Kathleen Cole Inc. acquired the following assets in January of 2015.
Equipment, estimated service life, 5 years; salvage value, $15,000 $525,000
Building, estimated service life, 30 years; no salvage value $693,000
The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2018, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.
Instructions (a) Prepare the general journal entry to record depreciation expenses for the equipment in 2018.
(b) Prepare the journal entry to record depreciation expenses for the building in 2018. (Round all computations to two decimal places.)
The depreciation expense of equipment for 2018 is $51,000 and of building for 2018 is $16,857.
Accumulated Depreciation- Equipment
(Being Depreciation expense recorded)
Accumulated Depreciation- Building
(Being Depreciation expense recorded)
Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.
Investment in Martin
1/1/15 Cost $3,180,000 12/6/15 Dividend received $150,000
12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000
12/31/16 Share of income 510,000
On January 2, 2017, Aykroyd sold 126,000 shares of Martin for $3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.
Martin Dividends Paid Income (Loss) to Aykroyd 2017 $300,000 $50,400
At December 31, 2017, the fair value of Martin shares held by Aykroyd is $1,570,000. This is the first reporting date since the January 2 sale.
Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?
(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).
(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.
Whittier Construction Co. had followed the practice of expensing all materials assigned to a construction job without recognizing any salvage inventory. On December 31, 2017, it was determined that salvage inventory should be valued at $52,000. Of this amount, $29,000 arose during the current year. How does this information affect the financial statements to be prepared at the end of 2017?
Botticelli Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.
2015 $140,000a 2017 $205,000
2016 160,000b 2018 276,000
a Includes a $10,000 increase because of change in bad debt experience rate.
bIncludes a gain of $30,000.
The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.
1. In early 2016, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2015.
2. In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.
2015 2016 2017 2018
Net income unadjusted—LIFO basis $140,000 $160,000 $205,000 $276,000
Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000
$ 15,000 $ 5,000 $ 10,000 $ (16,000)
3. In 2018, the auditor discovered that:
(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2017.
(b) A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court’s finding, tax expenses in 2018 were reduced by $60,000.
(a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.)
(b) Present net income as reported in comparative income statements for the years 2015 to 2018
Sesame Company purchased a computer system for $74,000 on January 1, 2016. It was depreciated based on a 7-year life and an $18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.
94% of StudySmarter users get better grades.Sign up for free