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

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    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

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    https://brainmass.com/business/change-management/change-estimate-change-entity-correction-errors-267215

    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

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