1 - When a company changes from one acceptable accounting method to another, the
ID: 2503602 • Letter: 1
Question
1 - When a company changes from one acceptable accounting method to another, the change is reported
A -
in the statement of retained earnings, as a correction to the beginning balance.
B -
in the income statement, below income from continuing operations.
C -
in the income statement, above income from continuing operations
D -
through a retroactive restatement of prior period earnings.
2 - Blackwelder Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will require 275,000 direct labor hours and desk lamp production will need 125,000 direct labor hours. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the small lamp production if the actual direct hours for the period is 290,000?
A - $200,000
B - $320,000
C- $440,000
D - $464,000
3 - The Kaumajet Factory produces two products - table lamps and desk lamps. It has two separate departments - finishing and production. The overhead budget for the finishing department is $550,000, using 500,000 direct labor hours. The overhead budget for the production department is $400,000 using 80,000 direct labor hours. If the budget estimates that a table lamp will require 2 hours of finishing and 1 hours of production, what is the total amount of factory overhead to be allocated to table lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours, if 75,000 units are produced?
A - $368,250
B - $540,000
C - $832,500
D - $475,000
4 - When the rate of return on total assets ratio is greater than the rate of return on common stockholders' equity ratio, the management of the company has effectively used leverage. True or False
Explanation / Answer
Solution: 1. Answer is D - through a retroactive restatement of prior period earnings. Working Notes: When a company changes from one acceptable accounting method to another, the change is reported , its effect will be on earnings computation and earnings computed earlier years will also be taken effect for that retroactive restatement of prior period earnings required. statement of retained earnings , income statement above / below are used for computation for particular period items and adjustment of prior period items. But when we changes from one acceptable accounting method to another , to make books of accounts true and fair as per the current accounting method ,one time adjustment through a retroactive restatement of prior period earnings required. 2. Answer is D. $464,000 Working Notes: Single Plantwide Factory Overhead Rate = Total Budgeted Plant Overhead / Total Budgeted direct labor hours =$640,000 / 400,000 =$1.60 per direct labor hours Overhead allocated to the period =Single plantwide factory OH rate × Actual direct labor hours = $1.60 x 290,000 =$464,000 3. Answer is B. $540,000 Working Notes: Production Department Factory Overhead Rate = Budgeted Department Factory Overhead / Budgeted Department Allocation Base Overhead rate per hour for the Finishing Department = $550,000/500,000 = $1.1 Overhead rate per hour for the Production Department = $400,000/ 80,000 = $5 table lamp Allocation Base Usage per Unit Production Department Factory Overhead Rate overhead cost Finishing Department 2 hours of finishing $1.10 =2 x 1.1 =$2.2 Production Department 1 hours of production $5 =1x5 =5 Total overhead cost per table lamp $7.20 Total Factory overhead allocated to75,000 table lamps = $7.20× 75,000 units = $540,000 4. Answer is "False" Working Notes: When the rate of return on total assets ratio is greater than the rate of return on common stockholders' equity ratio, the management of the company has effectively used leverage is FA:LSE AS , we know the accounting equation Assets = Total liabilities + Total owner's Equity return on total assets ratio = Net income / average total assets return on common stockholders' equity ratio = Net income / Equity And Case is ROA > ROE Accounting equation shows that if firm is using debt , total assets cannot be equal to total equity. ROA can be greater than ROE only when , Equity value is negative or borrowed amount is greater than its total assets, and at that time , ROA assets can be greater than ROE. Equity at negative cannot be optimum utilization of leverage. Please feel free to ask if anything about above solution in comment section of the question.
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