Question

Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2016 and 2017, reported the following amounts and subtotals ($ in millions):

            Assets              Liabilities        Shareholders Equity               Net Income     Expenses

2016    $740                  $330                     $410                                   $210                 $150           

2017    $820                  $400                     $420                                   $230                 $175

In 2018, the following situations occurred or came to light:

Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts:

2016 inventory overstated by $12 million

2017 inventory understated by $10 million

A liability was accrued in 2016 for a probable payment of $7 million in connection with a lawsuit ultimately settled in December 2018 for $4 million.

A patent costing $18 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired.

Whaley’s conveyer equipment was depreciated by the sum-of-the-years’-digits (SYD) basis since it was acquired at the beginning of 2016 at a cost of $30 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2018, Whaley decided to switch to straight-line depreciation.

Required:
For each situation:

Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. (Ignore tax effects.)

1.Record entry necessary as a direct result of the change or error correction.

2.Record adjusting journal entry if needed for 2018.

3.Record entry necessary as a direct result of the change or error correction.

4.Record adjusting journal entry if needed for 2018.

5.Record entry necessary as a direct result of the change or error correction.

6.Record adjusting journal entry if needed for 2018.

7.Record entry necessary as a direct result of the change or error correction.

8.Record adjusting journal entry if needed for 2018.

Answer 1