ACCOUNTING

Accounting Chapter 20

Problem Number 1

The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2013. At December 31, 2012, inventories were $120,000 (average cost basis) and were $124,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $155,000 at December 31, 2012, and $160,000 at December 31, 2011, if determined on a FIFO basis. A tax rate of 40% is in effect for all years.

    One hundred thousand common shares were outstanding each year. Income from continuing operations was $400,000 in 2012 and $525,000 in 2013. There were no extraordinary items either year

A) Prepare the journal entry to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.)

B) Prepare the 2013–2012 comparative income statements beginning with income from continuing operations. Include per share amounts.

Problem Number 2

Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2013 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 40% in all years. Any tax effects should be adjusted through the deferred tax liability account.
a. Fleming Home Products introduced a new line of commercial awnings in 2012 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 3% of sales. Sales of the awnings in 2012 were $3,500,000. Accordingly, warranty expense and a warranty liability of $105,000 were recorded in 2012. In late 2013, the company’s claims experience was evaluated and it was determined that claims were far fewer than expected: 2% of sales rather than 3%. Sales of the awnings in 2013 were $4,000,000 and warranty expenditures in 2013 totaled $91,000.
b. On December 30, 2009, Rival Industries acquired its office building at a cost of $1,000,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2013 to relocate the company headquarters at the end of 2017. The vacated office building will have a salvage value at that time of $700,000.
c. Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2013 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2014, is $690,000.
d. At the beginning of 2010, the Hoffman Group purchased office equipment at a cost of $330,000. Its useful life was estimated to be 10 years with no salvage value. The equipment was depreciated by the sum-of-the-years’-digits method. On January 1, 2013, the company changed to the straight-line method.
e. In November 2011, the State of Minnesota filed suit against Huggins Manufacturing Company, seeking penalties for violations of clean air laws. When the financial statements were issued in 2012, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $200,000 in penalties. Accordingly, the following entry was recorded:

 

     
  Loss—litigation 200,000  
       Liability—litigation   200,000

 

Late in 2013, a settlement was reached with state authorities to pay a total of $350,000 in penalties.

 

f. At the beginning of 2013, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net earnings by $445,000.

A) Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2013 related to the situation described.

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