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 $740 820 2016 Liabilities S330 400 Shareholdere Equity 5410 Net Income $210 230 $150 420 In 2018, the following situations occurred or came to light a. 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 2017 Inventory Overstated by Understated by $12 million $10 million b. A liability was accrued in 2016 for a probable payment of $7 million in connection with a lawsuit ultimately settled in December 2018 for $4 million CA patent costing $18 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired. d. 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 $30 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. lgnore tax effects.) 2. Determine the amounts to be reported for each of the five items shown above from the 2016 and 2017 financial statements when those amounts are reported again in the 2016-2018 comparative financial statements. Complete this question by entering your answers in the tabs below Required 1 Required 2 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) (Enter your answers in milions. If no entry is required for a transaction event, select "NO journal entry required in the first account field.) View transaction lit Journal entry worksheet Record entry necessary as a direct result of the change or error correction te det before cred < Prev 2 of 2 !!! Next

Answer 1

ANSWER

(1) Date Account Title and Explanation Post Ref. Debit Credit 2018 $10,000,000 Inventory Retained earnings To record error correction) $10,000,000 • Inventory is an asset and it is understated by $10million in 2017. In order to adjust it, W distributors need to debit the inventory by $10million in 2018. . Due to understatement $10million of inventory in 2017, income also understated by the same amount in 2017. In order to correct it, retained earnings account must be credited to increase the earnings by $10million.

During 2016, a liability-litigation of $7million is created and credited, simultaneously loss on litigation also recorded. But in 2018, lawsuit is finally settled with $4 million. In 2018. gain on litigation must be recorded to correct the loss on litigation recorded in 2016. Post Date Account Title and Explanation Debit Credit Ref. 2018 Liability - litigation $7,000,000 Gain- litigation($700,000 - $400,000) $3,000,000 Cash $4,000,000 (To record gain on litigation) • Liability - litigation is an expense. There is a decrease in liability value. Therefore, it is debited. • Gain on litigation would increase the equity value; thereby the loss on litigation of $300,000 would be compensated. Therefore, Gain on litigation is credited. Cash is an asset. There is a decrease in asset value. Therefore, it is credited

c) Post Date Account Title and Explanation Debit Credit Ref. 2018 Retained earnings $6,000,000 Patent $18 million $6,000,000 (To record the change in inventory value) • In order to amortize the patent for 2 years (2016 and 2017), retained earnings must be debited to decrease the equity value. • Patent is an asset. There is a decrease in asset value. Therefore, it is credited.

Adjustment entry for the year 2018: Date Account Title and Explanation Post Ref. Debit Credit 2018 $3,000,000 Patent amortization expense Patent ($18 million ovear (To record amortization expense) -Xlyear $3,000,000 • Patent amortization expense is an expense account. In order to record the patent amortization expense of the year 2018, $3,000,000 has been debited. • Patent is an asset. There is a decrease in asset value. Therefore, it is credited.

d) No Journal entry to record the change

Sum of the years' digits depreciation: First sum the digits in the year of the assets' useful life. (1+2+3+4+5=15). For the first and second year the depreciable amount is ( $30,000,000~ 4 15 ) 518,000,000. Calculate the depreciation value over remaining 3 years: Particulars | Amount Cost of the asset $30,000,000 Less Accumulated depreciation to date $18,000,000 Un depreciated cost, Jan 1, 2018 $12,000,000 Estimated residual value To be depreciated over remaining 3 $12,000,000 vears $0 Hence, the calculated depreciation value over remaining 3 years is $12,000,000

Calculate the annual straight-line depreciation: The calculated depreciation value over remaining 3 years is $12,000,000 and remaining years are 3 years. Now, calculate the annual straight-line depreciation: Depreciation value Annual straight over remaining 3 years -line depreciation Remaining years $12,000,000 3 years = $4,000,000 Hence, the calculated annual straight-line depreciation is $4,000,000

Adjustment journal 2018: Post Date Account Title and Explanation Debit Credit Ref. Depreciation expense $4,000,000 Accumulated depreciation $4,000,000 To record adjusting depreciation entry) Depreciation expense is an expense. There is a decrease in liability value. Therefore, it is debited. • Accumulated depreciation is a contra asset. There is a decrease in asset value.

Determine the amount to be reported for each of the given five items of financial statements when those amounts are reported again in 2016-2018 comparative financial statements. Particulars 2016 2016 inventory Loss contingency Patent Deprecation Shareholders' Assets Liability equity et income Expenses $740 $330_ $410 $210 $150 (12) (12) (12) $12 No adjustment to prior years (3) (3) (3) (3) $3 No adjustment to prior years $725 $330 $395 $195 $165

Particulars 2017 2016 inventory 2017 inventory Loss contingency Patent Deprecation Assets Liability/Shareholders' Net income Expenses equity $820 $400 $4201 $2301 $175 $12 ($12) $101 $10 ($10) ($10) No adjustment to prior years ($6 ($6 ($) $3 No adjustment to prior years $824 $400 $424 $249 $156

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