Hello, Could you please help me with this question Below are four independent, m

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Hello, Could you please help me with this question

Below are four independent, material and unrelated situations involving accounting changes. Each change occurs during 2014 before any adjusting or closing entries were prepared. Assume a tax rate of 40% and any tax effects are adjusted through the deferred tax asset or liability account. Discuss and evaluate the type of accounting change, briefly describe any steps that should be taken to appropriately report the situation, if you wish to complete journal entries to document the change, please feel free to do so.

A) On December 31, 2005, Laurie Inc. acquired its office building at a cost of $8,000,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. Plans were finalized in 2014 to relocate the company headquarters at the end of 2015. The vacated office building will have a salvage value at that time of $2,800,000.

B) At the beginning of 2009, Sam Corp. purchased office equipment at a cost of $1,200,000. Its useful life was estimated to be ten years with no salvage value. The equipment has been depreciated by the sum-of-the-years digits method. On January 1, 2014, the company changed to the straight-line method.

C ) John Company changed its inventory cost method to LIFO from FIFO at the beginning of 2014 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2014 was estimated to be $15 million. A LIFO reserve at the end of 2014 was calculated to be $706,000.

D) Karl Inc. introduced a new line of auto covers in 2013 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are expected to approximate 4% of sales. Sales of the covers in 2013 were $1,500,000. Warranty expense and warranty liability of $60,000 was recorded in 2013. In late 2014, the company’s claims experience was evaluated and it was determined that claims were far fewer than expected and 3% rather than 4% was recommended. Sales of the covers in 2014 amounted to $3,200,000 and warranty expenditures in 2014 totaled $72,000.  

Thank you

Explanation / Answer

A). Here the building is to be revalued considering the new useful life. Any increase or deacrease in the value is to be adjusted to income statement.

B). In such situation where the method of calculating the depriciation has changed, the depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed.

C). Any decrease in the inventory valuation is to be adjusted against the inventory reserves first and then to be charged to income statement. Similarly, any increase increase is to be credited to income statement.

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