roblem 20-1 counting anges; sis Described below are six independent and unrelate
ID: 2599132 • Letter: R
Question
roblem 20-1 counting anges; sis Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2016 before any adjusting entries or closing entries were prepared Assume the tax rate for each company is 40% in all years. through the deferred tax liability account. Any tax effects should be adjusted 20-1 LO20-3 20-4 a. JB Industries introduced a new line of auto covers in 2015 that carry a one-year warranty against manufacturer's defects. Based on industry experience, warranty costs were expected to approximate 4% of sales. Sales of the covers in 2015 were $700,000. Accordingly, warranty expense and a warranty liability of $28,000 were recorded in 2015. In late 2016, the company's claims experience was evaluated and it was determined that claims were far fewer than expected: 3% of sales rather than 4%. Sales of the covers in 2016 were $800,000 and warranty st: P 20-8 expenditures in 2016 totaled $18,000 b. On December 30, 2012, Jefferson, Inc. acquired its office building at a cost of $4,000,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2016 to relocate the company headquarters at the end of 2017. The vacated office building will have a salvage value at that time of $2.800,000. Sterling Technology changed inventory cost methods to LIFO from FIFO at the end of 2016 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, c. 2017, is $13 million. d. At the beginning of 2013, DD Corp. purchased office equipment at a cost of $990.000. Its useful life was estimated to be ten years with no salvage value. The equipment has been depreciated by the sum-of-the-years'-digits method. On January 1, 2016, the company changed to the straight-line method e. In October, 2014, the State of Florida filed suit against Master Industries, seeking penalties for violations of clean air laws. When the financial statements were issued in 2015, Master had not reached a settlement with state authorities, but legal counsel advises Master that it was probable the company would have to pay $40 million in penalties. Accordingly, the following entry was recorded: Loss - litigatio.40 40,000,000 Liability- litigation 40,000,000 Late in 2016, a settlement was reached with state authorities to pay a total of $45 million in penalties. f. At the beginning of 2016, the Higher Tech, which uses the sum-of-the-years'-digits method changed to the straight-line method for newly acquired equipment. The change increased current year net earnings by $4.6 million. Required: For each situation: Identify the type of change. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2016 related to the situation described. Briefly describe any other steps that should be taken to appropriately report the situation.Explanation / Answer
A.
This is a change in estimate.
No entry is needed to record the change
2016 adjusting entry:
Warranty expense (3% x $8,00,000) 24,000
Estimated warranty liability 24,000
If the effect is material, a disclosure note should describe the effect of achange in estimate on income before extraordinary items, net income,and related per share amounts for the current period.
B.
This is a change in estimate. No entry is needed to record the change.
Calculation of annual depreciation after the estimate change:
Cost = $4,000,000
Old depreciation ($4,000,000 ÷ 40 years) = $1,00,000
Depreciation to date(2013-2015) $1,00,000x3yrs = (3,00,000)
Undepreciated cost($4,000,000 - 3,00,000) = $3,700,000
New estimated salvage value = (2,800,000)
To be depreciated( $3,700,000 - 2,800,000) = $900,000
Estimated remaining life = 2 Years(2016-17)
New annual depreciation2016 = $450,000 ($900,000/2)
Adjusting entry:
Depreciation expense 450,000
Accumulated depreciation 450,000
A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per share amounts for the current period.
C.
This change in accounting principle is reported prospectively.
No Entry is required to record the change.
When a company changes to the LIFO inventory method from another method, accounting records are usually insufficient to determine the cumulative income effect of the change necessary to retrospectively revise accounts. So, a company changing to LIFO usually reports the beginning inventory in the year LIFO method is adopted ($13 Million) as the base year inventory for all future LIFO calculations. The disclosure required is a footnote to the financial statements describing the nature of and justification for the change as well as an explanation as to why the retrospective application was impracticable.
D.
Cost of Equipment = $990,000
Estimated Life = 10 Years
Sum of Digits = 55 (1+2+3+4+5 ....... +10)
Depreciation of 1st Year = 10/55 * 990,000 = $180,000
Depreciation of 2nd Year = 9/55 * 990,000 = $162,000
Depreciation of 3st Year = 8/55 * 990,000 = $144,000
Total 3 Years Depreciation = $486,000
Straight Line Method :
Cost = $990,000
Life = 10 Years
Depreciation per year = 990,000/10 = $99,000
Depreciation 3 years = 99,000*3 = $297,000
Increased profits = 486,000 - 297,000 = $189,000
Journal Entry :
Accumulated depreciation account 189,000
Profit & Loss Account 189,000
Footnote-Change in the method of charging depreciation and the retrospective effect of it on income statements.
E.
Assuming if we pay the penalty immediately the entry will be:
Liability-litigation $40 Million
Loss -litigation $5 Million
Cash $45 Million
If we don't pay the penalty immediately but account for it the entry will be:
Loss-litigation $5 Million
Liability-litigation $5 Million
Footnote - $ 45 Million penalty accounted as loss has been due to the clean air law violatio
F.
Accumulated Depreciation a/c $4.6 Million
Profit & Loss A/c $4.6 Million
Footnote - The 4.6 Million increase has been due to change in depreciation method from sum of years digit method to straight line method.
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