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Exercise 22-2

Waterway Company began operations on January 1, 2015, and usesthe average-cost method of pricing inventory. Management iscontemplating a change in inventory methods for 2018. The followinginformation is available for the years 2015–2017.

Net Income Computed Using

Average-Cost Method

FIFO Method

LIFO Method

2015

$15,910

$18,950

$12,020

2016

18,030

21,160

13,990

2017

19,920

24,940

17,140


(a) Prepare the journal entry necessary to recorda change from the average cost method to the FIFO method in 2018.(Credit account titles are automatically indented whenamount is entered. Do not indent manually. If no entry is required,select "No Entry" for the account titles and enter 0 for theamounts.)

Account Titles and Explanation

Debit

Credit


(b) Determine net income to be reported for 2015,2016, and 2017, after giving effect to the change in accountingprinciple.

Net Income

2015

$

2016

$

2017

$


(c) Assume Waterway Company used the LIFO methodinstead of the average cost method during the years 2015–2017. In2018, Waterway changed to the FIFO method. Prepare the journalentry necessary to record the change in principle.(Credit account titles are automatically indented whenamount is entered. Do not indent manually. If no entry is required,select "No Entry" for the account titles and enter 0 for theamounts.)

Account Titles and Explanation

Debit

Credit

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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Exercise 22-2 Holder-Webb Company began operations on January 1,2012, and uses the average-cost method of pricing inventory.Management is contemplating a change in inventory methods for 2015.The following information is available for the years 2012–2014. NetIncome Computed Using Average-Cost Method FIFO Method LIFO Method2012 $15,958 $19,564 $12,444 2013 18,366 20,057 14,976 2014 20,46025,174 16,520 (a) Prepare the journal entry necessary to record achange from the average cost method to the FIFO method in 2015.(Credit account titles are automatically indented when amount isentered. Do not indent manually. If no entry is required, select"No Entry" for the account titles and enter 0 for the amounts.)Account Titles and Explanation Debit Credit (b) Determine netincome to be reported for 2012, 2013, and 2014, after giving effectto the change in accounting principle. Net Income 2012 $ 2013 $2014 $ (c) Assume Holder-Webb Company used the LIFO method insteadof the average cost method during the years 2012–2014. In 2015,Holder-Webb changed to the FIFO method. Prepare the journal entrynecessary to record the change in principle. (Credit account titlesare automatically indented when amount is entered. Do not indentmanually. If no entry is required, select "No Entry" for theaccount titles and enter 0 for the amounts.) Account Titles andExplanation Debit Credit Click if you would like to Show Work forthis question: Open Show Work

Millington Materials is a leading supplier of buildingequipment, building products,materials & timber for sale, withover 200 branches across the Mid-South. On January 1, 2016,management decided to change from the LIFO inventory costing methodto the FIFO inventory costing method at each of its outlets. Thefollowing table presents information concerning the change. Theincome tax rate for all years is 40%.

Income before Income Tax
FIFO Average Cost Difference
Before 2015 $ 35 million $ 28 million $ 7 million
2015 48 million 25 million 23 million
2016 30 million 29 million 1 million

Required:
1.

Prepare the journal entry to record the change in accountingprinciple. (All tax effects should be reflected in the deferred taxliability account.) (If no entry isrequired for a transaction/event, select "No journal entryrequired" in the first account field. Enter youranswers in millions rounded to 1 decimal place (i.e., 5,500,000should be entered as 5.5).)

2.

Determine the net income to be reported in the 2016–2015comparative income statements. (Enter your answers inmillions rounded to 1 decimal place (i.e., 5,500,000 should beentered as 5.5).)

3.

Which other 2015 amounts would be reported differently in the2016–2015 comparative income statements and 2016–2015 comparativebalance sheets than they were reported the previous year?(Select all that apply.)

4.

Compute the balance of retained earnings on Jan. 1, 2015, Dec.31, 2015 and Dec. 31, 2016. Cash dividends were $3.0 million eachyear. (Enter your answers in millions rounded to 1 decimalplace (i.e., 5,500,000 should be entered as 5.5).)

Described below are six independent and unrelated situationsinvolving accounting changes. Each change occurs during 2018 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 2017 that carry a one-year warranty againstmanufacturer’s defects. Based on industry experience, warrantycosts were expected to approximate 4% of sales. Sales of theawnings in 2017 were $4,000,000. Accordingly, warranty expense anda warranty liability of $160,000 were recorded in 2017. In late2018, the company’s claims experience was evaluated and it wasdetermined that claims were far fewer than expected: 3% of salesrather than 4%. Sales of the awnings in 2018 were $4,500,000, andwarranty expenditures in 2018 totaled $102,375.

B) On December 30, 2014, Rival Industries acquired its officebuilding at a cost of $1,100,000. It was depreciated on astraight-line basis assuming a useful life of 40 years and nosalvage value. However, plans were finalized in 2018 to relocatethe company headquarters at the end of 2022. The vacated officebuilding will have a salvage value at that time of $750,000.

C) Hobbs-Barto Merchandising, Inc., changed inventory costmethods to LIFO from FIFO at the end of 2018 for both financialstatement and income tax purposes. Under FIFO, the inventory atJanuary 1, 2018, is $740,000.

D)At the beginning of 2015, the Hoffman Group purchased officeequipment at a cost of $385,000. Its useful life was estimated tobe 10 years with no salvage value. The equipment was depreciated bythe sum-of-the-years’-digits method. On January 1, 2018, thecompany changed to the straight-line method.

E) In November 2016, the State of Minnesota filed suit againstHuggins Manufacturing Company, seeking penalties for violations ofclean air laws. When the financial statements were issued in 2017,Huggins had not reached a settlement with state authorities, butlegal counsel advised Huggins that it was probable the companywould have to pay $250,000 in penalties. Accordingly, the followingentry was recorded:

Loss—litigation 250,000 Liability—litigation 250,000Late in 2018, a settlement was reached with state authorities topay a total of $405,000 in penalties.

Loss-Litigation 250,000
Liability-Litigation 250,000

F) At the beginning of 2018, Jantzen Specialties, which uses thesum-of-the-years’-digits method, changed to the straight-linemethod for newly acquired buildings and equipment. The changeincreased current year net earnings by $500,000.

Required: For each situation:

1. Identify the type of change.

2. Prepare any journal entry necessary as a direct result of thechange as well as any adjusting entry for 2018 related to thesituation described.

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