Question

Problem 20-8 Accounting changes; six situations (LO20-1, 20-3, 20-4] Described below are six independent and unreliated stuations involving accounting changes. Each change occurs during 2018 before any adjusting entries or closin entries were prepared Assume the tax rate for each company is 40% r, at years Any tax effects should be adjusted through the deferred tax lability account 30 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 awn ngs n 2017 were $4.400,000. Accordingly, warranty expense and a warranfy Bablity of $132,000 were recoided 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 $4,900,000, and warranty expenditures in 2018 totaled $111,475 b. On December 30, 2014, Rival Industries acquired its office building at a cost of $1,180,000. It was depreciated on a straight line basis assurming a useful ife 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 budding wll have a salvage value at that time of $790,000 С HOODS Bato Mech andrsing h changed rwentory cost methods touro from FI。nt the end of 2018 for both nanci l statement and income tax purposes Under FIFO, the inventory at January 1 2018, is $780,000 d. At the beginning of 205, the Hoffman Group purchased office equiment at a cost of $429,000 Its useful life was estimated to be 0 years with no salvage value. The equpment was depreciated by the sum of the -years digts method On January 1, 2018, the company changed to the straight-line method 9 e In Noversber 2016, the State of Minnesota tled sut against Hog Mandfactuiring Company, seeking penalties for violations of clean air laws. When the financial statements were issued in 2017 Hugns had not reached a settlement with state authorities, tbut legal counsel advised Huggins that t was probable the company would have to pay $290,000 in penalties following entry was recorded Accordingly. the Loss-litigation Liability-litigation 96,000 290,000 Late in 2018, a settlement was reached with state authoities to pay a total of $449,000 in t At the beginning or newly acquired of 2018, Jantren Specialties, which uses the sum of the years'-digits method, changed to the straight-ine buildings and equipment. The change increased current year net earnings by $544,000

Answer 1

Six Independent situations 1. Identify the type of change Type of change Event Change in estimate Change in estimate c. Change in accounting principle Change in accounting estimate resulting from a change in accounting principle Change in estimate Change in accounting principle ecessary as a direct result of the changee Debit in $ Credit in $ Event Particulars a1 Nojournal entry required Warranty expense a/c a(2) Dr. 98000 To Estimated warranty liability 98000 (warranty estimated) 4900000 x 2% b(1 No journal entry required b(2) Depreciation expense a/c Dr 60300 To Accumulated depreciation 60300 To record depreciation) Calculation of annual depreciation after the estimate change Cost 1180000 a depreciation (1180000/40) 29500 x 3 88500 Undepreciated cost 1091500 b New estimated salvage value 790000 To be depreciated 301500 remaining life New annual depreciation 60300 c1) Nojournal entry required (2) Nojournal entry required d(1) Nojournal entry required d(2) Depreciation expense a/c Dr 31200 To Accumulated depreciation 31200 To record depreciation)

Asset's cost 429000 Accumulated depreciation to date 210600 Undepreciated cost, Jan. 1, 2018 218400 Estimated residual value 0 To be depreciated over remaining 7 years 218400 7 Annual straight-line depreciation 2016-2022 31200 (10 + 9t 8 ) /55 = 0.4909 x 429000 = 210600 e(1) Loss-litigation a/c Dr. 159000 To Liability litigation 159000 (To estimate loss of litigation) 449000- 290000 159000 e(2) No journal entry required f1 No journal entry required f(2 No journal entry required c.This is a change in accounting principle that usually is reported prospectively hen a compaychanges to the LIFO inventory method from another inventory meth accounting records usually are insufficient to determine the cumulative income effect of the change necessary to retrospectively revise accounts. So, a company changing to LIFO usually reports the beginning inventory in the year the LIFO method is adopted ($780,000 in this case) as the base year inventory for all future LIFO calculations. The disclosure required is a note to the financial statements describing the nature of and justification for the change as well as an explanation as to why the retrospective application was impracticable d.This is a change in accounting estimate resulting from a change in accounting principle A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. Accordingly, the Hoffman Group reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from now on. The undepreciated cost remaining at the time of the change is depreciated straight line over the remaining useful life e.To revise the liability on the basis of the new estimate: Liability - litigation ($449,000- $290,000) $159,000 A disclosure note should describe the effect of a change in estimate on income from continuing operations, net income, and related per share amounts for the current period f.This is a change in accounting principle accounted for prospectively.Because the change will be effective only for assets placed in service after the date of change, the change doesn't affect assets depreciated in prior periods. The nature of and justification for the change should be described in the disclosure notes. Also, the effect of the change on the current period's financial statements should be disclosed