Question

On January 1, 2021, Sunland Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $1090000 increase in the January 1, 2021 inventory. Assume that the income tax rate for all years is 30%. Assuming that comparative statements are not issued, the cumulative effect of the accounting change should be reported by Sunland in its 2021

income statement as a $650,000 cumulative effect of accounting change
income statement as a $520,000 cumulative effect of accounting change
retained earnings statement as of $650,000 addition to the beginning balance
retained earnings statement as of $520,000 addition to the beginning balance
QUESTION 2
In 2020, a company failed to record $100,000 of depreciation expense on a new asset. This was not discovered until 2021. However, the company did record the depreciation on its 2020 income tax return and properly recorded its 20% income taxes payable? How much was net income overstated or understated in 2020?
Overstated by $100,000
Overstated by $80,000
Understated by $80,000
Understated by $100,000
QUESTION 3
Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2021. In 2021, it changed to the percentage-of-completion method.
The company decided to continue using completed contract for income tax purposes. The tax rate enacted is 20%. Income before taxes under both the methods for the past three years appears below.
2019 2020 2021
Completed contract $450,000 $300,000 $150,000
Percentage-of-completion 750,000 375,000 270,000
What amount will be debited to the Construction in Process account, to record the change at the beginning of 2021?
$75,000
$200,000
$300,000
$375,000

Answer 1

Answer: See explanation

Step-by-step explanation:

1. Based on the information given in the question, there'll be a retained earning statement of:

= $1090000 × (1 - 30%).

= $1090000 × 70%

= $1090000 × 0.7

= $763000

There'll be a retained earnings statement as of $763,000 addition to the beginning balance.

2. Based on the information given in the question, the net income was overstated by $100,000 since the depreciation expense hasn't been deducted. Therefore, the correct option is A ''Overstated by $100,000".

3. The amount that will be debited to the Construction in Process account, to record the change at the beginning of 2021 will be:

= ($750000 - $450000) + ($375000 - $300000)

= $300000 + $75000

= $375000