Exercise 1

BE.22-2, Bruce Bickner Co changed

depreciation methods in 2005 from straight
line to double declining balance, resulting in a
cumulative effect adjustment of $ 84,000.
The 2005 income before the change was $
250,000. Bickner had 10,000 shares of
common stock outstanding all year.
Prepare Bickners 2005 income statement
beginning with income before cumulative
effect.

Answer of Exercise 1
Income before cumulative effect of a change in
accounting principle $ 250,000
Cumulative effect of change in depreciation methods
(84,000)
Net income $ 166,000
Earnings per share
Income before cumulative effect
$25.00
Cumulative effect
(8.40)
Net income $16.60
Pro-forma amounts
Net income $250,000
Earnings per share $25.00

Exercise 2
BE.22-4, Nancy Castle Co purchased a
computer system for $ 60,000 on January 1,
2003. It was depreciated based on a 7 year
life an $ 18,000 salvage value. On January 1,
2005, Castle revised these estimates to a total
useful life of 4 years and a salvage value of $
10,000.
Prepare Castles entry to record 2005
depreciation expense.

Answer of Exercise 2
Depreciation Expense
Accumulated Depreciation
$ 48,000 - $ 10,000 = $ 19,000
4-2

19,000
19,000

Exercise 3
BE.22-6, At January 1, 2005, William R Monat
Co reported retained earnings of $ 2,000,000.
In 2005, Monat discovered that 2004
depreciation expense was understated by $
500,000. In 2005, net income was $ 900,000
and dividends declared were $ 250,000. The
tax rate is 40 %. Prepare a 2005 retained
earnings statement for William R Monat Co.

Answer of Exercise 3
WILLIAM R. MONAT COMPANY
Retained Earnings Statement
December 31, 2005
Retained earnings, 1/1/05,
as previously reported
$ 2,000,000
Correction of depreciation error, net of tax
(300,000)
Retained earnings, 1/1/05, as adjusted
1,700,000
Add: Net income
900,000
2,600,000
Deduct: Dividends
250,000
Retained earnings, 12/31/05
$ 2,350,000

Exercise 4
BE.22-9, Rocket Co has owned stock of Knight Co since
2001. At December 31, 2004, its balances related to this
investment were :
Available for sale securities
Securities Fair Value (SFA)
Unrealized holding gain or loss Equity

$ 185,000
$ 34,000 Dr
$ 34,000 Cr

On January 1, 2005, Rocket purchased additional stock

of Knight Co for $ 445,000 and now has significant
influence over Knight. If the equity method had been
used in 2001 2004, income would have been $ 33,000
greater than dividends received. Prepare Rockets
journal entries to record the purchase of the investment
and the change to the equity method.

Answer of Exercise 4
Investment in Terminator Stock
478,000
Cash
445,000
Retained Earnings
33,000
Investment in Terminator Stock
185,000
Available-for-Sale Securities
185,000
Unrealized Holding Gain or LossEquity
34,000
Securities Fair Value Adjustment
(Available-for-Sale)
34,000

Exercise 5
E.22-4, Peter M dell Co purchased equipment for $
510,000 which was estimated to have a useful life
of 10 years with a salvage value of $ 10,000 at the
end of that time. Depreciation has been entered for
7 years on a straight line basis. In 2005, it is
determined that the total estimated useful life
should be 15 years with a salvage value of $ 5,000
at the end of that time.
Instruction :
a. Prepare the entry (if any) to correct the prior
years depreciation
b. Prepare the entry to record depreciation for 2005.

Answer of Exercise 5
(a) No entry necessary.
(b) Depreciation Expense
19,375*
Accumulated DepreciationEquipment 19,375
Original cost
$ 510,000
Acc depreciation [($ 510,000 $ 10,000) 10] x 7 (350,000)
Book value (1/1/05)
160,000
Estimated salvage value
(5,000)
Remaining depreciable basis
155,000
Remaining useful life
(15 years 7 years)
8
Depreciation expense2005
$ 19,375