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Chapter 22: 22-3BE (page 1307)

Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year’s income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon’s 2017 journal entry to record the change in accounting principle.

Short Answer

Expert verified

Retained earnings are the accumulated profits, and Journal entry to record accounting change is Inventory is debited, deferred tax liability and retained earnings are credited.

Step by step solution

01

Definition of Retained Earnings

Retained Earnings are defined as the accumulated profits of the previous years which are left after the payment of dividends

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

2017

Inventory

1,200,000

Deferred Tax Liability

480,000

Retained Earnings

720,000

(Being change in accounting principle is recorded)

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Most popular questions from this chapter

Gerald Englehart Industries changed from the double-declining-balance to the straight-line method in 2018 on all its equipment. There was no change in the assets’ salvage values or useful lives. Plant assets, acquired on January 2, 2015, had an original cost of \(1,600,000, with a \)100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was \(270,000 in 2017 and \)300,000 in 2018.

Instructions (a) Prepare the journal entry(ies) to record depreciation expense in 2018.

(b) Starting with income before depreciation expense, prepare the remaining portion of the income statement for 2017 and 2018.

Holtzman Company is in the process of preparing its financial statements for 2017. Assume that no entries for depreciation have been recorded in 2017. The following information related to depreciation of fixed assets is provided to you.

1. Holtzman purchased equipment on January 2, 2014, for \(85,000. At that time, the equipment had an estimated useful life of 10 years with a \)5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2017, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a \(3,000 salvage value.

2. During 2017, Holtzman changed from the double-declining-balance method for its building to the straight-line method. The building originally cost \)300,000. It had a useful life of 10 years and a salvage value of \(30,000. The following computations present depreciation on both bases for 2015 and 2016. 2016 2015 Straight-line \)27,000 \(27,000 Declining-balance 48,000 60,000

3. Holtzman purchased a machine on July 1, 2015, at a cost of \)120,000. The machine has a salvage value of \(16,000 and a useful life of 8 years. Holtzman’s bookkeeper recorded straight-line depreciation in 2015 and 2016 but failed to consider the salvage value.

Instructions (a) Prepare the journal entries to record depreciation expense for 2017 and correct any errors made to date related to the information provided. (Ignore taxes.)

(b) Show comparative net income for 2016 and 2017. Income before depreciation expense was \)300,000 in 2017, and was $310,000 in 2016. (Ignore taxes.)

Which of the following is true regarding whether IFRS specifically addresses the accounting and reporting for effects of changes in accounting policies?

Direct effects Indirect effects

(a) Yes Yes

(b) No No

(c) No Yes

(d) Yes No

Which of the following is false?

(a) GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

(b) The accounting for changes in estimates is similar between GAAP and IFRS.

(c) Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors.

(d) GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2017 net income and 2018 net income. 2017 2018 (a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015. (b) Wages payable were not recorded at 12/31/17. (c) Equipment purchased in 2017 was expensed. (d) 2017 ending inventory was overstated. (e) Patent amortization was not recorded in 2018.
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