Chapter 20, Problem 20.8P

(a)

To determine

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 journal entry or adjusting entry of F Industry for the year 2016 if needed, and (3) steps taken to report the change.

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:

$\begin{array}{c}\text{Warranty}\text{expense=Actual}\text{Rate}\text{of}\text{sales×sales}\\ \text{=}\text{2\%×\$4,000,000}\\ \text{=\$80,000}\text{.}\end{array}$ (1)

(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 determine

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.

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

The Adjusting entry for the year 2016:

Date	Account Title and Explanation	Debit Amount($)	Credit Amount($)
	Depreciation expense	45,000
	Accumulated depreciation (6)		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 straight line method:

$\begin{array}{c}\text{Depreciation=cost}\text{of}\text{}\text{building×useful}\text{life}\text{of}\text{years}\\ \text{=\$1,000,000×40}\\ \text{=\$25,000}\text{.}\end{array}$ (2)

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.

$\begin{array}{c}\text{Annual straight}-\text{line depreciation=}\left(\begin{array}{l}\text{Old annual depreciation }\\ \times \text{ Number of years completed}\end{array}\right)\\ \text{=}\$25,000\times 3\text{ years}\\ =\$75,000\end{array}$ (3)

c. Calculate the book value:

$\begin{array}{c}\text{Book value}=\left(\begin{array}{l}\text{Cost is and calculated}\\ -\text{Annual straight-line depreciation}\end{array}\right)\\ =\$1,000,000-\$75,000(3)\\ =\$925,000\end{array}$ (4)

d. Calculate the revised depreciation base:

$\begin{array}{c}\text{Revised depreciation base=}\left(\begin{array}{l}\text{Book value}-\\ \text{Revised residual value}\end{array}\right)\\ \text{=}\$9\text{25},000(4)-\$700,000\\ =\$225,000\end{array}$ (5)

e. Calculate the new annual depreciation:

$\begin{array}{c}\text{New}\text{annual}\text{depreciation=}\left(\frac{\text{Revised depreciation base }}{\text{Estimated remaining life}}\right)\\ \text{=}\frac{\$225,000(5)}{\text{5 years}}\\ =\$45,000\end{array}$ (6)

(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 determine

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.

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 determine

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.

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.

$\begin{array}{c}\text{Average number of years=}\frac{\text{n}\left(\text{n=1}\right)}{\text{2}}\\ \text{=}\frac{\left(\text{10}\left(\text{11}\right)\right)}{\text{2}}\\ \text{=}\left(\frac{\text{110}}{\text{2}}\right)\\ \text{=55}\end{array}$ (11)

b. Calculate the SYD (Sum of the year’s digit depreciation) depreciation:

Now, calculate the SYD depreciation:

$\begin{array}{c}\text{SYD depreciation=}\left(\begin{array}{l}\frac{\text{Number of years completed}}{\text{Average number of year}}\\ \times \text{ Cost of the asset }\end{array}\right)\\ \text{=}\left(\frac{10+9+8}{\text{55(11)}}\right)\times \$330,000\\ =0.\text{49}0\text{9}0\text{9}0\text{91}\times \text{\$330,000}\\ \text{=\$162,000}\end{array}$ (12)

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 determine

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.

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:

$\begin{array}{c}\text{Final}\text{settlemet=Penalty}\text{after}\text{settlement-Penalty}\text{before}\text{settlement}\\ \text{=\$350,000-\$200,000}\\ \text{=\$150,000}\end{array}$ (14)

(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 determine

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.

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.