Question

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.

1. 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 2% of sales. Sales of the awnings in 2020 were $2,600,000. Accordingly, warranty expense and a warranty liability of $52,000 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: 1% of sales rather than 2%. Sales of the awnings in 2021 were $3,100,000, and warranty expenditures in 2021 totaled $70,525.
2. On December 30, 2017, Rival Industries acquired its office building at a cost of $820,000. 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 $610,000.
3. 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 $600,000.
4. At the beginning of 2018, the Hoffman Group purchased office equipment at a cost of $231,000. 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.
5. 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 $110,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	110,000
Liability—litigation		110,000

Late in 2021, a settlement was reached with state authorities to pay a total of $251,000 in penalties.

6. 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 $346,000.

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.
  

Answer 1

1) and 2)
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 (1% x $3,100,000)	31000
Estimated warranty liability		31000
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	29700
Accumulated depreciation		29700
Initial cost of building	$ 820,000.00
Old depreciation ($820,000 ÷ 40 years) = $20500
Depreciation to date (2018-2021) = $20500 x 3years	$   61,500.00
Undepreciated cost	$ 758,500.00
New estimated salvage value	$(610,000.00)
To be depreciated	$ 148,500.00
Estimated remaining life (2021-2025)	$            5.00	years
New annual depreciation	$   29,700.00
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	16800
Accumulated depreciation		16800
Initial cost of building	231000
Accumulated depreciation to date  $231000x (10+9+8)/55 =	-113400
Undepreciated cost	117600
New estimated salvage value	0
To be depreciated	117600
Estimated remaining life (10-3)	7	years
New annual depreciation	16800
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	141000
Liability - Litigation($251,000 -$110,000)		141000
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.