The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2016 and 2015: 2016 2015 $15,000,000 9,200,000 $9,600,000 6,000,000 Sales Cost of goods sold Gross profit Operating expenses 5,800,000 3,200,000 3,600,000 2,600,000 Operating income Gain on sale of division 2,600,000 600,000 1,000,000 3,200,000 1,280,000 1,000,000 400,000 Income tax expense $ 1,920,000 $ 600,000 Net income On October 15, 2016, Jackson entered into a tentative agreement to sell the assets of one of its divisions. The division qualifies as a component of an entity as defined by GAAP. The division was sold on December 31, 2016, for $5,000,000. Book value of the division's assets was $4,400,000. The division's contribution to Jack- son's operating income before-tax for each year was as follows: $400,000 loss $300,000 loss 2016 2015 Assume an income tax rate of 40%.

After conducting a thorough review of the company’s fi nancial statements, Martinez concludes the following:Conclusion 1 Although Stellar’s fi nancial statements adhere to generally accepted accounting principles (GAAP), Stellar understates earnings in periods whenthe company is performing well and overstates earnings in periods whenthe company is struggling.Conclusion 2 Stellar most likely understated the value of amortizable intangibles whenrecording the acquisition of Solar, Inc. last year. No goodwill impairmentcharges have been taken since the acquisition.Conclusion 3 Over time, the accruals component of Stellar’s earnings is large relative tothe cash component.Conclusion 4 Stellar reported an unusually sharp decline in accounts receivable in thecurrent year, and an increase in long-term trade receivables.2 . Based on Conclusion 2, after the acquisition of Solar, Stellar’s earnings are most likely :A . understated.B . fairly stated.C . overstated

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Ray Solutions decided to make the following changes in its accounting policies on January 1, 2016: a. Changed from the cash to the accrual basis of accounting for recognizing revenue on its service contracts. b. Adopted straight-line depreciation for all future equipment purchases, but continued to use accelerated depreciation for all equipment acquired before 2016. c. Changed from the LIFO inventory method to the FIFO inventory method. Required: For each accounting change Ray undertook, indicate the type of change and how Ray should report the change. Be specific.