ACCOUNTING-ACTP 5008 Worksheet 6 Accounting changes

QUESTION

ACTP 5008
Worksheet 6
Accounting changes

You have been asked
to review the books of Delmonico Company, a construction and building supplies
company, on December 30, 2014, before
year-end closing. In your audit, you discover certain items that occurred between
the years 2012 through 2014. No errors were corrected during those years. The
items are summarized below:

a.
On
January 1, 2012, Delmonico Company purchased a piece of manufacturing equipment
for $140,000. It had a $15,000 salvage value and a 10-year useful life. In
computing depreciation expense, the bookkeeper failed to deduct salvage value
for all years recorded.

b.
Beginning
merchandise inventory on January 1, 2012 was understated by $10,550.

c.
The
purchase of a $62,500 of Trading securities was originally recorded in the
Investments section of the Balance Sheet. These securities were purchased in February
of 2014. (Disregard unrealized holding gains or losses).

d.
The
bookkeeper failed to record $55,000 of wages expense in 2013.

e.
On
December 30, 2012, Delmonico sold $8,500 of goods to Renfro Co., but the sale
was recorded in 2013. The merchandise was shipped F.O.B. shipping point and was
not included in ending inventory. Delmonico uses a periodic inventory system.

f.
A
two-year fire insurance policy was purchased on May 30, 2012, for $12,000. No
adjusting entry was made in 2012 or 2013.

g.
At the
beginning of 2014, the company changed its method of accounting for bad debts
from the direct write-off method
(hint: what do we know about this method of recording bad debts?) to the
allowance method. It was determined that an allowance of $45,000 should be
established on that date.

h.
On
January 1, 2011, Delmonico purchased a piece of equipment for $685,000. It had
a $35,000 salvage value and a 20-year useful life. On January 1, 2014, it was
determined that the equipment would only be used for another 15 years. The
salvage value remained unchanged.

i.
In 2014,
the company switched from FIFO to LIFO for its inventory valuation. Net income computed
using FIFO for years 2012 – 2014 is: 2012-
$120,000; 2013 – $80,000 and 2014- $165,000. Net income computed using LIFO
for years 2012 – 2014 is: 2012 –
$80,000; 2013 – $50,000; 2014 –
$130,000.

j.
In
2006, Delmonico purchased 15% of the equity securities of Franco Corporation. By
December 2014, it had acquired 30% of Franco Corporation’s stock and was able
to exert significant influence over Franco Corporation’s operations. The
current balance in the Available-for-Sale Securities account is $156,000. However,
if the accounts been adjusted to reflect the equity method, it is determined
that the balance would be $189,000.

k.
In
October of 2013, Delmonico had been a defendant in a lawsuit that it was
probable it would lose, and had accrued $650,000 as a contingent loss. In
November of 2014, Delmonico settled the lawsuit for $475,000.

l.
On
January 1, 2012, Delmonico purchased a truck for $60,000 with a $2,400 salvage
value and a 10-year useful life. It used the double-declining balance method to
depreciate the asset. On January 1,
2014, Delmonico switched to the straight-line method of depreciation for this
truck. On this date, it also determined that the truck only had a remaining
useful life of six years.

m.
Prior
to 2014, Delmonico used the completed-contract method to account for its
long-term contracts. In February of 2014, they switched to the
percentage-of-completion method to account for long-term construction
contracts, but continued to use the completed-contract method for tax purposes.
Income for 2014, determined using the percentage-of-completion method, is
$88,000. Pre-tax income reported prior
to 2014 using the completed-contract method was $225,000 and under the
percentage-of-completion method, it would be $305,000. The income tax rate is
40%.

Instructions:

1.
Explain
whether each of the above is an accounting change in estimate (or change in
estimate affected by a change in principle), change in accounting principle, reclassification
error, error correction or none of the above.
2.
Explain
whether or not each change/correction should be reported retrospectively,
currently or prospectively.
3.
Prepare
all necessary entries to record/correct the above transactions. If no entry is
necessary, explain why.

ANSWER:

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