4. VanDyke Company\'s net incomes for the past three years are presented below:

Question

4. VanDyke Company's net incomes for the past three years are presented below:

2016 = $480,000 2015 = $450,000 2016 = $360,000

During the 2016 year-end audit, the following items come to your attention:

1. VanDyke bought equipment on January 1, 2013 for $392,000 with a $32,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method)

2. During 2016, VanDyke changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases: 2016 2015 2014 Straight-line 36,000 36,000 36,000 Double-declining 46,080 57,600 72,000 The net income for 2016 was computed using the double-declining balance method. The depreciation recorded in 2016 was $46,080.

3. VanDyke, in reviewing its provision for allowance for doubtful accounts during 2016, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2015 and 2014 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2016. The company would have recorded $6,000 less of bad debt expense on December 31, 2016 under the old rate.

Instructions (a) Identify what type of accounting change for each of the three situations above. (

b) Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year (2016).

(c) Compute the net income to be reported each year 2014 through 2016. (d) Assume that the beginning retained earnings balance (unadjusted) for 2015 was $1,260,000 prepare any necessary adjustment to beginning retained earnings balance for 2015.

Explanation / Answer

a. 1. The revenue expense needs to be converted to a capital account.

2. A retroactive recomputation of the deperciation under the new method needs to be done till the beginning of the current reporting period. Any surplus or deficiency is to be adjusted through the retained earnings account.

3. Change in accounting estimate, to be applied prospectively.

b. Rectification entries:

Error No. Account Titles Debit Credit $ $ 1. Equipment 392,000 Depreciation expense 60,000 Accumulated depreciation-equipment 240,000 Retained earnings 212,000 2. Retained earnings 57,600 Accumulated depreciation-cement plant 57,600 3. No entry required

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