FINANCE

Question 1

Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows.

 

 

(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

 

 

Question 2

Taveras Co. decides at the beginning of 2014 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2012, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The table presents the effects of the change in accounting principle on inventory and cost of goods sold.

 

 

 

Question 2

Taveras Co. decides at the beginning of 2014 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2012, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The table presents the effects of the change in accounting principle on inventory and cost of goods sold.

 

 

Inventory Determined by  Cost of Goods Sold Determined by

Date  LIFO Method  FIFO Method  LIFO Method  FIFO Method

1-Jan-12  $0   $0   $0   $0

31-Dec-12  100  80  800  820

31-Dec-13  200  240  1,000  940

31-Dec-14  320  390  1,130  1,100

 

Retained earnings reported under LIFO are as follows.

Retained Earnings Balance

31-Dec-12  $1,200

31-Dec-13  2,200

31-Dec-14  3,070

 

Other information:

1 For each year presented, sales are $3,000 and operating expenses are $1,000.

2 Taveras provides two years of financial statements. Earnings per share information is not required.

 

Prepare income statements under LIFO for 2012, 2013, and 2014.

Prepare income statements under FIFO for 2012, 2013, and 2014.

Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2014 and 2013.

 

Prepare comparative retained earnings statements for 2013 and 2014 under FIFO.

Question 3

Kathleen Cole Inc. acquired the following assets in January of 2012.

Equipment, estimated service life, 5 years; salvage value, $15,000       $525,000

Building, estimated service life, 30 years; no salvage value       $693,000

 

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.

Question 4

Joy Cunningham Co. purchased a machine on January 1, 2012, for $550,000. At that time, it was estimated that the machine would have a 10-year life and no salvage value. On December 31, 2015, the firm’s accountant found that the entry for depreciation expense had been omitted in 2013. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2015. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment.

 

 

Prepare the general journal entries that should be made at December 31, 2015, to record these events. (Ignore tax effects.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

 

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