Accounting Changes – Berkeley Company, a manufacturer of many different products, changed its inventory method from FIFO to LIFO. The LIFO method was determined to be preferable. In addition, Berkeley changed the residual values used in computing depreciation for its office equipment. It made this change on January 1, 2007 because it obtained additional information. On December 31, 2007, Berkeley changed the specific subsidiaries comprising […]

Change in Inventory Cost Flow Assumption – The Berg Company began operations on January 1, 2007 and uses the FIFO method in costing its raw material inventory. During 2008 management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: 2007 2008 FIFO—Ending inventory $240,000 […]

Accounting Changes – Sometimes a business entity may change its method of accounting for certain items. It may classify the change as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. The following are three independent, unrelated sets of facts relating to accounting changes. Situation I A company determined that the depreciable lives of its fixed assets are […]

Journal Entries to Correct Errors – The following are several independent errors made by a company that uses the periodic inventory system: 1. Goods in transit, purchased on credit and shipped FOB destination, $10,000, were included in purchases but not in the ending inventory. 2. A purchase of a machine for $2,000 was expensed. The machine has a four-year life, no residual value, and straight-line […]

Accounting Changes – It is important in accounting theory to be able to distinguish the types of accounting changes. Required 1. If a public company desires to change from the sum-ofthe- years’-digits depreciation method to the straight-line method for its fixed assets, what type of accounting change would this be? Discuss the permissibility of this change. 2. If a public company obtained additional information about […]

Effects of Errors – The following are several independent errors made by a company: 1. Failure to record a purchase of inventory on credit. 2. Expensing the purchase of a machine. 3. Failure to accrue wages. 4. Failure to record an allowance for uncollectibles. 5. Including collections in advance as revenue. 6. Including payments in advance as expenses. 7. Failure to accrue warranty costs. 8. […]

Identification and Effects of Changes and Errors – On January 2, 2007, Quo, Inc. hired Reed as its controller. During the year, Reed, working closely with Quo’s president and outside accountants, made changes in accounting policies, corrected several errors dating from 2006 and before, and instituted new accounting policies. Quo’s 2007 financial statements will be presented in comparative form with its 2006 financial statements. Items […]

Change from FIFO to Average Cost – Koopman Company began operations on January 1, 2006 and uses the FIFO inventory method for financial reporting and the average-cost inventory method for income taxes. At the beginning of 2008 the company decided to switch to the average-cost inventory method for financial reporting. The company had previously reported the following financial statements for 2007: Income Statement 2007 Revenues […]

Change from LIFO to Average Cost – Schmidt Company began operations on January 1, 2006 and used the LIFO inventory method for both financial reporting and income taxes. However, at the beginning of 2008 the company decided to switch to the average-cost inventory method for financial and income tax reporting. The company had previously reported the following financial statements for 2007: Income Statement 2007 Revenues […]

Changes and Corrections of Depreciation – At the beginning of 2008, the controller of Holden Company asked you to prepare correcting entries for the following three situations: 1. Machine X was purchased for $100,000 on January 1, 2003. Straight-line depreciation has been recorded for five years, and the Accumulated Depreciation account has a balance of $45,000. The estimated residual value remains at $10,000, but the […]