1.Assume that the following data relative to Eddy Company for 2014 is available:


Net Income$1,400,000


Transactions in Common Shares  ChangeCumulative

Jan. 1, 2014, Beginning number500,000

Mar. 1, 2014, Purchase of treasury shares(60,000)440,000

June 1, 2014, Stock split 2-1440,000880,000

Nov. 1, 2014, Issuance of shares120,0001,000,000


8% Cumulative Convertible Preferred Stock

Sold at par, convertible into 200,000 shares of common;

Outstanding for all of 2014.$1,000,000


Stock Options

Exercisable at the option price of $25 per share. Average 

market price in 2014, $30.  Outstanding for all of 2014.60,000 shares



Compute both basic and diluted earnings per share.







2.Your client has asked you to provide guidance on the following potential accounting changes:


(1)Change from straight-line method of depreciation to sum-of-the-years’-digits

(2)Change from the cash basis to accrual basis of accounting

(3)Change from FIFO to LIFO method for inventory valuation purposes

(4)Change from presentation of statements of individual companies to presentation of consolidated statements

(5)Change due to failure to record depreciation in a previous period

(6)Change in the realizability of certain receivables

(7)Change from LIFO to FIFO method for inventory valuation purposes



For each of the items above: 

  • Indicate the type of accounting change, using one of the following codes:

E – Change in estimate

EP – Change in estimate resulting from change in principle

N – Not an accounting change (correction of an error)

PP – Change in principle reported prospectively

PR – Change in principle reported retrospectively

R – Change in reporting entity

  • Indicate whether or not restatement of prior year financial statements is necessary.
  • Indicate whether the cumulative effect on prior years’ income is reported.




3.  Yarman Inc. began business on January 1, 2013. Its pretax financial income for the first 2 years was as follows:


2013$  95,000



The following items caused the only differences between pretax financial income and taxable income.


  • In 2013, the company collected $90,000 of rent; of this amount, $30,000 was earned in 2013; the other $60,000 will be earned equally over the 2014-2015 period. The full $90,000 was included in taxable income in 2013.


  • The company pays $5,000 a year for life insurance on officers.


  • In 2014, the company terminated a top executive and agreed to $60,000 of severance pay. The amount will be paid $20,000 per year for 2014-2016. The 2014 payment was made. The $60,000 was expensed in 2014. For tax purposes, the severance pay is deductible as it is paid.


  • The enacted tax rates existing at December 31, 2013 are 35% for 2013 and 40% for 2014 and beyond.




(a)Determine taxable income for 2013 and 2014.

(b)Compute the total deferred tax asset / (liability) at the end of 2013 and 2014.

(c)Prepare the journal entry to record income taxes for 2013 and 2014.

(d)Compute net income for 2013 and 2014.


(e)Compute the effective income tax rate for 2013 and 2014.