Molina Companys reported net incomes for 2013 and the previoustwo years are presented below.
2013 2012 2011
$105,000 $95,000 $70,000
2015s net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2013 and 2014 do nottake these items into account and are stated at the amountsdetermined in those years. Ignore income taxes.
Instructions
(a)For each of the six accounting changes, errors, or priorperiod adjustment situations described below, prepare the journalentry or entries Molina Company should record during 2015 . If noentry is required, write none.
(b)After recording the situation in part (a) above, prepare theyear-end adjusting entry for December 31, 2015 . If no entry, writenone.
1>Early in 2013, Molina determined that equipment purchasedin January, 2011 at a cost of $645,000, with an estimated life of 5years and salvage value of $45,000 is now estimated to continue inuse until December 31, 2017 and will have a $15,000 salvage value.Molina recorded its 2013 depreciation at the end of 2013 .
2>Molina determined that it had understated its depreciationby $20,000 in 2012 owing to the fact that an adjusting entry didnot get recorded.
3>Molina bought a truck January 1, 2010 for $50,000 with a$5,000 estimated salvage value and a six-year life. The companydebited an expense account and credited cash on the purchase date.The truck is expected to be traded at the end of 2015 . Molina usesstraight-line depreciation for its trucks.
4>During 2013, Molina changed from the straight-line methodof depreciating its cement plant to the double-declining-balancemethod. The following calculations present depreciation on bothbases. (Ignore income taxes.) The 2013 amount appliesdouble-declining balance to the 1/1/13 carrying amount afterstraight-line was used.
2013 2012 2011
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000
5>Molina, in reviewing its provision for uncollectiblesduring 2013, has determined that 1/2 of 1% is the appropriateamount of bad debt expense to be charged to operations. The companyhad used 1% as its rate in 2012 and 2011 when the expense had been$20,000 and $14,000, respectively. The company would have recorded$50,000 of bad debt expense on December 31, 2013 under the oldrate.
6>During 2013, Molina decided to change from the LIFO methodof valuing inventories to average cost. The net incomes involvedunder each method were as follows:
2013 2012 2011
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000
Assume no difference between LIFO and average cost inventoryvalues in years prior to 2011 .
Molina Companys reported net incomes for 2013 and the previoustwo years are presented below.
2013 2012 2011
$105,000 $95,000 $70,000
2015s net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2013 and 2014 do nottake these items into account and are stated at the amountsdetermined in those years. Ignore income taxes.
Instructions
(a)For each of the six accounting changes, errors, or priorperiod adjustment situations described below, prepare the journalentry or entries Molina Company should record during 2015 . If noentry is required, write none.
(b)After recording the situation in part (a) above, prepare theyear-end adjusting entry for December 31, 2015 . If no entry, writenone.
1>Early in 2013, Molina determined that equipment purchasedin January, 2011 at a cost of $645,000, with an estimated life of 5years and salvage value of $45,000 is now estimated to continue inuse until December 31, 2017 and will have a $15,000 salvage value.Molina recorded its 2013 depreciation at the end of 2013 .
2>Molina determined that it had understated its depreciationby $20,000 in 2012 owing to the fact that an adjusting entry didnot get recorded.
3>Molina bought a truck January 1, 2010 for $50,000 with a$5,000 estimated salvage value and a six-year life. The companydebited an expense account and credited cash on the purchase date.The truck is expected to be traded at the end of 2015 . Molina usesstraight-line depreciation for its trucks.
4>During 2013, Molina changed from the straight-line methodof depreciating its cement plant to the double-declining-balancemethod. The following calculations present depreciation on bothbases. (Ignore income taxes.) The 2013 amount appliesdouble-declining balance to the 1/1/13 carrying amount afterstraight-line was used.
2013 2012 2011
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000
5>Molina, in reviewing its provision for uncollectiblesduring 2013, has determined that 1/2 of 1% is the appropriateamount of bad debt expense to be charged to operations. The companyhad used 1% as its rate in 2012 and 2011 when the expense had been$20,000 and $14,000, respectively. The company would have recorded$50,000 of bad debt expense on December 31, 2013 under the oldrate.
6>During 2013, Molina decided to change from the LIFO methodof valuing inventories to average cost. The net incomes involvedunder each method were as follows:
2013 2012 2011
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000
Assume no difference between LIFO and average cost inventoryvalues in years prior to 2011 .
Related questions
Described below are six independent and unrelated situationsinvolving accounting changes. Each change occurs during 2016 beforeany adjusting entries or closing entries were prepared. Assume thetax rate for each company is 40% in all years. Any tax effectsshould be adjusted through the deferred tax liability account. |
| a. | Fleming Home Products introduced a new line of commercialawnings in 2015 that carry a one-year warranty againstmanufacturerâs defects. Based on industry experience, warrantycosts were expected to approximate 3% of sales. Sales of theawnings in 2015 were $4,400,000. Accordingly, warranty expense anda warranty liability of $132,000 were recorded in 2015. In late2016, the companyâs claims experience was evaluated and it wasdetermined that claims were far fewer than expected: 2% of salesrather than 3%. Sales of the awnings in 2016 were $4,900,000 andwarranty expenditures in 2016 totaled $111,475. |
| b. | On December 30, 2012, Rival Industries acquired its officebuilding at a cost of $1,180,000. It was depreciated on astraight-line basis assuming a useful life of 40 years and nosalvage value. However, plans were finalized in 2016 to relocatethe company headquarters at the end of 2020. The vacated officebuilding will have a salvage value at that time of$790,000. |
| c. | Hobbs-Barto Merchandising, Inc., changed inventory cost methodsto LIFO from FIFO at the end of 2016 for both financial statementand income tax purposes. Under FIFO, the inventory at January 1,2016, is $780,000. |
| d. | At the beginning of 2013, the Hoffman Group purchased officeequipment at a cost of $429,000. Its useful life was estimated tobe 10 years with no salvage value. The equipment was depreciated bythe sum-of-the-yearsâ-digits method. On January 1, 2016, thecompany changed to the straight-line method. |
| e. | In November 2014, the State of Minnesota filed suit againstHuggins Manufacturing Company, seeking penalties for violations ofclean air laws. When the financial statements were issued in 2015,Huggins had not reached a settlement with state authorities, butlegal counsel advised Huggins that it was probable the companywould have to pay $290,000 in penalties. Accordingly, the followingentry was recorded: |
| Lossâlitigation | 290,000 | |
| Liabilityâlitigation | 290,000 | |
Late in 2016, a settlement wasreached with state authorities to pay a total of $449,000 inpenalties. |
| f. | At the beginning of 2016, Jantzen Specialties, which uses thesum-of-the-yearsâ-digits method, changed to the straight-linemethod for newly acquired buildings and equipment. The changeincreased current year net earnings by $544,000. Prepare any journal entry necessary as a direct result of thechange as well as any adjusting entry for 2016 related to thesituation described. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.) 1 Record journal entry as a direct result of the change. 2 Record adjusting entry for change in warranty. 3 Record journal entry as a direct result of the change. 4 Record adjusting entry for depreciation. 5 Record journal entry as a direct result of the change. 6 Record the adjusting entry for change in inventory costmethod. 7 Record journal entry as a direct result of the change. 8 Record adjusting entry for depreciation. 9 Record journal entry as a direct result of the change. 10 Record the adjusting entry for revision of liability. 11 Record journal entry as a direct result of the change. 12 Record the adjusting entry for change in depreciation methodfrom sum-of-the-yearsâ-digits method to straight-line method. |
