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Chapter 22: Question 14 (page 1306)
Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.
The counterbalancing errors can be offset in 2 weeks, and non-counterbalancing errors offset in the next accounting period.
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Holder-Webb Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015鈥�2017. Net Income Computed Using Average-Cost Method FIFO Method LIFO Method 2015 \(15,000 \)19,000 $12,000 2016 18,000 23,000 14,000 2017 20,000 25,000 17,000 Instructions (Ignore all tax effects.) (a) Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2018. (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle. (c) Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2015鈥� 2017. In 2018, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.
(Change in Principle鈥擫ong-Term Contracts) Cullen Construction Company, which began operations in 2017, changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows.
Pretax Income Percentage-of-Completion Completed-Contract Difference 2017 \(880,000 \)590,000 $290,000 2018 900,000 480,000 420,000
Instructions (a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?
Tedesco Company changed depreciation methods in 2017 from double-declining-balance to straight-line. Depreciation prior to 2017 under double-declining-balance was \(90,000, whereas straight-line depreciation prior to 2017 would have been \)50,000. Tedesco鈥檚 depreciable assets had a cost of \(250,000 with a \)40,000 salvage value, and an 8-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Tedesco鈥檚 depreciable assets
Below is the net income of Anita Ferreri Instrument Co., a private corporation, computed under the three inventory methods using a periodic system. FIFO Average-Cost LIFO 2015 \(26,000 \)24,000 $20,000 2016 30,000 25,000 21,000 2017 28,000 27,000 24,000 2018 34,000 30,000 26,000
Instructions (Ignore tax considerations.) (a) Assume that in 2018 Ferreri decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2018, and show net income reported for 2015, 2016, 2017, and 2018.
(b) Assume that in 2018 Ferreri, which had been using the LIFO method since incorporation in 2015, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2018 and show net income reported for 2015, 2016, 2017, and 2018
Peter Henning Tool Company鈥檚 December 31 year-end financial statements contained the following errors.
December 31, 2017 December 31, 2018
Ending inventory \(9,600 understated \)8,100 overstated
Depreciation expense \(2,300 understated 鈥�
An insurance premium of \)66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017.
In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019.
There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
Instructions
(a) Compute the total effect of the errors on 2018 net income.
(b) Compute the total effect of the errors on the amount of Henning鈥檚 working capital at December 31, 2018.
(c) Compute the total effect of the errors on the balance of Henning鈥檚 retained earnings at December 31, 2018.
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