Answered: LG Co. has recently hired a new…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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LG Co. has recently hired a new independent auditor, Jeff Clan, CPA, who says he wants "to get everything straightened out." Consequently, he has proposed the following accounting changes in connection with LG Co.'s 2022 financial statements. 1. At December 31, 2021, the client had a receivable of P820,000 from Blue Stones Inc. on its statement of financial position. Blue Stones has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item. 2. The client proposes the following changes in depreciation policies. * For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2021, would have been P250,000 less. The effect of the change on 2022 income alone is a reduction of P60,000. * For its equipment in the leasing division, the client proposes to adopt the sum-of-the years'-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2022. If straight-line depreciation were used, 2022 income would be P110,000 greater. 3. In preparing its 2021 statements, one of the client's bookkeepers overstated ending inventory by P235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment. 4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the "fad" type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture's introduction. If the new accounting method had been used prior to 2022, retained earnings at December 31, 2021, would have been P375,000 less. 5. For the nursery division, the client proposes to switch from FIFO to average-cost inventories because it believes that average-cost will provide a better matching of current costs with revenues. The eftect of making this change on 2022 earnings will be an increase of P320,000. The client says that the effect of the change on December 31, 2021, retained earnings cannot be determined. 6. To achieve a better measure of income in its building construction division, the client proposes to switch from the cost-recovery method of accounting to the percentage-of completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2021, would have been P1,075,000 greater. Instructions: 1. For each of the changes described above, decide whether: * The change involves an accounting policy, accounting estimate, or correction of an error. * Restatement of opening retained earnings is required. 2. What is the proper adjustment to the December 31, 2021, retained earnings?

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