Each change occurs during 2013 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.
P20-8 Described below are six independent and
unrelated situations involving accounting changes. Each change occurs during
2013 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 2012 that carry a one-year warranty against manufacturer's
defects. Based on industry experience, warranty costs were expected to
approximate 3% of sales. Sales of the awnings in 2012 were $3,500,000.
Accordingly, warranty expense and a warranty liability of $105,000 were
recorded in 2012. In late 2013, the company's claims experience was evaluated
and it was determined that claims were far fewer than expected: 2% of sales
rather than 3%. Sales of the awnings in 2013 were $4,000,000 and warranty
expenditures in 2013 totaled $91,000.
b. On December 30, 2009, Rival Industries
acquired its office building at a cost of $1,000,000. It was depreciated on a
straight-line basis assuming a useful life of 40 years and no salvage value.
However, plans were finalized in 2013 to relocate the company headquarters at
the end of 2017. The vacated office building will have a salvage value at that
time of $700,000.
c. Hobbs-Barto Merchandising, Inc., changed
inventory cost methods to LIFO from FIFO at the end of 2013 for both financial
statement and income tax purposes. Under FIFO, the inventory at January 1,
2014, is $690,000.
d. At the beginning of 2010, the Hoffman Group
purchased office equipment at a cost of $330,000. 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, 2013, the company changed to the
straight-line method.
e. In November 2011, 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
2012, Huggins had not reached a settlement with state authorities, but legal
counsel advised Huggins that it was probable the company would have to pay
$200,000 in penalties. Accordingly, the following entry was recorded:
Loss—litigation
................................................ 200,000
Liability—litigation ........................................
200,000
Late in 2013, a settlement was reached with
state authorities to pay a total of $350,000 in penalties.
f. At the beginning of 2013, Jantzen
Specialties, which uses the sum-of-the-years'-digits method, changed to the
straight-line method for newly acquired buildings and equipment. The change
increased current year net earnings by $445,000.
Required:
For each situation:
1. Identify the type of change.
2. Prepare any journal entry necessary as a
direct result of the change as well as any adjusting entry for 2011 related to
the situation described.
3. Briefly describe any other steps that should
be taken to appropriately report the situation.
TUTORIAL PREVIEW
a. This is a
change in estimate.
No entry is
needed to record the change
2013
adjusting entry:
Warranty expense (2% x $4,000,000)................................. 80,000
Estimated warranty liability ............................... 80,000
Estimated warranty liability ............................... 80,000
File name: P20-8 Described below are.docx File type: doc PRICE: $8
