During 2007 White Company determined that machinery previously depreciated over a seven-year life had a total estimated useful life of only five years. An accounting change was made in 2007 to reflect the change in estimate. If the change had been made in 2006, accumulated depreciation at December 31, 2006 would have been $1,600,000 instead of $1,200,000. As a result of this change the 2007 depreciation expense was $100,000 greater. The income tax rate was 30% in both years. What should be reported in White’s retained earnings statement for the year ended December 31, 2007 as the cumulative effect on prior years of changing the estimated useful life of the machinery?
a. $0
b. $280,000
c. $300,000
d. $400,000
Items 2 and 3 are based on the following information:
The Shannon Corporation began operations on January 1, 2007. Financial statements for the years ended December 31, 2007 and 2008 contained the following errors:
|
31-Dec |
||
|
2007 |
2008 |
|
|
Ending inventory |
$16,000 |
$15,000 |
|
understated |
overstated |
|
|
Depreciation expense |
$6,000 |
|
|
understated |
||
|
Insurance expense |
$10,000 |
$10,000 |
|
overstated |
understated |
|
|
Prepaid insurance |
$10,000 |
|
|
understated |
In addition, on December 31, 2008 fully depreciated machinery was sold for $10,800 cash, but the sale was not recorded until 2009. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors.