(Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fastgrowing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really see your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”
Instructions Answer the following questions.
(a) What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets?
(b) Who could be harmed by Frost’s unusual accounting changes?
(c) What should Crane do in this situation?
There will be no ethical issue if there is a reason to change the useful life of the asset. It will affect future period calculations and Crane should report this upper management of the company.
There are no ethical issues in changing the useful life of any fixed asset of the business. Under both GAAP and IFRS, changes in methods of depreciation and any change in estimated useful life are reported in current and future periods.
In this case, any significant change made to the asset will affect its useful life. This will not affect prior period depreciation but it will affect future periods.
Crane should report these changes to the upper management of the company, also this needs to be disclosed in a form of a report containing all the findings.
Presented below are the comparative income and retained earnings statements for Denise Habbe Inc. for the years 2017 and 2018.
2018 2017 Sales $340,000 $270,000 Cost of sales 200,000 142,000 Gross profit 140,000 128,000 Expenses 88,000 50,000 Net income $ 52,000 $ 78,000 Retained earnings (Jan. 1) $125,000 $ 72,000 Net income 52,000 78,000 Dividends (30,000) (25,000) Retained earnings (Dec. 31) $147,000 $125,000
The following additional information is provided: 1. In 2018, Denise Habbe Inc. decided to switch its depreciation method from sum-of-the-years’ digits to the straight-line method. The assets were purchased at the beginning of 2017 for $100,000 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of $30,000 on the assets purchased at the beginning of 2017.) 2. In 2018, the company discovered that the ending inventory for 2017 was overstated by $24,000; ending inventory for 2018 is correctly stated.
Instructions Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.)
Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.
Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 $100,000 $ 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000
Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?
(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?
(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?
(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?
You have been engaged to review the financial statements of Gottschalk 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 $3,400 were not recorded because the bookkeeper thought that “they were immaterial.”
2. Accrued vacation pay for the year of $31,100 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 $2,640 because “the amount of the check is about the same every year.” 4. Reported sales revenue for the year is $2,120,000. 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 $103,400.
Instructions Prepare the necessary correcting entries, assuming that Gottschalk uses a calendar-year basis.
Tedesco Company changed depreciation methods in 2017 from double-declining-balance to straight-line. Depreciation prior to 2017 under double-declining-balance was $90,000, whereas straight-line depreciation prior to 2017 would have been $50,000. Tedesco’s depreciable assets had a cost of $250,000 with a $40,000 salvage value, and an 8-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Tedesco’s depreciable assets
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