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a.
Introduction: FIFO stands for First in First Out where the goods or inventories that are brought first are sold first. This method is used where goods are of perishable nature.
To prepare: A statement to show the interim financial data for 3 quarters of the year 20X7 and comparative data for 20X6 when switch from FIFO to LIFO
a.
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Explanation of Solution
Quarter Ended | Net Sales | Gross Profit | Operating Expenses | Earnings from operations before tax | Net Earnings |
20X7 | $ | $ | $ | $ | |
Mar -31 | 388 | 123 | 106 | 17 | 10.2 |
June-30 | 406 | 123 | 105 | 18 | 10.8 |
Sep − 30 | 428 | 137 | 119 | 18 | 10.8 |
20X6 | |||||
Mar -31 | 394 | 127 | 112 | 15 | 9 |
June -30 | 416 | 138 | 119 | 19 | 11.4 |
Sep -30 | 403 | 123 | 117 | 6 | 3.6 |
Dec − 31 | 385 | 125 | 103 | 22 | 13.2 |
b.
Introduction:
To explain: The effect of a company deciding to switch from straight-line method to accelerated method of depreciation
b.
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Explanation of Solution
Accelerated depreciation refers to the use of one method from different methods of depreciation by a company, for financial accounting or tax purposes to depreciates a fixed asset in such a way that the amount of depreciation is higher than the earlier years of an asset’s life. As it is a change in accounting estimate because there will be a change in the expected future benefits derived. As per the requirement of FASB 154, this change should be accounted for during the period in which the change occurred or it should be accounted for during the period and the future periods if the change is of both current and future effects. The newly adopted method of depreciation will be used for the 3rd quarter on 30th September and for the future periods till the useful life of the assets. In the footnote disclosure to the financial statements, the effects of change on the income from operations should be justified.
c.
Introduction: LIFO stands for Last in First Out where the goods or inventories that are brought last are sold first. This method is only used in the Unites States of America.
To prepare: A statement to show the interim financial data for 3 quarters of the year 20X7 and comparative data for 20X6 for the company deciding to change its method of accounting from completed contract method to percentage of completion method to recognize sales revenue on long term contract.
c.
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Explanation of Solution
Quarter Ended | Completed Contract | % of completion | Effects of Change | |||
Sales | Gross Profit | Sales | Gross Profit | Sales | Gross Profit | |
20X7 | $ | $ | $ | $ | ||
Mar -31 | 80 | 20 | 60 | 30 | (20) | 10 |
June-30 | 0 | 0 | 55 | 30 | 55 | 30 |
Sep − 30 | 100 | 50 | 70 | 40 | (30) | (10) |
20X6 | ||||||
Mar -31 | 0 | 0 | 60 | 40 | 60 | 40 |
June -30 | 150 | 100 | 40 | 20 | (110) | (80) |
Sep -30 | 0 | 0 | 50 | 30 | 50 | 30 |
Dec − 31 | 60 | 40 | 50 | 30 | (10) | (10) |
The change of completed contract to the % of completion method involves the application of new method to the
Statement showing the net earnings after deducting the tax rate of 40 %.
Quarter Ended | Net Sales | Gross Profit | Operating Expenses | Earnings from operations before tax | Net Earnings |
20X7 | $ | $ | $ | $ | |
Mar -31 | 368 | 143 | 106 | 37 | 22.2 |
June-30 | 461 | 165 | 105 | 60 | 36 |
Sep − 30 | 398 | 141 | 119 | 22 | 13.2 |
20X6 | |||||
Mar -31 | 454 | 179 | 112 | 67 | 40.2 |
June -30 | 306 | 71 | 119 | 48 | (28.8) |
Sep -30 | 453 | 178 | 117 | (61) | 36.6 |
Dec − 31 | 375 | 124 | 103 | 21 | 12.6 |
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Chapter 13 Solutions
EBK ADVANCED FINANCIAL ACCOUNTING
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