Eastland Inc. began operations in 2019 and used the LIFO method to compute $800,000 for cost of goods sold for that year. At the start of the subsequent year (2020), it decided to switch to the FIFO method.

QUESTION

Name: _______________________

 

Chapter 22 Graded Assignment

 

Problem I: (18 points)

 

Eastland Inc. began operations in 2019 and used the LIFO method to compute $800,000 for cost of goods sold for that year. At the start of the subsequent year (2020), it decided to switch to the FIFO method.

 

Eastland determined that its cost of goods sold under FIFO would have been $600,000 in 2019.

 

Required: If Eastland is subject to a 25% income tax rate, what journal entry should it make on 1/1/20 when it switches from LIFO to FIFO?

 

		Debit	Credit
1/1/20

 

 

Problem II: (12 points)

 

Jernigan Corp.’s trial balance indicates the following select account balances at the end of 2019 before the year-end adjustment to record bad debts:

 

Jernigan Corp. Trial Balance (partial) 12/31/19
	Debit	Credit
Accounts Receivable – 12/31/19	$ 800,000
Allowance for Doubtful Accounts – 12/31/19		$   16,000
Sales Revenue		12,000,000
Bad Debts Expense – 1/1/19	0

At the end of 2019, Jernigan’s accountant estimated 3% of its ending gross accounts receivable account balance was uncollectible, and the following incorrect adjusting entry was prepared:

		Debit	Credit
12/31/19	Bad Debt Expense	24,000
	Allowance for Doubtful Accounts		24,000

(Continued on next page)

 

 

Required: Assume you discover this error in January of 2020, after 2019’s financial statements and closing entries have been prepared. In the journal below, prepare the correcting journal entry that should be made (ignore tax effects).

Note: A check figure is given below.

		Debit	Credit
1/1/20

 

Check figure: After the correcting entry is made, the “Allowance for Doubtful Accounts” balance should be $24,000.

 

Problem III: (12 points) On 1/1/19, Red Inc. issued 10-year bonds with a face value of $2,000,000 and a face rate of 6% compounded semi-annually when the effective rate of interest was 7% compounded semi-annually. The issue price of the bonds was $1,857,876. Interest is paid semi-annually on January 1 and July 1, beginning July 1, 2019. Red has a calendar year-end and uses the effective interest method.

 

Red made the following journal entries related to this bond during 2019:

 

Date		Debit	Credit
1/1/19	Cash	1,857,876
	Discount on Bond Payable	142,124
	Bond Payable		2,000,000
7/1/19	Interest Expense	65,026
	Cash		60,000
	Discount on Bond Payable		5,026
12/31/19	Interest Expense	65,026
	Interest Payable		60,000
	Discount on BP		5,026

 

While the 1/1/19 and 7/1/19 entries are correct, the 12/31/19 entry is partially incorrect.

Part A: Assume you find this error prior to the issuance of the 2019 financial statements.  What correcting journal entry, dated 12/31/19, should Red make? Round all calculations to the nearest whole dollar.

Note: A check figure is given below.

Date		Debit	Credit
12/31/19

 

Check figure: After the correcting entry is made, the carrying value of the bonds should be $1,868,104.

 

Part B: Assume you find this error shortly after the issuance of the 2019 financial statements and 2019 closing entries are made. Also, assume no other journal entries related to this bond have yet been made in 2020.

What correcting journal entry dated 1/1/20 should Red make?  Round all calculations to the nearest whole dollar.

Date		Debit	Credit
1/1/20

 

 

Problem IV: (9 points)  On 1/1/19, Greenwood Corp. (the lessee) leased equipment from a lessor.  The following information is available:

• Greenwood has already determined the lease is an operating lease 
• The lease term is eight (8) years and requires annual payments of $10,000 at the beginning of each year
• Using a 10% discount rate, the present value of the lease payments has already been determined to be $58,684
• Greenwood is not guaranteeing a residual value
• Greenwood knows the implicit rate on the lease is 10%
• Greenwood has a calendar year-end.

The 1/1/19 and 12/31/19 journal entries the accountant made are as follows:

		Debit	Credit
1/1/19	Right of Use Asset	58,684
	Lease Liability		58,684
1/1/19	Lease Liability	10,000
	Cash		10,000
12/31/19	Lease Expense	4,868
	Lease Liability		4,868

Required: While the above 1/1/19 entries are correct, the entry for 12/31/19 is incorrect. Assume you discover this error in January of 2020 after 2019’s financial statements and closing entries have already been prepared. In the journal below, prepare the correcting journal entry, which should be made. Round all calculations to the nearest whole dollar.

Note: A check figure is given below.

		Debit	Credit
1/1/20

Check figure: After the correcting entry is made, the Right of Use Asset account balance should be $53,552.

Problem V: (9 points)

 

Basic Facts:   Wheeler Inc. has the following information available for one of its machines:   Date purchased ————- 1/1/2018 Cost ————————– $400,000 Estimated useful life ——- 5 years Estimated residual value — $20,000   Wheeler used the straight-line method for the first two years of the asset’s life. On 1/1/20, a capital expenditure was made with respect to this machine for $35,000.  In addition, Wheeler decided that the remaining life (as of 1/1/2020) is 4 years.   They also estimate that the new residual value is $30,000.

 

Part A: Assuming Wheeler continues to use the straight-line method, what amount of depreciation expense should be recorded in 2020? Calculations must be shown to receive partial credit. An accounting check reminder is given below.

Answer: $________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounting check:  The book value of the machine at the end of its useful life should equal its new residual value.

 

Part B: Assume that, in addition to the basic facts, Wheeler also decides to switch to the DDB method for 2020 and beyond. What amount of depreciation expense should be recorded in 2020? Calculations must be shown to receive partial credit.

Answer: $_________

 

 

 

 

 

Multiple-Choice: Worth 5 points each.

 

Important directions for multiple choice:  After indicating your answer on each multiple-choice question, transfer your answers to the area below. Please use only capital letters. If Bella cannot determine your letter, no credit will be received.

 

1.			5.
2.			6.
3.			7.
4.			8.

 

 

Multiple-Choice: Circle or highlight the best one answer. No partial credit is given for multiple-choice questions. (5 points each)

 

1. Assume a company decides half-way through 2020 to change one of the accounting principles it has been using for the past five years. Which of the following statements is true?

 

1. The cumulative effect on retained earnings is determined as of the date of the change.
2. The cumulative effect on retained earnings is determined as of the beginning of the year in which the change is made.
3. The cumulative effect on retained earnings does not need to be determined.

 

2. Which of the following is describing a situation which will be accounted for as a change in accounting estimate?

 

1. A company realizes that last year’s ending inventory balance was overstated. It made this discovery shortly after last year’s financial statements were already prepared.
2. A company acquires 100% of the outstanding stock of another company.
3. A company adopts the new lease and revenue recognition accounting standards.
4. A company decides to no longer permit newly hired employees to participate in the company’s defined benefit plan.
5. A company decides to adjust its estimate of warranty expense from 2% of sales to 3% of sales.

 

 

3. True or False: If an error has self-corrected over two years, there is no need for a company to restate its financial statements for presentation purposes.
   1. True
   2. False

 

 

 

4. Taylor Inc. is a calendar-year corporation. During 2020, Taylor made three errors that were not caught before its 2020 financial statements, and closing entries had been prepared:

 

·        Error #1: Its ending inventory count for 2020 was understated by $40,000,

·        Error #2: Its depreciation expense calculation for 2020 was overstated by $10,000, and ·        Error #3: It failed to record an unrealized loss on trading securities in the amount of $15,000.

 

As a result of these three errors, by what amount was its 2020 net income over or understated (ignore income taxes)?

 

1. Net income was understated by $45,000.
2. Net income was overstated by $45,000.
3. Net income was understated by $35,000.
4. Net income was overstated by $35,000.
5. Net income was understated by $65,000.
6. Net income was overstated by $65,000.
7. Net income was understated by $15,000.
8. Net income was overstated by 15,000.

 

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:

 

Basic Facts:  On November 1, 2019, Red Corp., a calendar year-end company, financed the purchase of a machine to be used in its business by issuing a $500,000, 12%, one-year note payable. The note’s face value plus interest is due on November 1, 2020.   At the end of 2019, Red Corp. failed to accrue any interest on this note.

 

5. Assuming you discover this error on 1/1/20, after the 2019 financial statements and closing entries have already been prepared, the correcting entry you should make is:

				Debit	Credit
A.		1/1/20	Interest Expense	10,000
			Interest Payable		10,000
B.		1/1/20	Retained Earnings	10,000
			Interest Payable		10,000
C.		1/1/20	Interest Expense	10,000
			Retained Earnings		10,000
D.		1/1/20	Retained Earnings	60,000
			Interest Payable		60,000
E.		1/1/20	Retained Earnings	60,000
			Interest Expense		60,000

 

 

6. Going back to the basic facts, assume instead the error was not discovered until the end of 2020 (which is after the note was paid back). Assume the following journal entry was made on November 1, 2020, when the note was paid back:

 

		Debit	Credit
11/1/20	Note Payable	500,000
	Interest Expense	60,000
	Cash		560,000

 

If you discover the 2019 and 2020 errors on 12/31/20, before the 2020 financial statements and closing entries are prepared, what correcting journal entry, if any, should you make?

 

					Debit	Credit
A.		12/31/20	Retained Earnings		50,000
			Interest Expense			50,000
B.		12/31/20	Retained Earnings		50,000
			Interest Payable			50,000
C.		12/31/20	Retained Earnings		10,000
			Interest Expense			10,000
D.		12/31/20	Retained Earnings		10,000
			Interest Payable			10,000
E.		12/31/20	Cash		10,000
			Interest Expense			10,000
F.		No entry should be made

 

 

7. If the “income before income tax” subtotal is overstated by $100,000 due to an error, how will the “income tax expense” amount be affected if a company has a 25% income tax rate?

 

1. Income tax expense will be overstated by $25,000
2. Income tax expense will be understated by $25,000
3. Income tax expense will be overstated by $75,000
4. Income tax expense will be understated by $75,000

 

8. If the “income before income tax” subtotal is understated by $60,000 due to an error, and the company has a 25% income tax rate, how will the company’s after-tax net income amount be affected?

 

1. Net income is overstated by $75,000.
2. Net income is understated by $75,000.
3. Net income is overstated by $45,000.
4. Net income is understated by $45,000.
5. Net income is overstated by $60,000.
6. Net income is understated by $60,000.

7. ANSWER