ACCT 302 Connect Homework 20 Accounting Changes & Error Corrections Assignment solutions answers

ACCT 302 Connect Homework 20 Accounting Changes & Error Corrections Assignment solutions complete answers 

 

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In 2021, the Barton and Barton Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2020, B & B’s inventories were $33.0 million (FIFO). B & B’s records indicated that the inventories would have totaled $24.3 million at December 31, 2020, if determined on an average cost basis.
 
Ignoring income taxes, what journal entry will B & B use to record the adjustment in 2021? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

 

Irwin, Inc. constructed a machine at a total cost of $68 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The residual value is expected to be $2 million. At the beginning of 2021, Irwin decided to change to the straight-line method.
 
Ignoring income taxes, prepare the journal entry relating to the machine for 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

 

Three programmers at Feenix Computer Storage, Inc., write an operating systems control manual for Hill-McGraw Publishing, Inc., for which Feenix receives royalties equal to 12% of net sales. Royalties are payable annually on February 1 for sales the previous year. The editor indicated to Feenix on December 31, 2021, that book sales subject to royalties for the year just ended are expected to be $340,000. Accordingly, Feenix accrued royalty revenue of $40,800 at December 31 and received royalties of $41,340 on February 1, 2022.
 
What adjustments, if any, should be made to retained earnings or to the 2021 financial statements? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

In 2021, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $240,000 cost of a equipment purchased on January 1, 2018. The equipment’s useful life was expected to be four years with no residual value. Straight-line depreciation is used by PKE.
 
Ignoring income taxes, prepare the journal entry PKE use to correct the error. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2021. The inventory as reported at the end of 2020 using LIFO would have been $68,000 higher using FIFO. Retained earnings at the end of 2020 was reported as $860,000 (reflecting the LIFO method). The tax rate is 35%.
 
Required:
1. Calculate the balance in retained earnings at the time of the change (beginning of 2021) as it would have been reported if FIFO had been used in prior years.
2. Prepare the journal entry at the beginning of 2021 to record the change in accounting principle.

 

Wardell Company purchased a mini computer on January 1, 2019, at a cost of $45,100. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,600. On January 1, 2021, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.

Required:
1. Prepare the appropriate adjusting entry for depreciation in 2021 to reflect the revised estimate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

 

2. Prepare the appropriate adjusting entry for depreciation in 2021 to reflect the revised estimate, assuming that the company uses the sum-of-the-years'-digits method instead of the straight-line method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations and round your final answers to nearest whole dollar.)

 

Below are three independent and unrelated errors.
 

a.   On December 31, 2020, Wolfe-Bache Corporation failed to accrue salaries expense of $1,800. In January 2021, when it paid employees for the December 27–January 2 workweek, Wolfe-Bache made the following entry:
 

 
 
 
Salaries expense
1,800
 
Cash
 
1,800
 
b.   On the last day of 2020, Midwest Importers received a $90,000 prepayment from a tenant for 2021 rent of a building. Midwest recorded the receipt as rent revenue. The error was discovered midway through 2021.

c.    At the end of 2020, Dinkins-Lowery Corporation failed to accrue interest of $8,000 on a note receivable. At the beginning of 2021, when the company received the cash, it was recorded as interest revenue.


Required:
For each error:

1. What would be the effect of each error on the income statement and the balance sheet in the 2020 financial statements?
2. Prepare any journal entries each company should record in 2021 to correct the errors.

 

Shown below are net income amounts as they would be determined by Weihrich Steel Company by each of three different inventory costing methods ($ in thousands).
 

 
FIFO
Average Cost
LIFO
Pre-2020
$
2,760
 
 
$
2,500
 
$
2,240
 
2020
 
730
 
 
 
620
 
 
530
 
 
$
3,490
 
 
$
3,120
 
$
2,770
 
 
Required:

1. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to average cost. Prepare the journal entry to record the change in accounting principle. (Ignore income tax effects.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

 

2. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to LIFO. Assume accounting records are inadequate to determine LIFO information prior to 2021. Therefore, the 2020 ($530) and pre-2020 ($2,240) data are not available. Prepare the journal entry to record the change in accounting principle. (Ignore income tax effects.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

 

3. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to LIFO cost. Weihrich's records of inventory purchases and sales are not available for several previous years. Therefore, the pre-2020 LIFO information ($2,240) is not available. However, Weihrich does have the information needed to apply LIFO on a prospective basis beginning in 2020. Prepare the journal entry to record the change in accounting principle. (Ignore income tax effects.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

 

During 2019 and 2020, Faulkner Manufacturing used the sum-of-the-years’-digits (SYD) method of depreciation for its depreciable assets, for both financial reporting and tax purposes. At the beginning of 2021, Faulkner decided to change to the straight-line method for both financial reporting and tax purposes. A tax rate of 25% is in effect for all years.
 
For an asset that cost $22,100 with an estimated residual value of $1,100 and an estimated useful life of 10 years, the depreciation under different methods is as follows:
 

Year
Straight Line
SYD
Difference
2019
 
$
2,100
 
$
3,818
 
 
$
1,718
 
2020
 
 
2,100
 
 
3,436
 
 
 
1,336
 
 
 
$
4,200
 
$
7,254
 
 
$
3,054
 
 
   
Required:
1. Prepare the journal entry that Faulkner will record in 2021 related to the change.
2. Suppose instead that Faulkner previously used straight-line depreciation and changed to sum-of-the-years’- digits in 2021. Prepare the journal entry that Faulkner will record in 2021 related to the change.

 

Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2021 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 25% 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 2020 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 2020 were $4,300,000. Accordingly, warranty expense and a warranty liability of $172,000 were recorded in 2020. In late 2021, 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 in 2021 were $4,800,000, and warranty expenditures in 2021 totaled $109,200.

b.   On December 30, 2017, Rival Industries acquired its office building at a cost of $1,160,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2021 to relocate the company headquarters at the end of 2025. The vacated office building will have a salvage value at that time of $780,000.

c.    Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2021 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2021, is $770,000.

d.   At the beginning of 2018, the Hoffman Group purchased office equipment at a cost of $418,000. 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, 2021, the company changed to the straight-line method.

e.   In November 2019, 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 2020, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $280,000 in penalties. Accordingly, the following entry was recorded:

 

 
 
 
Loss—litigation
280,000
 
Liability—litigation
 
280,000
 
 
Late in 2021, a settlement was reached with state authorities to pay a total of $438,000 in penalties.
 

f.     At the beginning of 2021, 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 $533,000.

 
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 2021 related to the situation described.