Question

Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2018 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 40% in all years. Any tax effects should be adjusted through the deferred tax liability account. 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 4% of sales. Sales of the awnings in 2017 were $3,700,000. Accordingly, warranty expense and a warranty liability of $148,000 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: 3% of sales rather than 4%. Sales of the awnings s in 2018 totaled $95,550 in 2018 were $4.200,000, and warranty expenditure b. On December 30, 2014, Rival Industries acquired its office building at a cost of $1,040,000. 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 $720,000 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 $710,000 d. At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $352,000. 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 $220,000 in penalties. Accordingly, the following entry was recorded

Answer 1

(I) Identify the type of Change
a.	This is a change in estimate.
b.	This is a change in estimate.
c.	Change in the method of valuation of inventory is change in accounting policy and shall be applied propspectively.
d.	Change in the accounting estimate resulting from change in the accounting policy
e.	Change in the method of valuation of inventory is change in accounting policy and shall be applied propspectively.
f.	Change in accounting policy and shall be accuouted propspectively.
(b)			Dr	Cr
Journal entry to record the change
a.	No entry is needed to record the change
b.	No entry is needed to record the change
c.	No entry is needed to record the change
d.	No entry is needed to record the change
e.	Loss- Litigation [372000-220000]		$      152,000.00
	Liability- Litigation			$ 152,000.00
	[Liability litigation recorded]
f.	No entry is needed to record the change
Adjusting Journal Entry			Dr	Cr
a	Warranty expense		$      168,000.00
	Estimated Warranty Liability			$ 168,000.00	[4200000*4%]
	(to record the warranty expense)
b	Depreciation expense		$        48,400.00		[WN1]
	Accumulated depreciation			$    48,400.00
	(To record the depreciation expense)
c.	No entry is required
	Disclosure is required in the footnote of the Financial statements regarding the change in
	the method of valuation of inventory and is being applied prospectively.
d	Depreciation expense		$        25,600.00		[WN2]
	Accumulated depreciation			$    25,600.00
	(To record the depreciation expense)
e	No entry is required
	Disclosure is required in the footnote of the Financial statements
f	No entry is required
	Nature and Justification for the change should be disclosed in the financial statements
WN1	Calculation of annual depreciation after the estimated change
	Cost of the Asset		$ 1,040,000.00
	Less: Depreciation Expense per year [10.4Lacs/40 year]	$    26,000.00
	No of years for Depreciation (2015-2017)	$               3.00
	Accumulated Depreciation		$        78,000.00
	Undepreciated Cost		$      962,000.00
	new Estimated Salvage Value		$    (720,000.00)
	Cost to be depreciated		$      242,000.00
	Estimated Remaining life (2018-22)		$                   5.00
	New Annual depreciation		$        48,400.00
WN2	Calculation of annual depreciation after the estimated change
	Cost of the Asset	$ 352,000.00
	Less: Accumulated Depreciation [352000*(10+9+8)/55]	$ 172,800.00
	Undepreciated Cost as on 01.01.2018	$ 179,200.00
	new Estimated Salvage Value	$                   -
	Cost to be depreciated		$      179,200.00
	Estimated Remaining life [10year-3 years]		$                   7.00
	New Annual depreciation		$        25,600.00