Problem III — Accounting Changes, Error Corrections, and Prior Period Adjustment
ID: 2499596 • Letter: P
Question
Problem III — Accounting Changes, Error Corrections, and Prior Period Adjustments. (24 points)
Melba Company’s reported net incomes for 2015 and the previous two years are presented below.
2015 2014 2013
$105,000 $95,000 $70,000
2015’s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2013 and 2014 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes.
Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment situations described below, prepare the journal entry or entries Melba Company should record during 2015.
If no journal entry is required, write “none.”
(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2015. If no journal entry is required, write “none.”
1. Early in 2015, Melba determined that equipment purchased in January, 2013 at a cost of $1,075,000, with an estimated life of 5 years and salvage value of $75,000 is now estimated to continue in use until December 31, 2019 and will have a $25,000 salvage value. Melba recorded its 2015 depreciation at the end of 2015.
2. Melba determined that it had understated its depreciation by $20,000 in 2014 owing to the fact that an adjusting entry did not get recorded.
3. Melba bought a truck January 1, 2012 for $60,000 with a $6,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2017. Melba uses straight-line depreciation for its trucks.
4. During 2015, Melba changed from the straight-line method of depreciating its cement plant to the double-declining-balance method. The following calculations present depreciation on both bases. (Ignore income taxes.) The 2015 amount applies double-declining balance to the 1/1/15 carrying amount after straight-line was used.
2015 2014 2013
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000
5. Melba, in reviewing its provision for uncollectibles during 2015, has determined that 1/2 of 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1% as its rate in 2014 and 2013 when the expense had been $20,000 and $14,000, respectively. The company would have recorded $60,000 of bad debt expense on December 31, 2015 under the old rate.
6. During 2015, Melba decided to change from the LIFO method of valuing inventories to average cost. The net incomes involved under each method were as follows:
2015 2014 2013
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000
Assume no difference between LIFO and average cost inventory values in years prior to 2013.
Problem III 1 (a) Date Accounts Debit Credit During 2015 1 (b) Date Accounts Debit Credit Adjusting 2 (a) Date Accounts Debit Credit During 2015 2 (b) Date Accounts Debit Credit Adjusting 3 (a) Date Accounts Debit Credit During 2015 3 (b) Date Accounts Debit Credit Adjusting 4 (a) Date Accounts Debit Credit During 2015 4 (b) Date Accounts Debit Credit Adjusting 5 (a) Date Accounts Debit Credit During 2015 5 (b) Date Accounts Debit Credit Adjusting 6 (a) Date Accounts Debit Credit During 2015 6 (b) Date Accounts Debit Credit AdjustingExplanation / Answer
1. (a) None
(b) Depreciation Expense.............................................................. 78,000
Accumulated Depreciation.............................................. 78,000
[($645,000 – $240,000 – $15,000) ÷ 5]
2. (a) Retained Earnings.................................................................... 20,000
Accumulated Depreciation.............................................. 20,000
(b) None
3. (a) Truck......................................................................................... 50,000
Accumulated Depreciation.............................................. 22,500
Retained Earnings........................................................... 27,500
(b) Depreciation Expense.............................................................. 7,500
Accumulated Depreciation.............................................. 7,500
4. (a) None
(b) Depreciation Expense.............................................................. 200,000
Accumulated Depreciation.............................................. 200,000
5. (a) None
(b) Bad Debt Expense.................................................................... 25,000
Allowance for Doubtful Accounts.................................... 25,000
6. (a) Inventory (Beginning)............................................................... 14,000
Retained Earnings........................................................... 14,000
(b) None
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