(a)
Accounting changes:
Accounting changes are the alterations made to the accounting methods, accounting estimates, accounting principles (or) the reporting entity.
To Identify: (1) The type of change, (2) prepare
(a)
Explanation of Solution
(1)The type of change: Change in estimate
(2)Journal (or) Adjusting entry:
No entry is needed to record the change but Adjusting entry is made to record the 2% of change in sales estimate
Adjusting entry for the year 2016
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Warranty expense (1) | 80,000 | ||
Estimated warranty liability | 80,000 | ||
(To record the estimated liability warranty) |
Table (1)
Explanation:
- Warranty expense is an expense. The
retained earnings value is decreased. Therefore, it is debited. - Estimated warranty liability is a liability. The liability value is increased. Therefore, it is credited.
Working Note:
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(b)
To Identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.
(b)
Explanation of Solution
(1)The type of change: Change in estimate
(2)Journal (or) Adjusting entry:
No entry is needed to record the change but Adjusting entry is made to record the
The Adjusting entry for the year 2016:
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Depreciation expense | 45,000 | ||
|
45,000 | ||
(To record the accumulated depreciation) |
Table (2)
- Depreciation expense is an expense. The retained earnings value is decreased. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in assets value. Therefore, it is credited.
Working Notes:
a. Calculate the depreciation of building using
b. Calculate the annual straight-line depreciation:
It is given that the old annual depreciation is $25,000(2) and number of years completed is 3 years.
c. Calculate the book value:
d. Calculate the revised depreciation base:
e. Calculate the new annual depreciation:
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(c)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.
(c)
Explanation of Solution
(1)The type of change: Change in accounting principle.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change.
(3)Steps taken:
When the company switch over’s form one inventory method to LIFO (Last in first out) there is sufficiency in accounting records to determine the cumulative income effect. The beginning inventory is treated as base for future LIFO calculation ($690,000).
(d)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.
(d)
Explanation of Solution
(1)The type of change: Change in estimate.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change. But adjusting entry is made to record the depreciation value.
Adjusting entry for the year 2016.
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Depreciation expense | 24,000 | ||
Accumulated depreciation (13) | 24,000 | ||
(To record the accumulated depreciation) |
Table (3)
- Depreciation expense is an expense. There is an increase in liability value. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in assets value. Therefore, it is credited.
Working note:
a. Calculate the average number of years:
It is given that the number of years is 10 years.
b. Calculate the SYD (Sum of the year’s digit depreciation) depreciation:
Now, calculate the SYD depreciation:
c. Calculate the annual straight-line depreciation 2016 to 2022:
Particulars | Amount |
Asset cost | $330,000 |
Less: Accumulated depreciation | $162,000(12) |
Un depreciated cost, Jan. 1 2016 | $168,000 |
Estimated residual value | $0 |
Depreciation over remaining 7 years | $168,000 |
Divide: Remaining years | 7 years |
Annual straight-line depreciation 2016-2022 | $24,000 |
(13)
Table (4)
(3)Steps taken:
The H Company’s’ previous years, financial statements are not revised. Instead, the company implements straight-line method. The remaining cost undepreciated at the time of the change is depreciated using straight line method for the remaining life.
(e)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.
(e)
Explanation of Solution
(1)The type of change: Change in estimate.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change. But Adjusting Entry is made to revise the liability on the basis of the new estimate of H Company for the year 2016.
Adjusting entry for the year 2016.
Date | Account Title and Explanation | Debit Amount($) | Credit Amount($) |
Loss – litigation | 150,000 | ||
Liability- litigation (14) | 150,000 | ||
(To record adjusting depreciation entry) |
Table (5)
- Depreciation expense is an expense. There is a decrease in liability value. Therefore, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in asset value. Therefore, it is credited.
Working note:
(3)Steps taken:
The effect of change in estimate on Net income, Income from continuing operations and related per share amounts for the current fiscal period should be described in the disclosure note if the effect is material.
(f)
To identify: (1) The type of change, (2) prepare journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.
(f)
Explanation of Solution
(1)The type of change: Change in accounting principle.
(2)Journal (or) Adjusting entry:
No entry is needed to record the change
(3)Steps taken:
The change in accounting principle is effective for those assets placed in service after the date of change; Assets depreciated in prior periods are not affected by the change. Disclosure notes should include the nature and justification for the change.
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Chapter 20 Solutions
INTERMEDIATE ACCOUNTING
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