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.

1. 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 4% of sales. Sales of the awnings in 2017 were $2,800,000. Accordingly, warranty expense and a warranty liability of $112,000 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: 3% of sales rather than 4%. Sales of the awnings in 2018 were $3,300,000, and warranty expenditures in 2018 totaled $75,075.
2. On December 30, 2014, Rival Industries acquired its office building at a cost of $860,000. 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 $630,000.
3. 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 $620,000.
4. At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $253,000. 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.
5. 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 $130,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	130,000
Liability—litigation		130,000

Late in 2018, a settlement was reached with state authorities to pay a total of $273,000 in penalties.

6. 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 $368,000.

  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.

1. Record Journal Entry as direct result of change.

2. Record adjusting entry for change in warranty.

3. as a direct result of the change.

4. Adjusting entry for depreciation.

5. a direct result of the change.

6. adjusting entry for change in inventory cost method.

7. as a direct result of the change.

8. adjusting entry for depreciation.

9. as a direct result of the change.

10. as a direct result of the change.

11. adjusting entry for change in depreciation method from sum-of-the-years'-digits method to straight-line method.

Answer 1

a) This is a estimate change.
1) Record journal entry as a direct result of the change.
No entry
2)Record adjusting entry for change in warranty.
Warranty expense (3% x $3,300,000)	99,000.00
Estimated warranty liability		99,000.00
b) This is a change in estimate.
3) Record journal entry as a direct result of the change.
No entry
4)  Record adjusting entry for depreciation.
Depreciation expense	33100
Accumulated depreciation		33100
Initial cost of building	$ 860,000.00
Old depreciation ($860,000 ÷ 40 years) = $21500
Depreciation to date (2015-2018) = $21500 x 3years	$   64,500.00
Undepreciated cost	$ 795,500.00
New estimated salvage value	$(630,000.00)
To be depreciated	$ 165,500.00
Estimated remaining life (2018-2022)	$            5.00	years
New annual depreciation	$   33,100.00
C) This is a change in accounting Principle that should be recorded
5) Record journal entry as a direct result of the change
No entry
6) Record the adjusting entry for change in inventory cost method.
No entry
When a company changes to the LIFO inventory method from another inventory method, accounting records usually are insufficient to determine the cumulative income effect of the change necessary.
d) This is a change in accounting estimate resulting from a change in accounting principle.
7) Record journal entry as a direct result of the change.
No Entry
8)Record adjusting entry for depreciation.
Depreciation expense	18400
Accumulated depreciation		18400
Initial cost of building	253000
Accumulated depreciation to date  $253000x (10+9+8)/55 =	-124200
Undepreciated cost	128800
New estimated salvage value	0
To be depreciated	128800
Estimated remaining life (10-3)	7	years
New annual depreciation	18400
e)This is a change in estimate.
9) Record journal entry as a direct result of the change.
No Entry
10)Record the adjusting entry for revision of liability.
Loss- Litigation	143000
Liability - Litigation($273,000 -$130,000)		143000
f)This is a change in accounting principle
11) Record journal entry as a direct result of the change.
No Entry
12)Record the adjusting entry for change in depreciation method from sum-of-the-years’-digits method to straight-line method.
No Entry
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.