ACTP 5008Worksheet 6Accounting changesYou have been asked to review the books of Delmonico Company, a construction andbuilding supplies company, on December 30, 2014, before year-end closing. In youraudit, you discover certain items that occurred between the years 2012 through2014. No errors were corrected during those years. The items are summarizedbelow:a. On January 1, 2012, Delmonico Company purchased a piece of manufacturingequipment for $140,000. It had a $15,000 salvage value and a 10-year usefullife. In computing depreciation expense, the bookkeeper failed to deductsalvage value for all years recorded.b. Beginning merchandise inventory on January 1, 2012 was understated by$10,550.c. The purchase of a $62,500 of Trading securities was originally recorded inthe Investments section of the Balance Sheet. These securities werepurchased in February of 2014. (Disregard unrealized holding gains orlosses).d. The bookkeeper failed to record $55,000 of wages expense in 2013.e. On December 30, 2012, Delmonico sold $8,500 of goods to Renfro Co., but thesale was recorded in 2013. The merchandise was shipped F.O.B. shippingpoint and was not included in ending inventory. Delmonico uses a periodicinventory system.f. A two-year fire insurance policy was purchased on May 30, 2012, for$12,000. No adjusting entry was made in 2012 or 2013.g. At the beginning of 2014, the company changed its method of accounting forbad debts from the direct write-off method (hint: what do we know aboutthis method of recording bad debts?) to the allowance method. It wasdetermined that an allowance of $45,000 should be established on that date.h. On January 1, 2011, Delmonico purchased a piece of equipment for $685,000.It had a $35,000 salvage value and a 20-year useful life. On January 1, 2014, itwas determined that the equipment would only be used for another 15 years.The salvage value remained unchanged. i. In 2014, the company switched from FIFO to LIFO for its inventory valuation.Net income computed using FIFO for years 2012 – 2014 is: 2012- $120,000;2013 – $80,000 and 2014- $165,000. Net income computed using LIFO foryears 2012 – 2014 is: 2012 – $80,000; 2013 – $50,000; 2014 – $130,000. j. In 2006, Delmonico purchased 15% of the equity securities of FrancoCorporation. By December 2014, it had acquired 30% of Franco Corporation’sstock and was able to exert significant influence over Franco Corporation’soperations. The current balance in the Available-for-Sale Securities account is$156,000. However, if the accounts been adjusted to reflect the equitymethod, it is determined that the balance would be $189,000. k. In October of 2013, Delmonico had been a defendant in a lawsuit that it wasprobable it would lose, and had accrued $650,000 as a contingent loss. InNovember of 2014, Delmonico settled the lawsuit for $475,000.l. On January 1, 2012, Delmonico purchased a truck for $60,000 with a $2,400salvage value and a 10-year useful life. It used the double-declining balancemethod to depreciate the asset. On January 1, 2014, Delmonico switched tothe straight-line method of depreciation for this truck. On this date, it alsodetermined that the truck only had a remaining useful life of six years. m. Prior to 2014, Delmonico used the completed-contract method to account forits long-term contracts. In February of 2014, they switched to the percentageof-completion method to account for long-term construction contracts, butcontinued to use the completed-contract method for tax purposes. Income for2014, determined using the percentage-of-completion method, is $88,000.Pre-tax income reported prior to 2014 using the completed-contract methodwas $225,000 and under the percentage-of-completion method, it would be$305,000. The income tax rate is 40%. Instructions:1. Explain whether each of the above is an accounting change in estimate (orchange in estimate affected by a change in principle), change inaccounting principle, reclassification error, error correction or none of theabove.2. Explain whether or not each change/correction should be reportedretrospectively, currently or prospectively.3. Prepare all necessary entries to record/correct the above transactions. Ifno entry is necessary, explain why.
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