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.

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 2% of sales. Sales of the awnings in 2017 were $4,200,000. Accordingly, warranty expense and a warranty liability of $84,000 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: 1% of sales rather than 2%. Sales of the awnings in 2018 were $4,700,000, and warranty expenditures in 2018 totaled $106,925.

On December 30, 2014, Rival Industries acquired its office building at a cost of $1,140,000. 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 $770,000.

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 $760,000.

At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $407,000. 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.

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 $270,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	270,000
Liability—litigation		270,000

Late in 2018, a settlement was reached with state authorities to pay a total of $427,000 in penalties.

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 $522,000.

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 2018 related to the situation described.
  

Answer 1

Situation 1)

1)

This is the case of "Change in Estimate".

____

2)

No journal entry is required as a result of the change.

The adjusting entry for 2018 is provided as below:

Date	Account Titles	Debit	Credit
2018 Adjusting Entry	Warranty Expense (4,700,000*1%)	$47,000
	Estimated Warranty Liability		$47,000

_____

Situation 2)

1)

This is the case of "Change in Estimate".

____

2)

No journal entry is required as a result of the change.

The adjusting entry for 2018 is provided as below:

Date	Account Titles	Debit	Credit
2018 Adjusting Entry	Depreciation Expense	$56,900
	Accumulated Depreciation		$56,900

The value of depreciation for 2018 is calculated as below:

Annual Depreciation Upto 2017 = Cost/Original Estimated Life = 1,140,000/40 = $28,500

Book Value at the Beginning of 2018 = Cost - Depreciation for 2015 - Depreciation for 2016 - Depreciation for 2017 = 1,140,000 - 28,500 - 28,500 - 28,500 = $1,054,500

Revised Annual Depreciation = (Book Value at the Beginning of 2018 - Salvage Value at 2022)/Revised Estimated Life = (1,054,500 - 770,000)/5 = $56,900

_____

Situation 3)

1)

This is the case of "Change in Accounting Principle".

____

2)

No journal entry is required as a result of the change.

No adjusting entry is required to be made for 2018.

_____

Situation 4)

1)

This is the case of "Change in Accounting Estimate resulting from a Change in Accounting Principle".

____

2)

No journal entry is required as a result of the change.

The adjusting entry for 2018 is provided as below:

Date	Account Titles	Debit	Credit
2018 Adjusting Entry	Depreciation Expense	$29,600
	Accumulated Depreciation		$29,600

The value of depreciation for 2018 is calculated as below:

Depreciation for Year 2015 = Cost*10/55 = 407,000*10/55 = $74,000

Depreciation for Year 2016 = Cost*9/55 = 407,000*9/55 = $66,600

Depreciation for Year 2017 = Cost*9/55 = 407,000*8/55 = $59,200

From year 2018 onwards the value of revised depreciation will be $29,600 calculated as below:

Book Value at the Beginning of 2018 = Cost - Depreciation for Year 2015 - Depreciation for Year 2016 - Depreciation for Year 2017 = 407,000 - 74,000 - 66,600 - 59,200 = $207,200

Depreciation for 2018 = Book Value at the Beginning of 2018/Remaining Useful Life = 207,200/7 = $29,600

_____

Situation 5)

1)

This is the case of "Change in Estimate".

____

The journal entry as a result of the change is provided below:

Account Titles	Debit	Credit
Loss-Litigation (427,000 - 270,000)	$157,000
Liability-Litigation		$157,000

No adjusting entry is required to be made for 2018.

_____

Situation 6)

1)

This is the case of "Change in Accounting Principle".

____

2)

No journal entry is required as a result of the change.

No adjusting entry is required to be made for 2018.