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 a. 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 $4,500,000. Accordingly, warranty expense and a warranty liability of $90,000 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 $5,000,000, and warranty expenditures in 2018 totaled $113,750. b. On December 30, 2014, Rival Industries acquired its office building at a cost of $1,200,000. It was depreciated on a straight-line basis assuminga 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 $800,000 c. 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 $790,000. d. At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $440,000. 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. e. 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 $300,000 in penalties. Accordingly, the following entry was recorded:

Answer 1

8 a (1) No Journal entry required 10 a (2) 45,000 Warranty Expense Estimated Warranty Liability 11 45,000 (4500000 *1%) 12 (To record adjusting entry) 13 14 15 b This is a change in estimate 16 No Journal entry required 17 b (1) 18 19 b (2) 77,500 Depreciation Expense Accumulated Depreciation 20 77,500 (To record depreciation Expense) 21 22 1,200,000 23 Cost Less Old Depreciation (1200000/40*3) (90,000) 24 Undepreciated Cost 25 1,110,000 New Salavage Value (800,000) 26 Amount to be depreciated 27 310,000 Estimated remaining useful life 28 4 New Depreciation (199500/4) 77,500 29 30

This is a change in accounting principle. 31 c 32 No Journal entry required 33 с (1) 34 35 с ( 2) No Journal entry required 36 37 d This is a change in estimate 38 39 d(1) No Journal entry required 40 41 d (2) Depreciation Expense 32,000 nulated Depreciation Acс 32,000 (To record depreciation Expense) 43 44 45 Cost 440,000 1st Year Dep (440000 *10/55) 2nd Year Dep. (440000*9/55) 3rd Year Dep. (440000 8/55) 46 80,000 47 72,000 64,000 48 Total Depreciation 49 216,000 Book Value at the beginning of Jan 1 2018 224,000 (440000-216000) 50 Estimated remaining useful life 51 7 New Depreciation (224000/7) 32,000 52 53 54 e This is a change in estimate 55

No Journal entry required 56 e (1) 57 Loss -Litigation 58 e(2) 160,000 Liability Litigation (460000-300000) 59 160,000 (To record revision of liability on the basis of new estimate) 60 61 62 f This is a change in accounting principle. 63 64 F(1) No Journal entry required 65 66 f(2) No Journal entry required 67 68 69