Ch 22 HWasdasdasdaccounting notes yeaaccounting notes yea PDF

Preview

Summary

asdasdasd accounting notes yeaaccounting notes yeaaccounting notes yeaaccounting notes yeaaccounting notes yeaaccounting notes yeaaccounting notes yea...

Description

Chapter 22 Accounting Changes and Errors Chapter 22 Brief Exercises BE22-1. (LO 1) At the beginning of 2017, Wertz Construction Company changed from the completedcontract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $120,000, and completed-contract $80,000. The tax rate is 35%. Prepare Wertz's 2017 journal entry to record the change in accounting principle BE22-3. (LO 1) Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year's income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon's 2017 journal entry to record the change in accounting principle. BE22-4. (LO 1) Tedesco Company changed depreciation methods in 2017 from double-declining-balance to straight-line. Depreciation prior to 2017 under double-declining-balance was $90,000, whereas straight-line depreciation prior to 2017 would have been $50,000. Tedesco's depreciable assets had a cost of $250,000 with a $40,000 salvage value, and an 8-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Tedesco's depreciable assets. BE22-5. (LO 2) Sesame Company purchased a computer system for $74,000 on January 1, 2016. It was depreciated based on a 7-year life and an $18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame's entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.

Chapter 22 Exercises E22-1. (Change in Principle—Long-Term Contracts) (LO 1) Pam Erickson Construction Company changed from the completed-contract to the percentage-ofcompletion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows. Pretax Income from: Percentage-of-Completion Completed-Contract Difference 201 7

$780,000

$590,000

$190,000

201 8

700,000

480,000

220,000

Instructions (a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

E22-2. (Change in Principle—Inventory Methods) (LO 1) Holder-Webb Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015-2017. Net Income Computed Using Average-Cost Method FIFO Method LIFO Method 201 5

$15,000

$19,000

$12,000

201 6

18,000

23,000

14,000

201 7

20,000

25,000

17,000

Instructions (Ignore all tax effects.)

(a) Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2018. (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle.

E22-3. (Accounting Change) (LO 1) Taveras Co. decides at the beginning of 2017 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2015, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold. Inventory Determined by Date January 1, 2015

LIFO Method FIFO Method $ 0

$

0

Cost of Goods Sold Determined by LIFO Method $

0

FIFO Method $

0

December 31, 2015

100

80

800

820

December 31, 2016

200

240

1,000

940

December 31, 2017

320

390

1,130

1,100

Other information:  1.For each year presented, sales are $3,000 and operating expenses are $1,000.  2.Taveras provides two years of financial statements. Earnings per share information is not required. Instructions (a) Prepare income statements under LIFO and FIFO for 2015, 2016, and 2017. (b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2017 and 2016. (c) Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate the income statement line items for 2017 and 2016 that were affected by the change in accounting principle. (d) Prepare comparative retained earnings statements for 2016 and 2017 under FIFO. Retained earnings reported under LIFO are as follows: Retained Earnings Balance December 31, 2015

$1,200

December 31, 2016

2,200

December 31, 2017

3,070

E22-4. (Accounting Change) (LO 1) Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information. Net Income

Retained Earnings (Ending Balance)

Under FIFO Under Average-Cost

Under FIFO

201 2

$100,000

$ 90,000

$100,000

201 3

70,000

65,000

160,000

201 4

90,000

80,000

235,000

201 5

120,000

130,000

340,000

201 6

300,000

290,000

590,000

201 7

305,000

310,000

780,000

Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014? (b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017? (c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018? (d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015? E22-6. (Change in Principle—Long-Term Contracts) (LO 1) Cullen Construction Company, which began operations in 2017, changed from the completedcontract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows. Pretax Income Percentage-of-Completion Completed-Contract Difference 201 7

$880,000

$590,000

$290,000

Pretax Income Percentage-of-Completion Completed-Contract Difference 201 8

900,000

480,000

420,000

Instructions (a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle? E22-7. (Various Changes in Principle—Inventory Methods) (LO 1) Below is the net income of Anita Ferreri Instrument Co., a private corporation, computed under the three inventory methods using a periodic system. FIFO

Average-Cost

LIFO

201 5

$26,000

$24,000

$20,000

201 6

30,000

25,000

21,000

201 7

28,000

27,000

24,000

201 8

34,000

30,000

26,000

Instructions (Ignore tax considerations.) (a) Assume that in 2018 Ferreri decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2018, and show net income reported for 2015, 2016, 2017, and 2018. (b) Assume that in 2018 Ferreri, which had been using the LIFO method since incorporation in 2015, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2018 and show net income reported for 2015, 2016, 2017, and 2018.

E22-8. (Accounting Changes—Depreciation) (LO 2) Kathleen Cole Inc. acquired the following assets in January of 2015. Equipment, estimated service life, 5 years; salvage value, $525,000 $15,000

Building, estimated service life, 30 years; no salvage value $693,000 The equipment has been depreciated using the sum-of-the-years'-digits method for the first 3 years for financial reporting purposes. In 2018, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method. Instructions (a) Prepare the general journal entry to record depreciation expense for the equipment in 2018. (b) Prepare the journal entry to record depreciation expense for the building in 2018. (Round all computations to two decimal places.)

E22-12. (Depreciation Changes) (LO 2) On January 1, 2014, Jackson Company purchased a building and equipment that have the following useful lives, salvage values, and costs. Building, 40-year estimated useful life, $50,000 salvage value, $800,000 cost Equipment, 12-year estimated useful life, $10,000 salvage value, $100,000 cost The building has been depreciated under the double-declining-balance method through 2017. In 2018, the company decided to switch to the straight-line method of depreciation. Jackson also decided to change the total useful life of the equipment to 9 years, with a salvage value of $5,000 at the end of that time. The equipment is depreciated using the straight-line method. Instructions (a) Prepare the journal entry(ies) necessary to record the depreciation expense on the building in 2018. (b) Compute depreciation expense on the equipment for 2018. E22-13. (Change in Estimate—Depreciation) (LO 2) Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2018, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time. Instructions (a) Prepare the entry (if any) to correct the prior years' depreciation. (b) Prepare the entry to record depreciation for 2018. E22-14. (Change in Estimate—Depreciation) (LO 2) Gerald Englehart Industries changed from the double-declining-balance to the straight-line method in 2018 on all its equipment. There was no change in the assets' salvage values or useful lives. Plant assets, acquired on January 2, 2015, had an original cost of $1,600,000, with a $100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was $270,000 in 2017 and $300,000 in 2018. Instructions (a) Prepare the journal entry(ies) to record depreciation expense in 2018. (b) Starting with income before depreciation expense, prepare the remaining portion of the income statement for 2017 and 2018....