22 Accounting Changes and Error Analysis BRIEF EXERCISES
BRIEF EXERCISES
BE22-1 (L01) At the beginning of 2017, Wertz Construction Company changed from the completed-contract 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.
BE22-2 (L01) Refer to the accounting change by Wertz Construction Company in BE22-1. Wertz has a profit-sharing plan, which pays all employees a bonus at year-end based on 1% of pretax income. Compute the indirect effect of Wertz’s change in accounting principle that will be reported in the 2017 income statement, assuming that the profit-sharing contract explicitly requires adjustment for changes in income numbers.
BE22-3 (L01) 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 (L01) 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 (L02) 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.
BE22-6 (L03) In 2017, Bailey Corporation discovered that equipment purchased on January 1, 2015, for $50,000 was expensed at that time. The equipment should have been depreciated over 5 years, with no salvage value. The effective tax rate is 30%. Prepare Bailey’s 2017 journal entry to correct the error. Bailey uses straight-line depreciation.
BE22-7 (L03) At January 1, 2017, Beidler Company reported retained earnings of $2,000,000. In 2017, Beidler discovered that 2016 depreciation expense was understated by $400,000. In 2017, net income was $900,000 and dividends declared were $250,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Beidler Company.
BE22-8 (L03) Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2017 net income and 2018 net income.
2017 2018
(a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015.
(b) Wages payable were not recorded at 12/31/17.
(c) Equipment purchased in 2017 was expensed.
(d) 2017 ending inventory was overstated.
(e) Patent amortization was not recorded in 2018.
BE22-9 (L01,2) Roundtree Manufacturing Co. is preparing its year-end financial statements and is considering the accounting for the following items.
1. The vice president of sales had indicated that one product line has lost its customer appeal and will be phased out over the next 3 years. Therefore, a decision has been made to lower the estimated lives on related production equipment from the remaining 5 years to 3 years.
2. The Hightone Building was converted from a sales office to offices for the Accounting Department at the beginning of this year. Therefore, the expense related to this building will now appear as an administrative expense rather than a selling expense on the current year’s income statement.
3. Estimating the lives of new products in the Leisure Products Division has become very difficult because of the highly competitive conditions in this market. Therefore, the practice of deferring and amortizing preproduction costs has been abandoned in favor of expensing such costs as they are incurred.
Identify and explain whether each of the above items is a change in principle, a change in estimate, or an error.
BE22-10 (L01,3) Palmer Co. is evaluating the appropriate accounting for the following items.
1. Management has decided to switch from the FIFO inventory valuation method to the LIFO inventory valuation method for all inventories.
2. When the year-end physical inventory adjustment was made for the current year, the controller discovered that the prior year’s physical inventory sheets for an entire warehouse were mislaid and excluded from last year’s count.
3. Palmer’s Custom Division manufactures large-scale, custom-designed machinery on a contract basis. Management decided to switch from the completed-contract method to the percentage-of-completion method of accounting for longterm contracts. Identify and explain whether each of the above items is a change in accounting principle, a change in estimate, or an error.
*BE22-11 (L05) Simmons Corporation owns stock of Armstrong, Inc. Prior to 2017, the investment was accounted for using the equity method. In early 2017, Simmons sold part of its investment in Armstrong, and began using the fair value method. In 2017, Armstrong earned net income of $80,000 and paid dividends of $95,000. Prepare Simmons’s entries related to Armstrong’s net income and dividends, assuming Simmons now owns 10% of Armstrong’s stock.
* BE22-12 (L05) Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:
Equity Investments $185,000
Fair Value Adjustment (AFS) 34,000 Dr.
Accumulated Unrealized Holding Gain or Loss—Income (recorded in Retained Earnings) 34,000 Cr.
On January 1, 2018, Oliver purchased additional stock of Conrad Company for $475,000 and now has significant influence over Conrad. If the equity method had been used in 2014–2017, Oliver’s share of income would have been $33,000 greater than dividends received. Prepare Oliver’s journal entries to record the purchase of the investment and the change to the equity method.
