Question

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Exercise 13-25 (Algo) Change in accounting estimate (LO13-3] The Commonwealth of Virginia filed sult in October 2019 against Northern Timber Corporation, seeking civil penalties and Injunctive relief for violations of environmental laws regulating forest conservation. When the 2020 financial statements were issued In 2021, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,083.000 in penalties. The following entry was recorded: Credit General Journal Loss-litigation Liability-litigation Debit 1.983, 1,083,eee Late In 2021. a settlement was reached with state authorities to pay a total of $668,000 to cover the cost of violations. Required: 1. Prepare any Journal entries related to the change. 2. Would a disclosure note be required for the change in estimate? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare any journal entries related to the change. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) View transaction lat Journal entry worksheet Record revision to the liability on the basis of the new estimate. Note: Enter debits before credits. Event General Journal Debit Credit Record entry Clear entry View general Journal Required 1 Required 2 >

Answer 1

1) When actual liability estimated in later date is less than estimated liability recorded already in accounting records, the liability recorded earlier shall be reversed to the extent of short amount of loss (which is equal to difference between liability recorded and amount as per revised estimate in later date ) by debiting the liability account. Also, loss recognized earlier shall be reversed by recognizing an income when the estimated amount is changed. Therefore, the journal entry related to the change would be: Credit Event General Journal 1 Liability - litigation Gain - litigation Debit $415,000 ($1,083,000 - $668,000] $415,000 2) Disclosure note be required for the change in estimate: YES Explanation: Whenever there is a significant change in accounting estimates, firm must add a disclosure note that should describe the effect of a change in estimate on the following figures: --> Income before extraordinary items --> Net income, and --> Related per-share amounts for the current period.