Problem 1: Handy Company purchased equipment that cost $750,000 on January 1, 2006. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Handy uses the straight-line method to account for depreciation expense.
The error was discovered on December 10, 2008. Handy is subject to a 40 % tax rate.
Handy's net income for the year ended December 31, 2006, was understated by
- $402,000
- $450,000
- $670,000
- $750,000
Problem 2: Change in estimate, change in entity, correction of errors.
Discuss the accounting procedures for and illustrate the following with examples:
(a) Change in estimate
(b) Change in entity
(c) Correction of an error