Accounting changes; six situations
• LO20–1, LO20–3, LO20–4
Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2018 before any
- a. Fleming Home Products introduced a new line of commercial awnings in 2017 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 3% of sales. Sales of the awnings in 2017 were $3,500,000. Accordingly, warranty expense and a warranty liability of $105,000 were recorded in 2017. In late 2018, the company’s claims experience was evaluated, and it was determined that claims were far fewer than expected: 2% of sales rather than 3%. Sales of the awnings in 2018 were $4,000,000, and warranty expenditures in 2018 totaled $91,000.
- b. On December 30, 2014, Rival Industries acquired its office building at a cost of $1,000,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2018 to relocate the company headquarters at the end of 2022. The vacated office building will have a salvage value at that time of $700,000.
- c. Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2018 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2018, is $690,000.
- d. At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $330,000. Its useful life was estimated to be 10 years with no salvage value. The equipment was depreciated by the sum-of-the-years’-digits method. On January 1, 2018, the company changed to the straight-line method.
- e. In November 2016, the State of Minnesota filed suit against Huggins Manufacturing Company, seeking penalties for violations of clean air laws. When the financial statements were issued in 2017, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $200,000 in penalties. Accordingly, the following entry was recorded:
Loss—litigation | 200,000 | |
Liability—litigation | 200,000 |
Late in 2018, a settlement was reached with state authorities to pay a total of $350,000 in penalties.
- f. At the beginning of 2018, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net earnings by $445,000.
Required:
For each situation:
- 1. Identify the type of change.
- 2. Prepare any
journal entry necessary as a direct result of the change, as well as any adjusting entry for 2018 related to the situation described. - 3. Briefly describe any other steps that should be taken to appropriately report the situation.
(a)
Accounting changes:
Accounting changes are the alterations made to the accounting methods, accounting estimates, accounting principles (or) the reporting entity.
To Identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change: Change in estimate
(2)Journal (or) Adjusting entry:
No entry is needed to record the change but Adjusting entry is made to record the 2% of change in sales estimate
Adjusting entry for the year 2018
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Warranty expense (1) | 80,000 | ||
Estimated warranty liability | 80,000 | ||
(To record the estimated liability warranty) |
Table (1)
- Warranty expense is an expense. The retained earnings value is decreased. Therefore, it is debited.
- Estimated warranty liability is a liability. The liability value is increased. Therefore, it is credited.
Working Note:
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(b)
To Identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change: Change in estimate
(2)Journal (or) Adjusting entry:
No entry is needed to record the change but Adjusting entry is made to record the depreciation value
The Adjusting entry for the year 2018:
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Depreciation expense | 45,000 | ||
Accumulated depreciation (6) | 45,000 | ||
(To record the accumulated depreciation) |
Table (2)
- Depreciation expense is an expense. The retained earnings value is decreased. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in assets value. Therefore, it is credited.
Working Notes:
a. Calculate the depreciation of building using straight line method:
b. Calculate the annual straight-line depreciation:
It is given that the old annual depreciation is $25,000(2) and number of years completed is 3 years.
(3)
c. Calculate the book value:
d. Calculate the revised depreciation base:
e. Calculate the new annual depreciation:
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(c)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change:Change in accounting principle.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change.
(3)Steps taken:
When the company switch over’s form one inventory method to LIFO (Last in first out) there is sufficiency in accounting records to determine the cumulative income effect. The beginning inventory is treated as base for future LIFO calculation ($690,000).
(d)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change:Change in estimate.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change. But adjusting entry is made to record the depreciation value.
Adjusting entry for the year 2018.
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Depreciation expense | 24,000 | ||
Accumulated depreciation (13) | 24,000 | ||
(To record the accumulated depreciation) |
Table (3)
- Depreciation expense is an expense. There is an increase in liability value. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in assets value. Therefore, it is credited.
Working note:
a. Calculate the average number of years:
It is given that the number of years is 10 years.
b. Calculate the SYD (Sum of the year’s digit depreciation) depreciation:
Now, calculate the SYD depreciation:
c. Calculate the annual straight-line depreciation 2018 to 2024:
Particulars | Amount |
Asset cost | $330,000 |
Less: Accumulated depreciation | $162,000(12) |
Un depreciated cost, Jan. 1 2016 | $168,000 |
Estimated residual value | $0 |
Depreciation over remaining 7 years | $168,000 |
Divide: Remaining years | 7 years |
Annual straight-line depreciation 2018-2022 | $24,000 |
(13)
Table (4)
(3)Steps taken:
The H Company’s’ previous years, financial statements are not revised. Instead, the company implements straight-line method. The remaining cost undepreciated at the time of the change is depreciated using straight line method for the remaining life.
(e)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change:Change in estimate.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change. But Adjusting Entry is made to revise the liability on the basis of the new estimate of H Company for the year 2018.
Adjusting entry for the year 2018.
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Loss – litigation | 150,000 | ||
Liability- litigation (14) | 150,000 | ||
(To record adjusting depreciation entry) |
Table (5)
Explanation:
- Depreciation expense is an expense. There is a decrease in liability value. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in asset value. Therefore, it is credited.
Working note:
(14)
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(f)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2018 if needed, and (3) steps taken to report the change.
Explanation of Solution
(1)The type of change:Change in accounting principle.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change
(3)Steps taken:
The change in accounting principle is effective for those assets placed in service after the date of change; Assets depreciated in prior periods are not affected by the change. Disclosure notes should include the nature and justification for the change.
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Chapter 20 Solutions
INTERMEDIATE ACCOUNTING RMU 9TH EDITION
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