Question

Problem 20-14 Errors; change in estimate; change in principle; restatement of previous financial statements [LO 20-1, 20-3, 20-4, 20-6] Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2016 and 2017 reported the following amounts and subtotals ($ in millions Assets $650 730 liabilities $285 Shareholders' Equity $365 2016 2017 Net Income $165 185 Expenses $141 166 375 In 2018 the following situations occurred or came to light a. Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2016 inventory 2017 Inventory Overstated by Understated by $11.1 million $ 9.1 lion b. A liability was accrued in 2016 for a probable payment of $5.2 million in connection with a lawsuit ultimately settled in December 2018 for $3.1 million C. A patent costing $12.6 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired. d. Whaley's conveyer equipment was depreciated by the sum-of-theyears-digits (SYD) basis since it was acquired at the beginning of 2016 at a cost of $16.5 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2018, Whaley decided to switch to straight-line depreciation Required: For each situation 1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described ignore tax effects.) 2. Determine the amounts to be reported for each of the five Items shown below from the 2016 and 2017 financial statements when those amounts are reported again in the 2016-2018 comparative financial statements.

Answer 1

From the given information 2016 Closing inventory is ove slated - This will doblaje dhe fotos by! | Million Than actual - Then we need to decrease the profits of J016 by $11.9 million. In 2017 clocin noventoon se in 2017 closing Inventory is unde slated. Then we need ole on the we need to increase the Profito (2012 to and 9-1 Million when There is chance of liab en There is chance of liability expeose we will record in the Boolel al per Prudence concept. Then we will Recosnize $5.2 Milion a expense. Patent is a moritized over the benifited period. Therefore we will recognize the expens as follows 2016= 12.6-2.1 2012 - +2.6 = 2.1 Dal there is a change in accounting Policy we will give Retrospective effect De Preciation as sum of years Desil Method Straight line Methad 2016 generation 116.5.0 rsace - XS $5.5 Million 2016 Depreciation - 16.5 53.3 Million ST413नटेन Jola Repreciation. $3.3 million 2017 Depreciation = $16.50 ..x 4 =1464 million stu13+2+1 2016 Profil to be increased by $2.2 million (5.5 3.30 2017 Profil tube increased by $ 1.1 milion (4.4.3.3) woodw3.3) Tolal effect on Profil - Jolo (11.1+(5-2) +2.1)+2.2 = (16.2) Profil to be de Geases 2012 => [9.1+6.1) + 1-13 -+S) million Profit to be increased Tolal effect ($8.U Ha Tolal effect ( Recreauer in Profil of 2018 ($8.1) + 5-2 (Reversal Brovision Because 3-1 already -($2.9) Alle Relloded entu Dalilalos ad Jost MealAll- 529 illit To prior period atm $1.9 milion B Described in the above Paurasraphy