Question 1 - Tulip Ltd. decided on January 1, 2007 to discontinue its steel-making division. The division, properly identified as a reportable segment, was sold on June 1, 2001. Division assets with a carrying value of $800,000 were sold for $500,000. Operating income from January 1, to May 30, 2007 for the division amounted to $125,000. Income taxes are at the rate of 45%. What amount should be reported on Tulip's income statement for the year ended December 31, 2007 under the caption "discontinued operations"?
Question 2 - A company acquired a machine for use in a business at the beginning of year 1: Cost, $110,000; Estimated life, 10 years; no residual value (straight-line depreciation).
Instructions -
Two separate and independent cases, involving accounting changes with respect to the machine are given below. For each case, respond to the following questions:
(1) If any, identify the type of change involved: change in accounting policy, change in accounting estimate or accounting error.
(2) Give the entry to reflect the change. If none is required, indicate "no entry" and provide a reason. Ignore any tax effect.
(3) Give the entry for depreciation in year 5.
CASE A At the end of the 5th year, it was discovered that no depreciation had ever been recorded: CASE B Assume depreciation has been recorded in the usual manner during the first four years. At the end of the 5th year, the estimated total life was changed from 10 to 15 years.
Question 3 - At the end of 2008, and before any adjusting entries were made, a company discovered that a tract of land (used as a parking lot next to the newly completed office building) that had been purchased for $20,000 cash on January 1, 2005, was debited in full to the office building account on that date. The building was being depreciated over a 20-year life with no residual value (straight-line). Assume a 25 percent tax rate.
(a) Correct all of the accounts (omit income tax effect).
(b) Record the income tax effects (assume income tax for 2008 has not yet been paid).
(c) If the asset were to be reclassified as "Held for Sale", what steps are required?