Chapter 13, Problem 13.18P

a.

To determine

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

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.

To determine

Introduction: Depreciation is an expense or loss involved in using fixed assets in the process of production which has to be provided for it is done by estimating the amount to be written off from the value of asset each year. Or it could be stated as a permanent decrease in the value of a fixed asset because of normal tear and wear while using them.

To explain: The effect of a company deciding to switch from straight-line method to accelerated method of depreciation

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 3^rd quarter on 30^th 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.

To determine

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.

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 balance sheet of previous period and the adjustments to all the subsequent annual and interim financial statements by applying the new method.

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