ended December 31, 2009?

On January 1, 2008, Bosco Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2008 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Bosco in its 2008

A change in accounting principle is evidenced by

Werth, Incorporated, has 3,200,000 shares of common stock outstanding on December 31, 2007. An additional 800,000 shares of common stock were issued on April 1, 2008, and 400,000 more on July 1, 2008. On October 1, 2008, Werth issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2008. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?

Equipment was purchased at the beginning of 2006 for $204,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $24,000. The equipment was depreciated using the straight-line method of depreciation through 2009. At the beginning of 2009, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $15,000. The amount to be recorded for depreciation for 2009, reflecting these changes in estimates, is