Question

Multiple Choice Question 44

Sandhill 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.

		2016		2017		2018
Completed contract		$490000		$324000		$158000
Percentage-of-completion		790000		407000		310000

What amount will be debited to Construction in Process account, to record the change at beginning of 2018?

$217000

$83000

$383000

$158000

Multiple Choice Question 45

Cullumber 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.

		2016		2017		2018
Completed contract		$395000		$267000		$139000
Percentage-of-completion		695000		331000		215000

Which of the following will be included in the journal entry made by Cullumber to record the income effect?

A credit to Retained Earnings for $218400

A debit to Retained Earnings for $134600

A debit to Retained Earnings for $231600

A credit to Retained Earnings for $134600

Multiple Choice Question 56

Sunland Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors:

		2017			2018
Ending inventory		$52000	overstatement		$70000	understatement
Depreciation expense		20000	understatement		46000	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?

$72000 overstatement

$32000 understatement

$96000 understatement

$70000 overstatement

Answer 1

44) Solution: $383,000

Working: (790,000 - 490,000) + (407,000 - 324,000) = 383,000

　

45) Solution: credit to Retained Earnings for $218400

Working: [267,000 - (267,000 * 0.40)] + [64,000 - (64,000 * 0.40)]

160,200 + 38,400

198,600; selecting the nearest option

　

56) Solution: $96000 understatement

Working: Ending inventory over all have been underestimated by $70,000; and depreciation expense overstated by 26,000. Thus retained earning underestimated with $96,000