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Chapter 22: Question 1 (page 1305)

In recent years, the Wall Street Journal has indicated that many companies have changed their accounting principles. What are the major reasons why companies change accounting methods?

Short Answer

Expert verified

The Accounting principles are the rules and regulations, and the reasons to change them are to bring change to the whole company and produce better accounting reports.

Step by step solution

01

Definition of accounting principles

Accounting principles refer to the rules and regulations which the companies have to follow when recording and reporting the financial data.

02

Explanation of reasons

The companies change accounting methods because of the following reasons:

  1. There is a requirement of change in accounting methods of the whole organization and its standards of accounting
  2. If the new accounting method shows more reliable and relevant accounting reports

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Most popular questions from this chapter

(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.

1. Depreciation of equipment for 2017 was overstated \(17,000.

2. Depreciation of equipment for 2018 was understated \)38,500.

3. December 31, 2017, inventory was understated \(50,000.

4. December 31, 2018, inventory was overstated \)16,200.

Instructions

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

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.

Below 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 LIFO 2015 \(26,000 \)24,000 $20,000 2016 30,000 25,000 21,000 2017 28,000 27,000 24,000 2018 34,000 30,000 26,000

Instructions (Ignore tax considerations.) (a) Assume that in 2018 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 2018, and show net income reported for 2015, 2016, 2017, and 2018.

(b) Assume that in 2018 Ferreri, which had been using the LIFO method since incorporation in 2015, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2018 and show net income reported for 2015, 2016, 2017, and 2018

A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.

Dr. Cr.

Supplies \( 2,700

Salaries and wages payable \) 1,500

Interest receivable 5,100

Prepaid insurance 90,000

Unearned rent –0–

Interest payable 15,000

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2018, totaled \(1,100.

2. Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to \)4,400.

3. The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to \(4,350 on December 31, 2018.

4. The unexpired portions of the insurance policies totaled \)65,000 as of December 31, 2018.

5. \(28,000 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.

6. Depreciation on equipment for the year was erroneously recorded as \)5,000 rather than the correct figure of \(50,000.

7. A further review of depreciation calculations of prior years revealed that equipment depreciation of \)7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(c) Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.
See all solutions

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