Problem 1Matching Accounting Changes to Situations

| June 9, 2016

Question
Problem 1Matching Accounting Changes to Situations
The four types of accounting changes, including error correction, are:

Change in accounting principle.

Change in accounting estimate.

Change in reporting entity.

Error correction.

Following are a series of situations. Enter a code letter to the left to indicate the type of change.
1. Change from presenting nonconsolidated to consolidated financial statements.
2. Change due to charging a new asset directly to an expense account.
3. Change from expensing to capitalizing certain costs, due to a change in periods benefited.
4. Change from FIFO to LIFO inventory procedures.
5. Change due to failure to recognize accrued (uncollected) revenue.
6. Change in amortization period for an intangible asset.
7. Changing the companies included in combined financial statements.
8. Change in the loss rate on warranty costs.
9. Change due to failure to recognize and accrue income.
10. Change in residual value of a depreciable plant asset.
11. Change from an unacceptable to an acceptable accounting principle.
12. Change in both estimate and acceptable accounting principles.
13. Change due to failure to recognize a prepaid asset.
14. Change from straight-line to sum-of-the-years’-digits method of depreciation.
15. Change in life of a depreciable plant asset.
16. Change from one acceptable principle to another acceptable principle.

17. Change due to understatement of inventory.
18. Change in expected recovery of an account receivable.
Problem 2Changes in Depreciation Methods, Estimates
On January 1, 2008, Powell Company purchased a building and machinery that have the
following useful lives, salvage value, and costs.

Building, 25-year estimated useful life, $5,000,000 cost, $500,000 salvage value

Machinery, 10-year estimated useful life, $700,000 cost, no salvage value

The building has been depreciated under the straight-line method through 2012. In 2013, the
company decided to switch to the double-declining balance method of depreciation for the
building. Powell also decided to change the total useful life of the machinery to 8 years, with a
salvage value of $35,000 at the end of that time. The machinery is depreciated using the straightline method.

Prepare the journal entry necessary to record the depreciation expense on the building in
2013.

Compute depreciation expense on the machinery for 2013.

Problem 3Accounting for Changes and Error Corrections
Dyke Company’s net incomes for the past three years are presented below:
2014

2013

2012

$480,000

$450,000

$360,000

During the 2014 year-end audit, the following items come to your attention:
1. Dyke bought equipment on January 1, 2011 for $294,000 with a $24,000 estimated
salvage value and a six-year life. The company debited an expense account and credited
cash on the purchase date for the entire cost of the asset (Straight-line method).
2. During 2014, Dyke changed from the straight-line method of depreciating its cement
plant to the double-declining balance method. The following computations present
depreciation on both bases:
2014

2013

2012

Straight-line

36,000

36,000

36,000

Double-declining

46,080

57,600

72,000

The net income for 2014 was computed using the double-declining balance method, on
the January 1, 2014 book value, over the useful life remaining at that time. The
depreciation recorded in 2014 was $72,000.
3. Dyke, in reviewing its provision for uncollectable during 2014, has determined that 1% is
the appropriate amount of bad debt expense to be charged to operations. The company
had used 1/2 of 1% as its rate in 2013 and 2014 when the expense had been $18,000 and
$12,000, respectively. The company recorded bad debt expense under the new rate for
2014. The company would have recorded $6,000 less of bad debt expense on December
31, 2014 under the old rate.
Instructions

Prepare in general journal form the entry necessary to correct the books for the
transaction in part 1 of this problem, assuming that the books have not been closed for the
current year.

Compute the net income to be reported each year 2012 through 2014.

Assume that the beginning retained earnings balance (unadjusted) for 2012 was
$1,260,000. At what adjusted amount should this beginning retained earnings balance for
2012 be stated, assuming that comparative financial statements were prepared?

Assume that the beginning retained earnings balance (unadjusted) for 2014 is $1,800,000
and that noncomparative financial statements are prepared. At what adjusted amount
should this beginning retained earnings balance be stated?

Support your responses with examples.

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