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Chapter 22: Question 4 (page 1305)
Identify and describe the approach the FASB requires for reporting changes in accounting principles.
FASB is an organization that regulates the accounting standards, and they believe that the best approach is retrospective.
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Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year鈥檚 income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon鈥檚 2017 journal entry to record the change in accounting principle.
(Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors.
______ 1. Change in a plant asset鈥檚 salvage value.
______ 2. Change due to overstatement of inventory.
______ 3. Change from sum-of-the-years鈥�-digits to straight-line method of depreciation.
______ 4. Change from presenting unconsolidated to consolidated financial statements.
______ 5. Change from LIFO to FIFO inventory method.
______ 6. Change in the rate used to compute warranty costs.
______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.
______ 8. Change in a patent鈥檚 amortization period.
______ 9. Change from completed-contract to percentage-of-completion method on construction contracts.
______ 10. Change from FIFO to average-cost inventory method.
Instructions For each change or error, indicate how it would be accounted for using the following code letters:
(a) Accounted for prospectively.
(b) Accounted for retrospectively.
(c) Neither of the above.
Joy Cunningham Co. purchased a machine on January 1, 2015, for $550,000. At that time, it was estimated that the machine would have a 10-year life and no salvage value. On December 31, 2018, the firm鈥檚 accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years鈥�-digits method for depreciating equipment. Instructions Prepare the general journal entries that should be made at December 31, 2018, to record these events. (Ignore tax effects.)
Palmer Co. is evaluating the appropriate accounting for the following items. 1. Management has decided to switch from the FIFO inventory valuation method to the LIFO inventory valuation method for all inventories. 2. When the year-end physical inventory adjustment was made for the current year, the controller discovered that the prior year鈥檚 physical inventory sheets for an entire warehouse were mislaid and excluded from last year鈥檚 count. 3. Palmer鈥檚 Custom Division manufactures large-scale, custom-designed machinery on a contract basis. Management decided to switch from the completed-contract method to the percentage-of-completion method of accounting for longterm contracts. Identify and explain whether each of the above items is a change in accounting principle, a change in estimate, or an error
Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.
Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 \(100,000 \) 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000
Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?
(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?
(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?
(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?
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