Question

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. 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.
2. 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.

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

____________________________________________________________________

Prepare any journal entry as a direct result:

Trn.	General Journal	Debit	Credit
a	No entry
b	No entry

Prepare Adjusting Entry as follows:

Compute Annual straight-Line depreciation:
Cost of the Asset	$264,000
Accumulated depreciation	($129,600)
[$264000 × (10+9+8)/55]
Undepreciated cost, Jan. 01, 2018	$134,400
Less: Estimated residual value	-
Cost to be depreciated over remaining 7 years		$134,400
Number of years to be depreciate		7
Annual straight line depreciation		$19,200

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