Chapter 20 Accounting Changes
103 Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Prospective approach
Required for all material accounting changes and
error corrections.
2. Disclosure note
The approach used for changes in depreciation
methods.
3. Error corrections
Most are handled under the retrospective
approach.
4. Changes in accounting
principle
Involves consolidated financial statements.
5. Changes in reporting entity
Accounting changes always handled
retrospectively.
Answer:
TERM
PHRASE
NUMBER
1. Prospective approach
Required for all material accounting changes and
error corrections.
2. Disclosure note
The approach used for changes in depreciation
methods.
3. Error corrections
Most are handled under the retrospective
approach.
4. Changes in accounting
principle
Involves consolidated financial statements.
Chapter 20 Accounting Changes
20–42 Spiceland/Sepe/Nelson, Intermediate Accounting, Eighth Edition
104. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the correct term.
1. Changes in accounting estimates
No longer used for changes in accounting
principle.
__
2. Current period adjustment to income
statement only
Adjustment to retained earnings of earliest
year reported.
__
3. Prior period adjustment
No journal entry needed, but disclosure is
required.
__
4. Prospective approach
Handled prospectively.
__
5. Pro forma disclosure
“As if” amounts for net income and EPS.
__
Answer:
1. Changes in accounting estimates
No longer used for changes in accounting
2. Current period adjustment to income
statement only
Adjustment to retained earnings of earliest
year reported.
3. Prior period adjustment
No journal entry needed, but disclosure is
required.
4. Prospective approach
Handled prospectively.
5. Pro forma disclosure
“As if” amounts for net income and EPS.
Chapter 20 Accounting Changes
Problems
105. Lugar Company purchased a piece of machinery for $30,000 on January 1, 2014, and has been
depreciating the machine using the sum–of-the-years’-digits method based on a five-year
estimated useful life and no salvage value. On January 1, 2016, Lugar decided to switch to the
straight-line method of depreciation. The salvage value is still zero and the estimated useful
life is changed to a total of six years from the date of purchase. Ignore income taxes.
Required:
(1.) Prepare the appropriate journal entry, if any, to record the accounting change.
(2.) Prepare the journal entry to record depreciation for 2016.
106. Albatross Company purchased a piece of machinery for $60,000 on January 1, 2014, and has
been depreciating the machine using the sum-of-the-years’-digits method based on a five-year
estimated useful life and no salvage value. On January 1, 2016, Albatross decided to switch to
the straight-line method of depreciation. The salvage value is still zero and the estimated
useful life did not change. Ignore income taxes.
Required:
(1.) Prepare the appropriate journal entry, if any, to record the accounting change.
(2.) Prepare the journal entry to record depreciation for 2016.
Chapter 20 Accounting Changes
107. Colorado Consulting Company has been using the sum-of-the-years’-digits depreciation
method to depreciate some office equipment that was acquired at the beginning of 2014. At
the beginning of 2016, Colorado Consulting decided to change to the straight-line method.
The equipment cost $120,000 and is expected to have no salvage value. The estimated useful
life of the equipment is five years. Ignore income taxes.
Required:
1. Prepare the appropriate journal entry, if any, to record the accounting change.
2. Prepare the journal entry to record depreciation for 2016.
Answer:
Chapter 20 Accounting Changes
108. Pinnacle Corporation has been using the straight-line depreciation method to depreciate some
office equipment that was acquired at the beginning of 2013. At the beginning of 2016,
Pinnacle decided to change to the sum–of-the-years’-digits method. The equipment cost
$120,000 and is expected to have no salvage value. The estimated useful life of the equipment
is five years. The tax rate is 30%.
Required:
Prepare the journal entry, if any, to record the accounting change at the beginning of 2016.
109. Annual depreciation expense on a building purchased a few years ago (using the straight-line
method) is $5,000. The cost of the building was $100,000. The current book value of the
equipment (January 1, 2016) is $85,000. At the time of purchase, the asset was estimated to
have a zero salvage value. On January 1, 2016, the company decided to reduce the original
useful life by 25% and to establish a salvage value of $5,000. The firm also decided double–
declining-balance depreciation was more appropriate. Ignore tax effects.
Required:
(1.) Record the journal entry, if any, to report the accounting change.
(2.) Record the annual depreciation for 2016.
Chapter 20 Accounting Changes
110. Green Co. constructed a machine at a total cost of $70 million. Construction was completed at
the end of 2012 and the machine was placed in service at the beginning of 2013. The machine
was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The
residual value is expected to be $4 million. At the beginning of 2016, Green decided to change
to the straight-line method.
Required:
1. Ignoring income taxes, what journal entry(s) should Green record relating to the machine
for 2016?
2. Suppose Green has been using the straight-line method and switches to the sum-of-the-
years’-digits method. Ignoring income taxes, what journal entry(s) should Green record
relating to the machine for 2016?
Answer:
Chapter 20 Accounting Changes
111. Macintosh Inc. changed from LIFO to the FIFO inventory costing method on January 1, 2016.
Inventory values at the end of each year since the inception of the company are as follows:
FIFO
LIFO
2014
$200,000
$180,000
2015
400,000
360,000
Required:
Ignoring income tax considerations, prepare the entry to report this accounting change.
112. B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2015,
related to a temporary difference of $60 million. The tax rate was 40%. The temporary
difference is expected to reverse in 2017 at which time the deferred tax liability will become
payable. There are no other temporary differences in 2015–2017. Assume a new tax law is
enacted in 2016 that causes the tax rate to change from 40% to 30% beginning in 2017. (The
rate remains 40% for 2016 taxes.) Taxable income in 2016 is $90 million.
Required:
Determine the effect of the change and prepare the appropriate journal entry to record B’s
income tax expense in 2016. What adjustment, if any, is needed to revise retained earnings
as a result of the change?
113. Buckeye Company purchased a machine on January 1, 2014. The machine had a cost of
$260,000 with a $10,000 residual value. The estimated useful life of the machine was eight
years. On January 1, 2016, due to technological innovations, the estimated useful life was
reduced by two years from the original life and the residual value was reduced by 50%. The
company uses straight-line depreciation.
Required:
Prepare the journal entry to record the annual depreciation on December 31, 2016.
Chapter 20 Accounting Changes
114. Johnson Company receives royalties on a patent it developed several years ago. Royalties are
5% of net sales, to be received on September 30 for sales from January through June and
receivable on March 31 for sales from July through December. The patent rights were
distributed on July 1, 2015, and Johnson accrued royalty revenue of $50,000 on December 31,
2015, as follows:
50,000
50,000
Johnson received royalties of $65,000 on March 31, 2016, and $90,000 on September 30,
2016. In December, 2016, the patent user indicated to Johnson that sales subject to royalties
for the second half of 2016 should be $600,000.
Required:
Prepare any journal entries Johnson should record during 2016 related to the royalty revenue.
Chapter 20 Accounting Changes
115. Mattson Company receives royalties on a patent it developed several years ago. Royalties are
5% of net sales, to be received on September 30 for sales from January through June and
receivable on March 31 for sales from July through December. The patent rights were
distributed on July 1, 2015, and Mattson accrued royalty revenue of $60,000 on December 31,
2015, as follows:
60,000
60,000
Mattson received royalties of $65,000 on March 31, 2016, and $80,000 on September 30,
2016. In December, 2016, the patent user indicated to Mattson that sales subject to royalties
for the second half of 2016 should be $800,000.
Required:
(1.) Prepare any journal entries Mattson should record during 2016 related to the royalty
revenue.
(2.) What changes should be made to retained earnings relative to these royalties?
Cash
65,000
Receivable – royalty revenue
60,000
Royalty revenue
Royalty revenue
80,000
Receivable – royalty revenue
40,000
Royalty revenue ($800,000 x 5%)
40,000
116. Nash Industries changed its method of accounting for warranties from the cash basis to the
accrual basis on January 1, 2016. The company’s accountant determined that a liability of
$70,000 should be established. Ignore income taxes.
Required:
Prepare the journal entry to record the accounting change.
117. Cherokee Company’s auditor discovered some errors. No errors were corrected during 2015.
The errors are described as follows:
(1.) Beginning inventory on January 1, 2015, was understated by $5,000.
(2.) A two-year insurance policy purchased on April 30, 2015, in the amount of $24,000 was
debited to Prepaid Insurance. No adjustment was made on December 31, 2015, or on
December 31, 2016.
Required:
Prepare appropriate journal entries (assume the 2016 books have not been closed). Ignore
income taxes.