1) For each of the following situations, determine the accounting method that should be employed.

Type of Accounting Changes Accounting Methods

Change in Principle
Change in Estimate
Change in Entities
Change in Accounting Estimate
effected by a Change in
Accounting Principle

2) Complete the following table by selecting the appropriate type of change and the accounting method appropriate for
each event.

Event Type of Change Accounting Method

Change from LIFO to FIFO.
Change in the warranty expense
provision.
Change from completed-
contract to percentage-of-
completion method.
Purchase of a new subsidiary
with 60% ownership that is five
years old.
Change from reporting
inventory from the aggregate
method to the individual item
method.
Change in the life and salvage
value of a depreciable asset.
Change from straight-line to
declining balance depreciation.

3) Bronco Construction, Inc. decided to change from the completed-contract method of accounting to the percentage-of-
completion method. The following information is available for net income. Ignore income tax effects:
Net Income
Year Ended Percentage of Completion Completed Contract
December 31, 2018 $145,000 $125,000
December 31, 2019 185,000 154,000
December 31, 2020 201,000 180,000

Required:
1) Prepare the journal entry required to record the accounting change on January 1, 2020.
2) Prepare the footnote disclosure for the change from the completed-contract method to the percentage-of-completion
method. Designate the note as "Note A: Change in Method of Accounting for Bronco Construction, Inc."
4) Machino, Inc. began operations on January 1, 2018. During 2020, management decided to change from average-cost
method to FIFO for its merchandise inventories. The change was effective at January 1, 2020. Management determined
that cost of goods sold for each method would be:

Cost of Goods Sold 2020 2019 2018

Average cost method $160,000 $130,000 $140,000
FIFO method $120,000 $110,000 $115,000

The company's statements as reported under average-cost before implementing the accounting change for 2020, 2019, and
2018, respectively, are presented below. The income tax rate for Machino is 40%.

Machino, Inc
Comparative Income Statements
For the Years Ended December 31
2020 2019 2018
Sales $550,000 $475,000 $445,000
Cost of Goods Sold (160,000) (130,000) (140,000)
Operating Expenses (70,000) (50,000) (35,000)
Income before Taxes $320,000 $295,000 $270,000
Tax Expense (40%) (128,000) (118,000) (108,000)
Net Income $192,000 $177,000 $162,000

Required:
1) Prepare the comparative income statements for Machino, Inc. after the change to FIFO.
2) Determine the after-tax cumulative effect in retained earnings at January 1, 2020.
3) Prepare the journal entry on January 1, 2020 for the change in accounting principle.

5) Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in
uncollectible accounts. In 2018, her sales were $3,200,000 and in 2019, sales were $3,800,000. Before 2019, she estimated
that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. She
has recorded bad debt expense of 2% for 2018. Does she need to make a retroactive correction for 2018, and should she
add an additional adjustment to 2019? If so, write the journal entry for the year-end adjustment in 2019. She has already
recorded 2% of sales for bad debts in 2019 for 2019 sales.
Answer: Estimates frequently need to be adjusted for changes in the business environment. Emma should not make any
adjustment for 2018 because the estimate was made in good faith relying on information at that time. Neither should she
make an additional change from 2018 during 2019. If Emma believes that the best rate for 2019 is 3%, she should record a
journal entry to increase the 2019 estimate of 2% to 3% of 2019 sales.

The journal entry for December 31, 2019 to adjust the estimated expense is:

Debit Credit
Bad Debt Expense 38,000
Allowance for Bad Debts 38,000

$3,800,000 × 1% additional equals $38,000.

6) In reconciling information to complete its financial statements, Flying High Corporation discovered the following
situations:

Income before taxes and the changes $400,000

Income tax rate 35%
Bad debt expense increased 1% of sales
Sales $900,000
Equipment original cost $500,000
Equipment accumulated depreciation $200,000
Method of depreciation unchanged DDB
Remaining life changed from 5 years to 3 years

Required: Assuming that no depreciation had been recorded, recompute depreciation expense, bad debt expense, income
before taxes, income tax expense, and net income.
7) In reconciling information to complete its financial statements, Biltmore, Inc. discovered the following situations:

Income before taxes and the changes $1,000,000

Income tax rate 40%
Warranty expense decreased 1% of sales
Sales $6,000,000
Equipment original cost $800,000
Equipment accumulated depreciation $200,000
Method of depreciation unchanged SL
Remaining life changed from 5 years to 6 years

Required: Assuming that no depreciation had been recorded, recompute depreciation expense, warranty expense
change, income before taxes, income tax expense, and net income.
8) While completing the adjusting entries for 2017 in early 2018, the internal auditor discovered that a trademark, with an
estimated eight-year life that was registered on January 1, 2017 had not been amortized. The trademark cost $400,000.
(The income tax rate is 40%.) The books are still open in 2017.

Required: Describe the steps to correct the error.

Answer: Since the error occurred in 2017 and the books are still open, the error can be corrected in a timely fashion. The
error is the failure to amortize the trademark costs over the first of eight years. There is no past year that needs correction
so the solution is to record on December 31, 2017 the following entry:
Amortization Expense—of Trademark 50,000
Trademark 50,000

No disclosure of the error is required after the entry is made.

9) Bauer Corp. purchased an insurance policy on its plant with liability for harm to its employees in the case of a
catastrophe in January, 2017 and paid a five-year premium for $300,000. The whole amount was recorded as Insurance
Expense. The error was discovered in early 2020 when the accountants were reconciling 2019 for adjusting entries. The
books are still open in 2019. (The tax rate is 40% for all years.) Income before taxes for 2017 is $1,040,000 and 2018 is
$1,220,000.

Required: Describe the steps to properly accounting for this error correction. Prepare the necessary journal entries on
December 31, 2019.
10) For each of the following situations, determine the accounting method that should be employed.

Type of Accounting Changes Accounting Methods

Change in Principle
Change in Estimate
Change in Estimate effected by a Principle change
Change in Entities
Error Correction

11) Complete the following table by selecting the appropriate type of change and the accounting method appropriate for
each event.

Event Type of Change Accounting Method

Change from FIFO to LIFO.
Change in the warranty expense
provision.
Multi-year insurance policy
charged to insurance expense.
Change from percentage-of-
completion to completed-
contract to method.
Patent not amortized because it
is not expected to decline in
value.
Purchase of a new subsidiary
with 60% ownership that is
three years old.
Change from reporting
inventory from the aggregate
method to the individual item
method.
Change from writing off bad
debts as they become
uncollectible to the allowance
method.
Change in the life and salvage
value of a depreciable asset.
Failure to record the correct
ending inventory balance.
Change from straight-line to
declining balance depreciation.

12) Vieta, Inc.'s CFO discovered a program error in its inventory program in early 2020, when she was making year-end
adjustments to the financial statements for 2019. The books are still open in 2019 . The errors began in 2017. Below is a
summary of the sales and cost of goods sold on income statement items for the three years:

Year 2017 2018 2019

Sales $980,000 $1,090,000 $1,210,000
Cost of Goods Sold:
Beginning Inventory 210,000 205,000 307,000
 Net Purchases 402,000 507,000 611,000
Cost of Goods Available for Sale 612,000 712,000 918,000
Ending Inventory 205,000 307,000 322,000
Cost of Goods Sold 407,000 405,000 596,000
Gross Profit $573,000 $685,000 $614,000

Upon further analysis, the CFO determined that each of the years had ending inventory errors. The correct amounts for
the years were: 2017, $231,000; 2018, $350,000; and 2019, $474,000. The amounts for 2017 beginning inventory and all
purchases are correct as stated.

Required:
1) Reconstruct the table with corrected amounts.

Year 2017 2018 2019

Sales $980,000 $1,090,000 $1,210,000
Cost of Goods Sold:
Beginning Inventory 210,000
Net Purchases 402,000 507,000 611,000
Cost of Goods Available for Sale 612,000
Ending Inventory
Cost of Goods Sold
Gross Profit

2) Make the journal entry to correct the errors using the proper date.
Account Debit Credit

3) Determine the required disclosures for this series of errors.

3) The CFO must disclose the reason for the error correction, include a reconstruction of the income statements and
balance sheets indicating the change in income before taxes, income taxes, net income, and earnings per share.
Comparative income statements and balance sheets should be retrospectively adjusted to reflect the corrected data.
13) Courtney's Cafes, Inc.'s CFO discovered a series of errors in its inventory system in early 2020, when he was making
year-end adjustments to the financial statements for 2019. The books are still open in 2019.The errors began in 2017. Below
is a summary of the sales and cost of goods sold on income statement items for the three years:

Year 2017 2018 2019

Sales $510,000 $690,000 $805,000
Cost of Goods Sold:
Beginning Inventory 52,000 75,000 84,000
Net Purchases 162,000 185,000 224,000
Cost of Goods Available for Sale 214,000 260,000 308,000
Ending Inventory 75,000 84,000 96,000
Cost of Goods Sold 139,000 176,000 212,000
Gross Profit $371,000 $514,000 $593,000

Upon further analysis, the CFO determined that each of the years had ending inventory errors. The correct amounts for
the years were: 2017, $63,000; 2018, $101,000; and 2019, $106,000. The amounts for 2017 beginning inventory and all
purchases are correct as stated.

Required:
1) Reconstruct the table with corrected amounts.

Year 2017 2018 2019

Sales $510,000 $690,000 $805,000
Cost of Goods Sold:
Beginning Inventory 52,000
Net Purchases 162,000 185,000 224,000
Cost of Goods Available for Sale 214,000
Ending Inventory
Cost of Goods Sold
Gross Profit

2) Make the journal entry to correct the errors using the proper date.

Account Debit Credit

3) Determine the required disclosures for this series of errors.