Brief Exercise 22-1
Brief Exercise 22-1
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At the beginning of 2017, Bonita Construction Company changed from the completed-contract method to recognizing revenue over time (percentage-of-completion) for financial reporting purposes. The company will continue to use the completed-contract method for tax purposes. For years prior to 2017, pretax income under the two methods was as follows: percentage-of-completion $110,900, and completed-contract $80,300. The tax rate is 35%. Prepare Bonita’s 2017 journal entry to record the change in accounting principle. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
Brief Exercise 22-4
Flint Company changed depreciation methods in 2017 from double-declining-balance to straight-line. Depreciation prior to 2017 under double-declining-balance was $87,900, whereas straight-line depreciation prior to 2017 would have been $54,900. Flint’s depreciable assets had a cost of $241,300 with a $43,800 salvage value, and an 8-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entry related to Flint’s depreciable assets (Equipment). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
Brief Exercise 22-7
At January 1, 2017, Pearl Company reported retained earnings of $2,081,000. In 2017, Pearl discovered that 2016 depreciation expense was understated by $426,000. In 2017, net income was $812,000 and dividends declared were $271,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Pearl Company.
PEARL COMPANY Retained Earnings Statement | |
$ | |
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$ |
Brief Exercise 22-8
Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2017 net income and 2018 net income.
2017 | 2018 | |||||
(a) | Equipment purchased in 2015 was expensed. | |||||
(b) | Wages payable were not recorded at 12/31/17. | |||||
(c) | Equipment purchased in 2017 was expensed. | |||||
(d) | 2017 ending inventory was overstated. | |||||
(e) | Patent amortization was not recorded in 2018. |
Exercise 22-2
Marigold Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015–2017.
Net Income Computed Using | ||||||
Average-Cost Method | FIFO Method | LIFO Method | ||||
2015 | $16,150 | $18,870 | $12,080 | |||
2016 | 17,860 | 20,890 | 14,140 | |||
2017 | 19,850 | 25,100 | 17,020 |
(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
(b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle.
Net Income | ||
2015 | $ | |
2016 | $ | |
2017 | $ |
(c) Assume Marigold Company used the LIFO method instead of the average cost method during the years 2015–2017. In 2018, Marigold changed to the FIFO method. Prepare the journal entry necessary to record the change in principle. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
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Exercise 22-10
Listed below are various types of accounting changes and errors. For each change or error, indicate how it would be accounted for using the following code:
1. | Change in a plant asset’s salvage value. | |||
2. | Change due to overstatement of inventory. | |||
3. | Change from sum-of-the-years’-digits to straight-line method of depreciation. | |||
4. | Change from presenting unconsolidated to consolidated financial statements. | |||
5. | Change from LIFO to FIFO inventory method. | |||
6. | Change in the rate used to compute warranty costs. | |||
7. | Change from an unacceptable accounting principle to an acceptable accounting principle. | |||
8. | Change in a patent’s amortization period. | |||
9. | Change from completed-contract to percentage-of-completion method on construction contracts. | |||
10. | Change from FIFO to average-cost inventory method. |
Exercise 22-11
Swifty Co. purchased a equipment on January 1, 2015, for $517,000. At that time, it was estimated that the equipment would have a 10-year life and no salvage value. On December 31, 2018, the firm’s accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment. Prepare the general journal entries that should be made at December 31, 2018, to record these events. (Ignore tax effects.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Date | Account Titles and Explanation | Debit | Credit |
Dec. 31, 2018 | |||
(To correct for the omission of depreciation expense in 2016.) | |||
Dec. 31, 2018 | |||
Exercise 22-16
You have been engaged to review the financial statements of Grouper Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.
1. | Year-end wages payable of $3,510 were not recorded because the bookkeeper thought that “they were immaterial.” | |
2. | Accrued vacation pay for the year of $33,300 was not recorded because the bookkeeper “never heard that you had to do it.” | |
3. | Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,652 because “the amount of the check is about the same every year.” | |
4. | Reported sales revenue for the year is $2,021,420. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $97,820. |
Prepare the necessary correcting entries, assuming that Grouper uses a calendar-year basis. The books for the current year have not been closed. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
No. | Account Titles and Explanation | Debit | Credit |
1. | |||
2. | |||
3. | |||
4. | |||
(To record the sales taxes due.) | |||
(To correct prior entry.) |
Exercise 22-17
The reported net incomes for the first 2 years of Flint Products, Inc., were as follows: 2017, $146,400; 2018, $187,600. Early in 2019, the following errors were discovered.
1. | Depreciation of equipment for 2017 was overstated $18,200. | |
2. | Depreciation of equipment for 2018 was understated $40,600. | |
3. | December 31, 2017, inventory was understated $49,300. | |
4. | December 31, 2018, inventory was overstated $16,000. |
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
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Exercise 22-22
On January 1, 2017, Vaughn Co. purchased 24,000 shares (a 10% interest) in Elton John Corp. for $1,300,000. At the time, the book value and the fair value of John’s net assets were $12,900,000. On July 1, 2018, Vaughn paid $2,890,000 for 48,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John’s identifiable assets net of liabilities was equal to their carrying amount of $14,100,000. As a result of this transaction, Vaughn owns 30% of John and can exercise significant influence over John’s operating and financial policies. (Any excess fair value is attributed to goodwill.) John reported the following net income and declared and paid the following dividends.
Net Income | Dividend per Share | |||
Year ended 12/31/17 | $650,000 | None | ||
Six months ended 6/30/18 | 470,000 | None | ||
Six months ended 12/31/18 | 776,000 | $1.50 |
Determine the ending balance that Vaughn Co. should report as its investment in John Corp. at the end of 2018.
Investment in Elton John Corp. | $ |