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 3% of sales. Sales of the awnings in 2020 were $3,800,000. Accordingly, warranty expense and a warranty liability of $114,000 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: 2% of sales rather than 3%. Sales of the awnings in 2021 were $4,300,000, and warranty expenditures in 2021 totaled $97,825.
2. On December 30, 2017, Rival Industries acquired its office building at a cost of $1,060,000. 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 $730,000.
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 $720,000.
4. At the beginning of 2018, the Hoffman Group purchased office equipment at a cost of $363,000. 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 $230,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	230,000
Liability—litigation		230,000

Late in 2021, a settlement was reached with state authorities to pay a total of $383,000 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 $478,000.

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

Answer:-

Accounting Change: An Accounting change is a change in accounting principle, accounting estimate, or the reporting entity. These changes can trigger modifications in the reported profits or other financial aspects of a business. In more detail:

• A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle. A change in principle does not occur when there is an initial adoption of an accounting principle caused by transactions occurring for the first time. This is a relatively rare occurrence.

• A change in accounting estimate is a change that adjusts the carrying amount of an existing asset or liability, or which alters subsequent accounting for either existing or future assets or liabilities. Accounting estimates that are commonly changed include reserves for uncollectible receivables, warranty obligations, and inventory obsolescence. Accounting estimates may occur as frequently as every reporting period.

• A change in reporting entity is a change that results in financial statements that are effectively those of a different reporting entity. This usually involves changing from individual to consolidated reporting or altering the subsidiaries that make up a group of entities whose results are consolidated.

Question (A)
There is change in accounting estimate. The adjustment entry follows
Particulars		Debit	Credit
Warranty Expense A/c	Dr	86000
To Estimated warranty liability			86000
(4,300,000*2%)
Question (B)
There is change inaccounting estimate. The adjustment entry follows
Particulars		Debit	Credit
Depreciation a/c	Dr	50100
To Accumulated Depreciation			50100
Calculate the value of Change in Depreciation
Sl No	Particulars		Amount
1	Cost Value of Building		1060000
2	No.of Years		40
3	Completed Years		3
4	Salvage Value		0
5	Depreciation per year ((1-4)/2)		26500
6	Accumulated Depreciation (5 x 3)		79500
7	Carrying Value of Asset on 2021 (1-6)		980500
8	Remaining Estimated Life		5
9	New Salvage Value		730000
10	New Annual Depreciation (7-9)/5		50100
Question (C)
There is change in accounting principle
No entry is needed to record the change. When a company changes to the LIFO to FIFO method
accounting records usually are insufficient to determine the cumulative income effect of the
change necessary to retrospectively revise accounts.
A company changing to LIFO method usually reports the beginning inventory in the year the LIFO
method is adopted as the base inventory for all the futute LIFO calculations. The disclosure required
is a footnote to the financial statements describing the nature of and justification for the change
as well as an explanation as to why the retrospective application was impracticable.
Question (D)
There is change in accounting estimate. The adjustment entry follows
Particulars		Debit	Credit
Depreciation a/c	Dr	26400
To Accumulated Depreciation			26400
Calculate the value of Change in Depreciation
Particulars		Amount		Dep Base	Life of Asset	Dep Fraction	Dep Exp
Cost value of asset		363000		363000	10	10/55	66,000
Less: Accumulated Depreciation (Sum of years)		178200		363000	9	9/55	59,400
Carrying Value (363000-178200)		184800		363000	8	8/55	52,800
Remaining Life of Asset		7					1,78,200
New Depreciation (SLM)		26400
Question (E)
There is change in accounting estimate. The adjustment entry follows
Particulars		Debit	Credit
Loss - Litigation	Dr	153000
To Liability-Litigation			153000
(383000-230000)
A Disclosure note should describe the effect of change in estimate on income
before extra ordinary items, net income & Related earnings per share
Question (F)
This is a change in accounting principle accounted for prospectively. Because 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. The nature and
justification for the change should be described in the disclosure notes. The effect
of the change on the current periods financial statements should be disclosed.