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Handy Co: Change in estimate, change in entity, correction of errors

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

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

Solution Preview

1. $402,000
The depreciation expense per year is (750,000-30,000)/9 = 80,000. This should have been recorded as an expense. The actual expense recorded was $750,000. Expense is overstated by 750,000-80,000=670,000. The net income was understated by the after tax amount = 670,000 X (1-0.4) = $402,000

2. (a) Change in estimate - A change in estimate is handled in the current and future ...

Solution Summary

The solution explains the correct alternative in relation to correction of error

$2.19