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 2% of sales. Sales of the awnings in 2017 were $2,900,000. Accordingly, warranty expense and a warranty liability of $58,000 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: 1% of sales rather than 2%. Sales of the awnings in 2018 were $3,400,000, and warranty expenditures in 2018 totaled $77,350.
B. On December 30, 2014, Rival Industries acquired its office building at a cost of $880,000. 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 $640,000.
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 $630,000.
D. At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $264,000. 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 $140,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation 140,000
Liability—litigation 140,000

Late in 2018, a settlement was reached with state authorities to pay a total of $284,000 in penalties.

At the beginning of 2018, 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 $379,000.

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 2018 related to the situation described.

Answer 1

1)IDENTIFY THE TYPES OF CHANGE

S.L	TYPE OF CHANGE
a	change in estimate
b	change in estimate
c	change in accounting principle that usually is reported prospectively
d	change in accounting estimate resulting from change in accounting principle
e	change in estimate
f	change in accounting principle accounted for prospectively

2) JOURNAL ENTRIES

DATE	GENERAL JOURNAL	DEBIT$	CREDIT$
a	No entry required to record the change
b	No entry required to record the change
c	No entry required to record the change
d	No entry required to record the change
e	loss-litigation(2,84,000-1,40.000)	1,44,000
	liability		1,44,000
	To record the litigation liability
f	No entry required to record the change
	This is because, the change will be effective only on assets placed in service after the change of date

ADJUSTING ENTRIES:-

DATE	GENERAL JOURNAL	DEBIT$	CREDIT$
	Warrenty expoenses	68,000
	TO estimated warranty liability (3,4,00,000*2%)		68,000
	To record the warranty expenses
b	depreciation exp	34,800
	To accumulated depreciation (note1)		34,800
	To record the dep exp
c	No entry required.A disclosure is required in foot note
d	depreciation expenses	19,200
	To accumulated dep (note 2)		19,200
	To record the dep exp
e	No entry required.A disclosure is required
f	the nature and justification for the change should be disclosed in disclosure note

NOTE

1) CALCULATION OF ANNUAL DEPRECIATION AFTER ESTIMATED CHANGE:

Cost of the asset		8,80,00
less:dep	22,000
(8,80,000/40 years)
no of yrs for dep(2013-15)	3
accumulated dep		(66,000)
undepreciated cost		8,14,000
new estimated salvage value		(6,40,000)
cost to be depreciated		1,74,000
estimated remaining life		5
NEW ANNUAL DEPRECIATION		34,800

2)CALCULATE THE ANNUAL STRAIGHT LINE DEPRECIATION

Cost of asset	2,64,000
accumulated dep	(1,29,600)
(2,64,000*(10+9+8)/55)
underpreciated cost	1,34,400
less-estimated residuakl value
cost to be depreciated over remaining 7 years		1,34,400
no of years to depreciate		7
ANNUAL STRAIGHT LINE DEPRECIATION		19,200