Reference no: EM132035071
Problem - Accounting changes
You have been asked to review the books of Delmonico Company, a construction and building supplies company, on December 30, 2014, before year-end closing. In your audit, you discover certain items that occurred between the years 2012 through 2014. No errors were corrected during those years. The items are summarized below:
a. On January 1, 2012, Delmonico Company purchased a piece of manufacturing equipment for $140,000. It had a $15,000 salvage value and a 10-year useful life. In computing depreciation expense, the bookkeeper failed to deduct salvage value for all years recorded.
b. Beginning merchandise inventory on January 1, 2012 was understated by $10,550.
c. The purchase of a $62,500 of Trading securities was originally recorded in the Investments section of the Balance Sheet. These securities were purchased in February of 2014. (Disregard unrealized holding gains or losses).
d. The bookkeeper failed to record $55,000 of wages expense in 2013.
e. On December 30, 2012, Delmonico sold $8,500 of goods to Renfro Co., but the sale was recorded in 2013. The merchandise was shipped F.O.B. shipping point and was not included in ending inventory. Delmonico uses a periodic inventory system.
f. A two-year fire insurance policy was purchased on May 30, 2012, for $12,000. No adjusting entry was made in 2012 or 2013.
g. At the beginning of 2014, the company changed its method of accounting for bad debts from the direct write-off method (hint: what do we know about this method of recording bad debts?) to the allowance method. It was determined that an allowance of $45,000 should be established on that date.
h. On January 1, 2011, Delmonico purchased a piece of equipment for $685,000. It had a $35,000 salvage value and a 20-year useful life. On January 1, 2014, it was determined that the equipment would only be used for another 15 years. The salvage value remained unchanged.
i. In 2014, the company switched from FIFO to LIFO for its inventory valuation. Net income computed using FIFO for years 2012 - 2014 is: 2012- $120,000; 2013 - $80,000 and 2014- $165,000. Net income computed using LIFO for years 2012 - 2014 is: 2012 - $80,000; 2013 - $50,000; 2014 - $130,000.
j. In 2006, Delmonico purchased 15% of the equity securities of Franco Corporation. By December 2014, it had acquired 30% of Franco Corporation's stock and was able to exert significant influence over Franco Corporation's operations. The current balance in the Available-for-Sale Securities account is $156,000. However, if the accounts been adjusted to reflect the equity method, it is determined that the balance would be $189,000.
k. In October of 2013, Delmonico had been a defendant in a lawsuit that it was probable it would lose, and had accrued $650,000 as a contingent loss. In November of 2014, Delmonico settled the lawsuit for $475,000.
l. On January 1, 2012, Delmonico purchased a truck for $60,000 with a $2,400 salvage value and a 10-year useful life. It used the double-declining balance method to depreciate the asset. On January 1, 2014, Delmonico switched to the straight-line method of depreciation for this truck. On this date, it also determined that the truck only had a remaining useful life of six years.
m. Prior to 2014, Delmonico used the completed-contract method to account for its long-term contracts. In February of 2014, they switched to the percentage-of-completion method to account for long-term construction contracts, but continued to use the completed-contract method for tax purposes. Income for 2014, determined using the percentage-of-completion method, is $88,000. Pre-tax income reported prior to 2014 using the completed-contract method was $225,000 and under the percentage-of-completion method, it would be $305,000. The income tax rate is 40%.
Instructions:
1. Explain whether each of the above is an accounting change in estimate (or change in estimate affected by a change in principle), change in accounting principle, reclassification error, error correction or none of the above.
2. Explain whether or not each change/correction should be reported retrospectively, currently or prospectively.
3. Prepare all necessary entries to record/correct the above transactions. If no entry is necessary, explain why.