Question

Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2016 and 2017, reported the following amounts and subtotals ($ in millions): Assets Liabilities Shareholders' Equity Net Income Expenses 2016 $ 690 $ 305 $ 385 $ 185 $ 145 2017 770 375 395 205 170 In 2018 the following situations occurred or came to light: Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2016 inventory Overstated by $ 11.5 million 2017 inventory Understated by $ 9.5 million A liability was accrued in 2016 for a probable payment of $6.0 million in connection with a lawsuit ultimately settled in December 2018 for $3.5 million. A patent costing $15.0 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired. Whaley’s conveyer equipment was depreciated by the sum-of-the-years’-digits (SYD) basis since it was acquired at the beginning of 2016 at a cost of $22.5 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2018, Whaley decided to switch to straight-line depreciation. Required: For each situation: 1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. (Ignore tax effects.) 2. Determine the amounts to be reported for each of the five items shown below from the 2016 and 2017 financial statements when those amounts are reported again in the 2016–2018 comparative financial statements.

Answer 1

Whaley Distributors (in million $) Journal Enteries Trans. Particulars al. Inventory a/c To Retained earnings Dr. Debit in $ Credit in $ 9.5 9.5 Assets 690 -11.5 Shareholders Liabilities Equity 305 385 -11.5 Net Income Expenses 185 145 -11.5 11.5 Particulars 2016 2016 Inventory Loss contingency Patent amortization Depreciation a2. No journal entry required -2.5 -2.5 -2.5 2.5 bl. Dr. 371 Liability-Litigation a/c To Gain-Litigation To Cash 676 770 305 375 2.5 171 205 11.5 159 170 -11.5 -9.5 3,5 9.5 9.5 2017 2017 Inventory 2018 Inventory Loss contingency Patent amortization Depreciation b2. No journal entry required -2.5 223.5 Dr. 2.5 151.5 cl. 774.5 375 Retained earnings a/c To Patent 15 x 2/6 c2. 2.5 Patent amortization expense a/c Dr. To Patent dl. No journal entry required d2. Depreciation expense a/c Dr. To Accumulated depreciation syd = ( 5+4 +3+2+1) = 15 22.5 / 15 = 1.5 x 5 + 1.5 x 4 = 13.5 22.5 - 13.5 = 9/3 = 3

Whaley Distributors (in million $) Journal Enteries Trans. Particulars al. Inventory a/c To Retained earnings Dr. Debit in $ Credit in $ 9.5 9.5 Assets 690 -11.5 Shareholders Liabilities Equity 305 385 -11.5 Net Income Expenses 185 145 -11.5 11.5 Particulars 2016 2016 Inventory Loss contingency Patent amortization Depreciation a2. No journal entry required -2.5 -2.5 -2.5 2.5 bl. Dr. 371 Liability-Litigation a/c To Gain-Litigation To Cash 676 770 305 375 2.5 171 205 11.5 159 170 -11.5 -9.5 3,5 9.5 9.5 2017 2017 Inventory 2018 Inventory Loss contingency Patent amortization Depreciation b2. No journal entry required -2.5 223.5 Dr. 2.5 151.5 cl. 774.5 375 Retained earnings a/c To Patent 15 x 2/6 c2. 2.5 Patent amortization expense a/c Dr. To Patent dl. No journal entry required d2. Depreciation expense a/c Dr. To Accumulated depreciation syd = ( 5+4 +3+2+1) = 15 22.5 / 15 = 1.5 x 5 + 1.5 x 4 = 13.5 22.5 - 13.5 = 9/3 = 3