(1) The Commonwealth of Virginia filed suit in October 2014, against Northern Timber Corporation seeking civil penalties and injunctive relief for violations of environmental laws regulating forest conservation. When the financial statements were issued in 2015, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,150,000 in penalties. The following entry was recorded:

  Loss—litigation 1,150,000

       Liability—litigation                  1,150,000

Late in 2016, a settlement was reached with state authorities to pay a total of $720,000 to cover the cost of violations.

Required:

Prepare any journal entries related to the change. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)

(2) The Peridot Company purchased machinery on January 2, 2014, for $950,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $190,000 in depreciation in 2014 and 2015. Early in 2016, the company revised the total estimated life of the machinery to eight years.

Required:

1. What type of change is this?

2. Determine depreciation for 2016.

(3) Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2016 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 40% in all years. Any tax effects should be adjusted through the deferred tax liability account.

Fleming Home Products introduced a new line of commercial awnings in 2015 that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 4% of sales. Sales of the awnings in 2015 were $3,400,000. Accordingly, warranty expense and a warranty liability of $136,000 were recorded in 2015. In late 2016, the company’s claims experience was evaluated and it was determined that claims were far fewer than expected: 3% of sales rather than 4%. Sales of the awnings in 2016 were $3,900,000 and warranty expenditures in 2016 totaled $88,725. On December 30, 2012, Rival Industries acquired its office building at a cost of $980,000. It was depreciated on a straight-line basis assuming a useful life of 40 years and no salvage value. However, plans were finalized in 2016 to relocate the company headquarters at the end of 2020. The vacated office building will have a salvage value at that time of $690,000. Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from FIFO at the end of 2016 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1, 2016, is $680,000. At the beginning of 2013, the Hoffman Group purchased office equipment at a cost of $319,000. Its useful life was estimated to be 10 years with no salvage value. The equipment was depreciated by the sum-of-the-years’-digits method. On January 1, 2016, the company changed to the straight-line method. In November 2014, the State of Minnesota filed suit against Huggins Manufacturing Company, seeking penalties for violations of clean air laws. When the financial statements were issued in 2015, Huggins had not reached a settlement with state authorities, but legal counsel advised Huggins that it was probable the company would have to pay $190,000 in penalties. Accordingly, the following entry was recorded:

  Loss—litigation

190,000  

       Liability—litigation

190,000  

Late in 2016, a settlement was reached with state authorities to pay a total of $339,000 in penalties.

At the beginning of 2016, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net earnings by $434,000.

Required:

For each situation:

1. Identify the type of change.

2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2016 related to the situation described. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)

(4) Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2004 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

A five-year casualty insurance policy was purchased at the beginning of 2014 for $38,000. The full amount was debited to insurance expense at the time. Effective January 1, 2016, the company changed the salvage value used in calculating depreciation for its office building. The building cost $624,000 on December 29, 2005, and has been depreciated on a straightline basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000. On December 31, 2015, merchandise inventory was overstated by $28,000 due to a mistake in the physical inventory count using the periodic inventory system. The company changed inventory cost methods to FIFO from LIFO at the end of 2016 for both financial statement and income tax purposes. The change will cause a $990,000 increase in the beginning inventory at January 1, 2017. At the end of 2015, the company failed to accrue $16,100 of sales commissions earned by employees during 2015. The expense was recorded when the commissions were paid in early 2016. At the beginning of 2014, the company purchased a machine at a cost of $780,000. Its useful life was estimated to be ten years with no salvage value. The machine has been depreciated by the double-declining balance method. Its book value on December 31, 2015, was $499,200. On January 1, 2016, the company changed to the straight-line method. Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.75% is a better indication of the actual cost. Management effects the change in 2016. Credit sales for 2016 are $4,600,000; in 2015 they were $4,300,000.

Required:

For each situation:

1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change.  For accounting errors, choose “Not applicable”.

2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2016 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund-income tax. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)

(5) Below are three independent and unrelated errors.

a. On December 31, 2015, Wolfe-Bache Corporation failed to accrue office supplies expense of $2,150. In January 2016, when it received the bill from its supplier, Wolfe-Bache made the following entry:

  Office supplies expense

2,150

       Cash

2,150

b. On the last day of 2015, Midwest Importers received a $97,000 prepayment from a tenant for 2016 rent of a building. Midwest recorded the receipt as rent revenue.

c. At the end of 2015, Dinkins-Lowery Corporation failed to accrue interest of $8,700 on a note receivable. At the beginning of 2016, when the company received the cash, it was recorded as interest revenue.

Required:

For each error:

1. What would be the effect of each error on the income statement and the balance sheet in the 2015 financial statements?

2. Prepare any journal entries each company should record in 2016 to correct the errors. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)