Pam erickson construction company changed from the completed-contract

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Question 1

Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows. 

Pretax Income from:

Percentage-of-CompletionCompleted-ContractDifference

2014$780,000                                 $590,000                 $190,000

2015700,000                                        480,000                                 220,000

(a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2015?(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Question 2

Taveras Co. decides at the beginning of 2014 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2012, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The table presents the effects of the change in accounting principle on inventory and cost of goods sold. Inventory Determined by Cost of Goods Sold Determined by Date LIFO Method FIFO Method LIFO Method FIFO Method 1-Jan-12 $0 $0 $0 $0 31-Dec-12 100 80 800 820 31-Dec-13 200 240 1,000 940 31-Dec-14 320 390 1,130 1,100 Retained earnings reported under LIFO are as follows. Retained Earnings Balance 31-Dec-12 $1,200 31-Dec-13 2,200 31-Dec-14 3,070 Other information: 1 For each year presented, sales are $3,000 and operating expenses are $1,000. 2 Taveras provides two years of financial statements. Earnings per share information is not required. Prepare income statements under LIFO for 2012, 2013, and 2014. Prepare income statements under FIFO for 2012, 2013, and 2014. Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2014 and 2013. Prepare comparative retained earnings statements for 2013 and 2014 under FIFO.

Question 3

Kathleen Cole Inc. acquired the following assets in January of 2012.

Equipment, estimated service life, 5 years; salvage value, $15,000 $525,000.  Building, estimated service life, 30 years; no salvage value $693,000. The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2015, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.

(a) Prepare the general journal entry to record depreciation expense for the equipment in 2015.

(b) Prepare the journal entry to record depreciation expense for the building in 2015.

Question 4

Joy Cunningham Co. purchased a machine on January 1, 2012, for $550,000. At that time, it was estimated that the machine would have a 10-year life and no salvage value. On December 31, 2015, the firm’s accountant found that the entry for depreciation expense had been omitted in 2013. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2015. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment. Prepare the general journal entries that should be made at December 31, 2015, to record these events.

Question 5

Below is the net income of Anita Ferreri Instrument Co., a private corporation, computed under the three inventory methods using a periodic system. FIFO Average Cost LIFO 2012 $26,000 $24,000 $20,000 2013 30,000 25,000 21,000 2014 28,000 27,000 24,000 2015 34,000 30,000 26,000. (a) Assume that in 2015 Ferreri decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2015, and show net income reported for 2012, 2013, 2014, and 2015. (b) Assume that in 2015 Ferreri, which had been using the LIFO method since incorporation in 2012, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2015 and show net income reported for 2012, 2013, 2014, and 2015. 

Question 6

The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2014, $147,000; 2015, $185,000. Early in 2016, the following errors were discovered. 1 Depreciation of equipment for 2014 was overstated $17,000. 2 Depreciation of equipment for 2015 was understated $38,500. 3 December 31, 2014, inventory was understated $50,000. 4 December 31, 2015, inventory was overstated $16,200. Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed.