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.
Accounting principles refer to the rules and regulations which the companies have to follow when recording and reporting the financial data.
The companies change accounting methods because of the following reasons:
Roundtree Manufacturing Co. is preparing its year-end financial statements and is considering the accounting for the following items. 1. The vice president of sales had indicated that one product line has lost its customer appeal and will be phased out over the next 3 years. Therefore, a decision has been made to lower the estimated lives on related production equipment from the remaining 5 years to 3 years. 2. The Hightone Building was converted from a sales office to offices for the Accounting Department at the beginning of this year. Therefore, the expense related to this building will now appear as an administrative expense rather than a selling expense on the current year’s income statement. 3. Estimating the lives of new products in the Leisure Products Division has become very difficult because of the highly competitive conditions in this market. Therefore, the practice of deferring and amortizing preproduction costs has been abandoned in favor of expensing such costs as they are incurred. Identify and explain whether each of the above items is a change in principle, a change in estimate, or an error.
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?
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.
Prior to 2017 $150,000 $105,000
2017 60,000 20,000
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.
Holder-Webb 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 $15,000 $19,000 $12,000 2016 18,000 23,000 14,000 2017 20,000 25,000 17,000 Instructions (Ignore all tax effects.) (a) Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2018. (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle. (c) Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2015– 2017. In 2018, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.
A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.
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.
(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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