Q1. 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.
|
Net Income Computed Using
|
|
|
Average-Cost Method
|
FIFO Method
|
LIFO Method
|
|
2012
|
$16,350
|
$19,997
|
$11,108
|
|
2013
|
18,570
|
20,463
|
14,224
|
|
2014
|
19,887
|
24,717
|
16,577
|
(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2015.
(b) Determine net income to be reported for 2012, 2013, and 2014, after giving effect to the change in accounting principle.
(c) Assume Holder-Webb Company used the LIFO method instead of the average cost method during the years 2012-2014. In 2015, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.
Q2. Gordon Company started operations on January 1, 2009, and has used the FIFO method of inventory valuation since its inception. In 2014, it decides to switch to the average cost method. You are provided with the following information.
|
|
Net income
|
Retained Earnings (Ending Balance)
|
|
|
Under FIFO
|
Under Average-Cost
|
Under FIFO
|
|
2009
|
$101,840
|
$92,070
|
$101,120
|
|
2010
|
69,840
|
64,080
|
160,100
|
|
2011
|
90,640
|
80,760
|
234,500
|
|
2012
|
119,680
|
129,010
|
340,470
|
|
2013
|
300,950
|
292,440
|
589,470
|
|
2014
|
305,560
|
309,700
|
780,500
|
a) What is the beginning retained earnings balance at January 1, 2011, if Gordon prepares comparative financial statements starting in 2011?
(b) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?
(c) What is the beginning retained earnings balance at January 1, 2015, if Gordon prepares single-period financial statements for 2015?
(d) What is the net income reported by Gordon in the 2014 income statement if it prepares comparative financial statements starting with 2012?
Q3. Kathleen Cole Inc. acquired the following assets in January of 2012.
|
Equipment, estimated service life, 5 years; salvage value, $16,500
|
$486,450
|
|
Building, estimated service life, 30 years; no salvage value
|
$747,000
|
The equipment has been depreciated using the sum-of-the-years'-digits method for the first 3 years for financial reporting purposes. In 2015, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.
(a) Prepare the general journal entry to record depreciation expense for the equipment in 2015.
(b) Prepare the journal entry to record depreciation expense for the building in 2015.
Q4. Peter Henning Tool Company's December 31 year-end financial statements contained the following errors.
|
December 31, 2014
|
December 31, 2015
|
|
Ending inventory
|
$9,959 understated
|
$6,593 overstated
|
|
Depreciation expense
|
$2,305 understated
|
|
An insurance premium of $63,630 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated machinery was sold for $19,560 cash, but the entry was not recorded until 2016. There were no other errors during 2014 or 2015, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
(a) Compute the total effect of the errors on 2015 net income.
(b) Compute the total effect of the errors on the amount of Henning's working capital at December 31, 2015.
(c) Compute the total effect of the errors on the balance of Henning's retained earnings at December 31, 2015.