Question

Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2018 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.

Fleming Home Products introduced a new line of commercial awnings in 2017 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 2% of sales. Sales of the awnings in 2017 were $3,900,000. Accordingly, warranty expense and a warranty liability of $78,000 were recorded in 2017. In late 2018, the company’s claims experience was evaluated and it was determined that claims were far fewer than expected: 1% of sales rather than 2%. Sales of the awnings in 2018 were $4,400,000, and warranty expenditures in 2018 totaled $100,100.

On December 30, 2014, Rival Industries acquired its office building at a cost of $1,080,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2018 to relocate the company headquarters at the end of 2022. The vacated office building will have a salvage value at that time of $740,000.

Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2018 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2018, is $730,000.

At the beginning of 2015, the Hoffman Group purchased office equipment at a cost of $374,000. 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, 2018, the company changed to the straight-line method.

In November 2016, 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 2017, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $240,000 in penalties. Accordingly, the following entry was recorded:

Loss—litigation	240,000
Liability—litigation		240,000

Late in 2018, a settlement was reached with state authorities to pay a total of $394,000 in penalties.

At the beginning of 2018, 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 $489,000.

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 2018 related to the situation described.

Record journal entry as a direct result of the change.Record adjusting entry for change in warranty.Record journal entry as a direct result of the change.Record adjusting entry for depreciation.Record journal entry as a direct result of the change.Record the adjusting entry for change in inventory cost method.Record journal entry as a direct result of the change. Record adjusting entry for depreciation.Record journal entry as a direct result of the change.Record journal entry as a direct result of the change.Record the adjusting entry for change in depreciation method from sum-of-the-years’-digits method to straight-line method.

Answer 1

Notes :

1. Change in Estimates

a. A change in estimate is merely the result of a change or revision arising due to new information becoming available, or new circumstances, or updated experience.

b. The effect of changes in estimates are recorded in the financial statements in the current and future years.

c. Prior Year financial statements are not revised, and neither are, Account Balances.

S.No	Company	Change in estimate /Change in principle	Approach to Change: Retrospective/ Prospective	Accounting Entry for direct result of change	$ impact of Change		Adjustment Accounting entry in 2019 for change, if any	Comments
A	Fleming Home Products	Change in Estimate	Prospective	No entry required	1% of $ 440,0000	$              44,000.00	Debit : Warranty expense : $ 44,000                Credit : Warranty Liability : $ 44,000	If the effect of change in estimate is material, then a disclosure should be made in the Financial Statements for 2018, to describe the effect of a change in estimate on Income before Extraordinary Items, Net income and Earnings per Share for 2018.
B	Rival Industries	Change in Estimate	Prospective	No entry required	Depreciation calculation as a consequence of change:
					Original Cost	$ 1,080,000
					Useful Life(in years)	40
					Salvage Value	$ -
					Original Depreciation	(Cost-Salvage value)/useful Life	Debit : Depreciation : $ 51,800                Credit : Accumulated Depreciation : $ 51,800	If the effect of change in estimate is material, then a disclosure should be made in the Financial Statements for 2018, to describe the effect of a change in estimate on Income before Extraordinary Items, Net income and Earnings per Share for 2018.
					Original Depreciation/Yr	$ 27,000
					Original depreciation from 2015-17	$ 81,000
					Written Down Value as at 31/12/2017	$999,000
					Revised Salvage value of old office	$740,000
					Revised Depreciation: (Written Down Value - Revised Salavage) / No. of years to relocation to new Office (2018-22)
					($999,000-$740,000)/ 5	51,800
					Therefore, revised depreciation	51,800
C.	Hobbs Barto Merchandizing Inc.	Change in Estimate as a consequence of a Change in Principle	Prospective	No entry required			Inventory at the beginning of the year when change to LIFO is adopted : $ 730,000. This will serve as the base year for Inventory calculated as per LIFO.	Not possible to estimate the cumulative effect on Income to revise accounts retrospectively, as accounting records / data are not available to determine the impact due to the Change in Principle. A Foot note disclosure is required in Financial Satements for the year in which the Change in Principle was given effect to, providing justification for the change in inventory method, as well as reasons for why the retrospective effect could not be applied for such change.
D.	Hoffman Group	Change in Estimate as a consequence of a Change in Principle	Propective	No entry is required			Debit : Depreciation as per SLM                       Credit : Accumulated Depreciation	A change in the method of calculating depreciation is a Change in Estimate as a consequence of a Change in Principle. The undepreciated value of the asset or the written down value will be depreciated on Straight :Line Method henceforth.
E	Huggins Manufacturing Company	Change in Estimate	Prospectively	No entry is required	Litigation Loss as per original estimate	$240,000
					Litigation Loss as per settlement	$394,000
					Change in Litigation Loss	$154,000	Debit : Loss -Litigation : $ 154,000                       Credit : Liability -Litigation; $154,000	A disclosure should be made in the Financial Statements for 2018, to describe the effect of a change in estimate on Income before Extraordinary Items, Net income and Earnings per Share for 2018.
F.	Nantzen Specialities	Change in Accounting Principle	Prospectively	No entry required	Change will be effective only for assets installed or completed after the date of change. It does not impact assets depreciated by the Sum-of-the-digits method in earlier or prior periods.			A disclosure is required in Financial Satements for the year in which the Change in Principle was given effect to, providing justification for the change, as well as reasons the impact of change in the income for the current year.