EXERCISES
E22-1 (L01) (Change in Principle—Long-Term Contracts) Pam Erickson Construction Company changed from the completed- contract 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. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows...
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 (L01) (Change in Principle—Inventory Methods) 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…
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.
(c) Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2015– 2017. In 2018, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.
E22-3 (L01) (Accounting Change) 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.
…
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 (L01) (Accounting Change) 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...
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?
E22-5 (L01) (Accounting Change) Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2016. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2017. The FIFO income statement is computed in accordance with the requirements of GAAP. Kenseth’s profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing. Income taxes are ignored.
Instructions
Answer the following questions.
(a) If comparative income statements are prepared, what net income should Kenseth report in 2016 and 2017?
(b) Explain why, under the FIFO basis, Kenseth reports $100 in 2016 and $96 in 2017 for its profit-sharing expense.
(c) Assume that Kenseth has a beginning balance of retained earnings at January 1, 2017, of $8,000 using the LIFO method. The company declared and paid dividends of $500 in 2017. Prepare the -retained earnings statement for 2017, assuming that Kenseth has switched to the FIFO method.
E22-6 (L01) (Change in Principle—Long-Term Contracts) Cullen Construction Company, which began operations in 2017, changed from the completed-contract 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...
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 (L01) (Various Changes in Principle—Inventory Methods) Below is the net income of Anita Ferreri Instrument Co., a private corporation, computed under the three inventory methods using a periodic system...
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 (L02) (Accounting Changes—Depreciation) Kathleen Cole Inc. acquired the following assets in January of 2015...
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.)
E22-9 (L02,3) (Change in Estimate and Error; Financial Statements) Presented below are the comparative income and retained earnings statements for Denise Habbe Inc. for the years 2017 and 2018...
Instructions
Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.)
E22-10 (L01,2,3) (Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors. ______ 1. Change in a plant asset’s salvage value. ______ 2. Change due to overstatement of inventory. ______ 3. Change from sum-of-the-years’-digits to straight-line method of depreciation. ______ 4. Change from presenting unconsolidated to consolidated financial statements. ______ 5. Change from LIFO to FIFO inventory method. ______ 6. Change in the rate used to compute warranty costs. ______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle. ______ 8. Change in a patent’s amortization period. ______ 9. Change from completed-contract to percentage-of-completion method on construction contracts. ______ 10. Change from FIFO to average-cost inventory method.
Instructions
For each change or error, indicate how it would be accounted for using the following code letters:
(a) Accounted for prospectively.
(b) Accounted for retrospectively.
(c) Neither of the above.
E22-11 (L02,3) EXCEL (Error and Change in Estimate—Depreciation) Joy Cunningham Co. purchased a machine on January 1, 2015, for $550,000. At that time, it was estimated that the machine would have a 10-year life and no salvage value. On December 31, 2018, the firm’s accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment.
Instructions
Prepare the general journal entries that should be made at December 31, 2018, to record these events. (Ignore tax effects.)
E22-12 (L02) (Depreciation Changes) On January 1, 2014, Jackson Company purchased a building and equipment that have the following useful lives, salvage values, and costs…
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 (L02) EXCEL (Change in Estimate—Depreciation) 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 (L02) (Change in Estimate—Depreciation) 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.
E22-15 (L03) (Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:
1. At the beginning of 2016, the company purchased a machine for $510,000 (salvage value of $51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.
2. At the end of 2017, the company failed to accrue sales salaries of $45,000.
3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional $85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the $85,000 to a loss account in 2018.
4. Gingrich Company purchased a copyright from another company early in 2016 for $45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.
5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings.
Instructions
Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.
E22-16 (L03) (Error Analysis and Correcting Entry) You have been engaged to review the financial statements of Gottschalk Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.
1. Year-end wages payable of $3,400 were not recorded because the bookkeeper thought that “they were immaterial.”
2. Accrued vacation pay for the year of $31,100 was not recorded because the bookkeeper “never heard that you had to do it.”
3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,640 because “the amount of the check is about the same every year.”
4. Reported sales revenue for the year is $2,120,000. This includes all sales taxes collected for the year. The sales tax rate is 6%.
Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400.
Instructions
Prepare the necessary correcting entries, assuming that Gottschalk uses a calendar-year basis.
E22-17 (L03) (Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, $147,000; 2018, $185,000. Early in 2019, the following errors were discovered.
1. Depreciation of equipment for 2017 was overstated $17,000.
2. Depreciation of equipment for 2018 was understated $38,500.
3. December 31, 2017, inventory was understated $50,000.
4. December 31, 2018, inventory was overstated $16,200.
Instructions
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)
E22-18 (L03,4) (Error Analysis) Peter Henning Tool Company’s December 31 year-end financial statements contained the following errors.
December 31, 2017 December 31, 2018
Ending inventory $9,600 understated $8,100 overstated
Depreciation expense $2,300 understated —
An insurance premium of $66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019. There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors.
(Ignore income tax considerations.)
Instructions
(a) Compute the total effect of the errors on 2018 net income.
(b) Compute the total effect of the errors on the amount of Henning’s working capital at December 31, 2018.
(c) Compute the total effect of the errors on the balance of Henning’s retained earnings at December 31, 2018.
E22-19 (L03,4) (Error Analysis; Correcting Entries) A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018…
Instructions
(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)
(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)
(c) Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.
E22-20 (L03,4) (Error Analysis) The before-tax income for Lonnie Holdiman Co. for 2017 was $101,000 and $77,400 for 2018. However, the accountant noted that the following errors had been made:
1. Sales for 2017 included amounts of $38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.
2. The inventory on December 31, 2017, was understated by $8,640.
3. The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis.
Interest Expense 15,000
Cash 15,000
The bonds have a face value of $250,000 and pay a stated interest rate of 6%. They were issued at a discount of $15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of $8,500 in 2017 and $9,400 in 2018 were so charged. The company applies a rate of 10% to the balance in the
Equipment account at the end of the year in its determination of depreciation charges.
Instructions
Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018.
E22-21 (L03,4) (Error Analysis) When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.
*E 22-22 (L05) (Change from Fair Value to Equity) On January 1, 2017, Beyonce Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for $1,400,000. At the time, the book value and the fair value of John’s net assets were $13,000,000. On July 1, 2018, Beyonce paid $3,040,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John’s identifiable assets net of liabilities was equal to their carrying amount of $14,200,000. As a result of this transaction, Beyonce owns 30% of John and can exercise significant influence over John’s operating and financial policies.
John reported the following net income and declared and paid the following dividends.
Net Income Dividend per Share
Year ended 12/31/17 $700,000 None
Six months ended 6/30/18 500,000 None
Six months ended 12/31/18 815,000 $1.55
Instructions
(Any excess fair value is attributed to goodwill.)
Determine the ending balance that Beyonce Co. should report as its investment in John Corp. at the end of 2018. *E 22-23 (L05) (Change from Equity to Fair Value) Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries...
Instructions
(a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?
(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).
(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.
