WEEK 5 EXERCISES ASSIGNMENTS

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Exercise 22-1Pam 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.  
Pretax Income from:  
Percentage-of-Completion 
Completed-Contract 
Difference2014 $780,000 $590,000 $190,0002015 700,000 480,000 220,000

(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2015?

Net income $

(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.)

Account Titles and Explanation
Debit
Credit

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Ok  Cancel   Exercise 22-3Taveras 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 MethodJanuary 1, 2012 $ 0 $ 0 $ 0 $ 0December 31, 2012 100 80 800 820December 31, 2013 200 240 1,000 940December 31, 2014 320 390 1,130 1,100

Retained earnings reported under LIFO are as follows.

  
Retained Earnings BalanceDecember 31, 2012 $1,200 December 31, 2013 2,200 December 31, 2014 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 reuired.

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Ok  Cancel   Prepare income statements under LIFO for 2012, 2013, and 2014.
TAVERAS CO.

Income Statement

For the Year Ended December 31

LIFO  
2012 
2013 
2014 Cost of Goods SoldNet Income / (Loss)SalesOperating Expenses $ $ $ SalesCost of Goods SoldOperating ExpensesNet Income / (Loss)    Operating ExpensesNet Income / (Loss)SalesCost of Goods Sold       Operating Expenses    Net Income / (Loss)    Cost of Goods Sold    Sales     $ $ $

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

TAVERAS CO.

Income Statement

For the Year Ended December 31

FIFO  
2012 
2013 
2014 Operating ExpensesNet Income / (Loss)SalesCost of Goods Sold $ $ $ SalesCost of Goods SoldNet Income / (Loss)Operating Expenses    SalesNet Income / (Loss)Cost of Goods SoldOperating Expenses       Operating Expenses    Sales    Cost of Goods Sold    Net Income / (Loss)     $ $ $

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Ok  Cancel   Link to TextPrepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2014 and 2013.
TAVERAS CO.

Income Statement

For the Year Ended December 31

  
2014 
2013 Cost of Goods SoldNet Income / (Loss)Operating ExpensesSales $ $ Operating ExpensesSalesCost of Goods SoldNet Income / (Loss)   Operating ExpensesCost of Goods SoldNet Income / (Loss)Sales      Net Income / (Loss)    Sales    Cost of Goods Sold    Operating Expenses     $ $

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Ok  Cancel   Link to TextPrepare comparative retained earnings statements for 2013 and 2014 under FIFO.  
2014 
2013 Retained Earnings, January 1, as adjustedNet Income / (Loss)Retained Earnings, December 31Retained Earnings, January 1, as reportedAdjustment for Cumulative Effect of Applying New Acounting Method $ $ AddLess: Retained Earnings, January 1, as adjustedAdjustment for Cumulative Effect of Applying New Acounting MethodNet Income / (Loss)Retained Earnings, December 31Retained Earnings, January 1, as reported   Retained Earnings, January 1, as adjustedRetained Earnings, December 31Retained Earnings, January 1, as reportedAdjustment for Cumulative Effect of Applying New Acounting MethodNet Income / (Loss) $  AddLess: Adjustment for Cumulative Effect of Applying New Acounting MethodRetained Earnings, January 1, as adjustedNet Income / (Loss)Retained Earnings, December 31Retained Earnings, January 1, as reported   Retained Earnings, January 1, as adjustedNet Income / (Loss)Retained Earnings, December 31Retained Earnings, January 1, as reportedAdjustment for Cumulative Effect of Applying New Acounting Method $ $

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Ok  Cancel   Exercise 22-6Kathleen Cole Inc. acquired the following assets in January of 2012.Equipment, estimated service life, 5 years; salvage value, $15,000 $525,000Building, 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.

(Round answers to 0 decimal places, e.g. 125. 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.)

No.
Account Titles and Explanation
Debit
Credit(a) (b) 

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Ok  Cancel   Exercise 22-9Joy 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.)

Date
Account Titles and Explanation
Debit
CreditDec. 31, 2015  (To correct for the omission of depreciation expense in 2013.)  Dec. 31, 2015  (To record depreciation expense for 2015.)  Exercise 22-14Below is the net income of Anita Ferreri Instrument Co., a private corporation, computed under the three inventory methods using a periodic system.  
FIFO 
Average Cost 
LIFO2012 $26,000 $24,000 $20,0002013 30,000 25,000 21,0002014 28,000 27,000 24,0002015 34,000 30,000 26,000

(Ignore tax considerations.)

(a) Assume that in 2015 Ferreri decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2015, and show net income reported for 2012, 2013, 2014, and 2015. (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.)

Account Titles and Explanation
Debit
Credit  
2015 
2014 
2013 
2012Net income $ $ $ $

(b) Assume that in 2015 Ferreri, which had been using the LIFO method since incorporation in 2012, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2015 and show net income reported for 2012, 2013, 2014, and 2015. (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.)

Account Titles and Explanation
Debit
Credit  
2015 
2014 
2013 
2012Net income $ $ $ $

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Ok  Cancel   Exercise 22-17The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2014, $147,000; 2015, $185,000. Early in 2016, the following errors were discovered.
1. Depreciation of equipment for 2014 was overstated $17,000.
2. Depreciation of equipment for 2015 was understated $38,500.
3. December 31, 2014, inventory was understated $50,000.
4. December 31, 2015, inventory was overstated $16,200.

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.) (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.)

Account Titles and Explanation
Debit
Credit

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