SMC219Y1 Chapter Notes - Chapter 5: Music Software, Kazaa, Parents Music Resource Center
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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. |
(Understanding the entity and its environment)You have just been assigned as in-charge accountant on HipStar,Inc. a new audit client in the recording industry. HipStar is anemerging growth company that finds new recording artists, recordstheir music, and distributes the music directly to consumersexclusively over the Internet. The company does not produce CDs ortapes and does not distribute the artist's music throughtraditional distribution channels. In order to better understandHipStar, you have set out to understand the following:
1. Industry conditions
2. The regulatory environment
3. Other external factors affecting the business
4. The entity's business operations
5. The entity's investing activities and financingactivities
6. The entity's financial reporting activities
7. The entity's objectives, strategies, and related businessrisks
8. How the entity measures and reviews its financialperformance.
Required
For each of these eight categories (1)describe the knowledge and understanding you want to obtain aboutHipStar to develop a knowledgeable perspective about the entity and(2) identify how this knowledge might assist in assessing the riskof material misstatement. Use the following format:
| Key Categories | Describe the knowledge used to develop aknowledgeable perspective about HipStar | Identify how this knowledge might assist inassessing the risk of material misstatement |
| 1. Industry conditions 2. Regulatory environment 3. Other external factors affecting the business 4. The client's business operations 5. The client's investing activities and financingactivities 6. The client's financial reporting activities 7. The client's objectives, strategies, and related businessrisks 8. How the client measures and reviews the entity's financialperformance |
| 7-22 | (Understanding the entity and its environment)You have just been assigned as in-charge accountant on HipStar,Inc. a new audit client in the recording industry. HipStar is anemerging growth company that finds new recording artists, recordstheir music, and distributes the music directly to consumersexclusively over the Internet. The company does not produce CDs ortapes and does not distribute the artist's music throughtraditional distribution channels. In order to better understandHipStar, you have set out to understand the following:
Required For each of these eight categories (1)describe the knowledge and understanding you want to obtain aboutHipStar to develop a knowledgeable perspective about the entity and(2) identify how this knowledge might assist in assessing the riskof material misstatement. Use the following format:
|
