Question

I have the answers to the questions (see image below) but I don't understand why it is this way. Please help explain the calculations:

42. a $10,000 – $7,000 = $3,000.
43. c $11,000 + $7,000 – $10,000 = $8,000.
44. b $0.
45. a $52,000 – $15,600 = $36,400.

Use the following information for questions 42 through 44. Ignore taxes Morat, Inc. is a calendar-year corporation. Its financial statements for the years 2010 and 2011 contained errors as follows 2011 Ending Inventory Amortization Expense $ 6,000 understated $10,000 overstated 7,000 overstated 11,000 overstated 42. Assuming that the errors made in 2010 were corrected, but that the errors made in 2011 were not detected, by what amount will 2011 income before taxes be overstated or understated? a. $3,000 overstated b. $10,000 overstated c. $17,000 overstated d. $3,000 understated 43. Assuming that none of the errors was detected or corrected, by what amount will retained earnings at December 31, 2011 be overstated or understated? a. $23,000 understated b. $17,000 understated c. $8,000 understated d. $10,000 overstated 44. Assuming that none of the errors was detected or corrected, and that no additional errors were made in 2012, by what amount will current assets at December 31, 2012 be overstated or understated? a. $10,000 overstated b. $0 c. $4,000 overstated d. $10,000 understated 45. In 2011 Roswell Company changed from straight-line to double declining-balance amortization. The total difference in amortization for all years through 2010 was $52,000 and for 2011 the difference was $5,000. The tax rate is 30 percent. The amount that should be reported in the statement of retained earnings for 2011 as a change in accounting principle is a. $36,400 debit b. $36,400 credit. c. $39,900 debit d. $39,900 credit

Answer 1

Answer 42

Impact on profit

remark

Ending inventory

Overstated

10000

When ending inventory is overstatement profit will be higher

Amortization expenses

Overstated

-7000

When expense are higher profit will be lower

Net impact

3000

Profit before tax will be overstated by

3000

Answer 43

year

Impact on profit

remark

Ending inventory

Overstated

2011

10000

When ending inventory is overstatement profit will be higher. Note ending inventory is as on date so 10000 include the impact of last year error with in itself

Amortization expenses

Overstated

2010

-11000

When expense are higher profit will be lower

Amortization expenses

Overstated

2011

-7000

When expense are higher profit will be lower

Net impact

-8000

Profit before tax will be understated by

8000

Answer 44

If no additional error was made in 2012 therefore ending inventory of 2012 will be as per correct amount

Therefore no error will be reported in current asset number.

Therefore correct answer is

0

Answer 45

Impact due to change in accounting principle =

differece in amoritation =

52000

Less: Tax @ 30%

-15600

Net impact due to change in principle

36400

Debit

Note : difference in 2011 for depreciation will be treated as normal adjustment and should not be counted as change in accounting principle adjustment.