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	$	730		$	325		$	405		$	205		$	149
2017		810			395			415			225			174

In 2018 the following situations occurred or came to light:

1. 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	$	11.9	million
2017 inventory	Understated by	$	9.9	million

2. A liability was accrued in 2016 for a probable payment of $6.8 million in connection with a lawsuit ultimately settled in December 2018 for $3.9 million.
3. A patent costing $17.4 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired.
4. 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 $28.5 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.

1)Record entry necessary as a direct result of the change or error correction.

2)Record adjusting journal entry if needed for 2018.

3)Record entry necessary as a direct result of the change or error correction.

4)Record adjusting journal entry if needed for 2018.

5)Record entry necessary as a direct result of the change or error correction.

6)Record adjusting journal entry if needed for 2018.

7)Record entry necessary as a direct result of the change or error correction.

8) Record adjusting journal entry if needed for 2018.

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. (Do not round intermediate calculations. Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5))

	Assets Liabilities Shareholders' Equity Net Income Expenses 2016 2016 inventory Loss contingency Patent amortization Depreciation $0.0 $0.0 $0.0 $0.0 $0.0 2017 2016 inventory 2017 inventory Loss contingency Patent amortization Depreciation $0.0 $0.0 $0.0 $0.0 $0.0

Answer 1

Answer
Answer 1	JOURNAL ENTRIES
	Particulars	Debit(millions)	Credit(millions)	Narration
	Cost of goods sold	11.9		Entry recorded for overstated inventory in 2016
	Inventory		11.9
	Amortisation Expenses	2.9		amortisation of patent recorded for 2016
	Accumulated amortisation		2.9
	Cost of goods sold		9.9	Entry recorded for understated inventory in 2017
	Inventory	9.9
	Amortisation Expense	2.9		Amortisation of patent recorded for 2017
	Accumulated amortisation		2.9

Answer 2		Assets	Liabilies	shareholders Equity	Net Income	Expenses
	2016	730	325	405	205	149
	2016 Inventory	($11.9)	0	($11.9)	($11.9)	($11.9)
	Loss contingency	0	0	0	0	0
	Patent Amortization	($2.9)	0	($2.9)	($2.9)	($2.9)
	Deprciation	0	0	0	0	0
	Total	715.2	325	390.2	190.2	134.2
	2017	810	395	415	225	174
	2016 Inventory	0	0	0	$11.9	($11.9)
	2017 Inventory	$9.9	0	$9.9	$9.9	($9.9)
	Loss contingency	0	0	0	0	0
	Patent Amortization	($2.9)	0	($2.9)	($2.9)	$2.9
	Deperciation	0	0	0	0	0
	Total	817	325	422	243.9	155.1