In: Accounting
Each change occurs during 2021 before any adjusting entries or
closing entries were prepared. Assume the...
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.
- 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 $2,900,000. Accordingly, warranty expense and
a warranty liability of $58,000 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 $3,400,000, and
warranty expenditures in 2021 totaled $77,350.
- On December 30, 2017, 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 2021 to relocate
the company headquarters at the end of 2025. The vacated office
building will have a salvage value at that time of $640,000.
- 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 $630,000.
- At the beginning of 2018, 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, 2021, the
company changed to the straight-line method.
- 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 $140,000 in penalties. Accordingly, the following
entry was recorded:
|
|
|
Loss—litigation |
140,000 |
|
Liability—litigation |
|
140,000 |
|
Late in 2021, a settlement was reached with state authorities to
pay a total of $284,000 in penalties.
- 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 $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 2021
related to the situation described.