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Question 1

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Intermediate Accounting (Kieso)
Found in: Page 1305

Short Answer

In recent years, the Wall Street Journal has indicated that many companies have changed their accounting principles. What are the major reasons why companies change accounting methods?

The Accounting principles are the rules and regulations, and the reasons to change them are to bring change to the whole company and produce better accounting reports.

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Step by Step Solution

Definition of accounting principles

Accounting principles refer to the rules and regulations which the companies have to follow when recording and reporting the financial data.

Explanation of reasons

The companies change accounting methods because of the following reasons:

  1. There is a requirement of change in accounting methods of the whole organization and its standards of accounting
  2. If the new accounting method shows more reliable and relevant accounting reports

Most popular questions for Business-studies Textbooks

Penn Company is in the process of adjusting and correcting its books at the end of 2017. In reviewing its records, the following information is compiled.

1. Penn has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2016 $3,500 December 31, 2017 $2,500

2. In reviewing the December 31, 2017, inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. December 31, 2015 Understated $16,000 December 31, 2016 Understated $19,000 December 31, 2017 Overstated $ 6,700 Penn has already made an entry that established the incorrect December 31, 2017, inventory amount.

3. At December 31, 2017, Penn decided to change the depreciation method on its office equipment from double-decliningbalance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2015. It has a 10- year useful life and no salvage value. Depreciation expense recorded prior to 2017 under the double-declining-balance method was $36,000. Penn has already recorded 2017 depreciation expense of $12,800 using the double-declining-balance method. 4. Before 2017, Penn accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2017, Penn changed to the percentage-of-completion basis for accounting purposes. It continues to use the completedcontract method for tax purposes. Income for 2017 has been recorded using the percentage-of-completion method. The following information is available.

Pretax Income

Percentage-of-Completion Completed-Contract

Prior to 2017 $150,000 $105,000

2017 60,000 20,000

Instructions

Prepare the journal entries necessary at December 31, 2017, to record the above corrections and changes. The books are still open for 2017. The income tax rate is 40%. Penn has not yet recorded its 2017 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.

A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.

Dr. Cr.

Supplies $ 2,700

Salaries and wages payable $ 1,500

Interest receivable 5,100

Prepaid insurance 90,000

Unearned rent –0–

Interest payable 15,000

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2018, totaled $1,100.

2. Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to $4,400.

3. The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to $4,350 on December 31, 2018.

4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2018.

5. $28,000 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.

6. Depreciation on equipment for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.

7. A further review of depreciation calculations of prior years revealed that equipment depreciation of $7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(c) Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.

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