Question

1. In November 2019, 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 2020, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $140,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	140,000
Liability—litigation		140,000

Late in 2021, a settlement was reached with state authorities to pay a total of $284,000 in penalties.

6. At the beginning of 2021, 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 $379,000.

Required:
For each situation:
1. Identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change, as well as any adjusting entry for 2021 related to the situation described.

Answer 1

Ans:

1. Its a change in Accounting Estimate. For rectification the same following reverse Journal Entry would be recorded.

S.no	Account title and explanation	Debit($)	Credit($)
	Loss-litigation{284,000-140,000}	144,000
	Liability-Litigation		144,000

2. its a change in Accounting Principal Accounted, no entry is required to record any change because as per the law, the change will be effective only on assets placed in service after the change of date.