Question

Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2024 before any adjusting entries or closing entries were prepared. Assume the tax rate for each company is 25% in all years. Any tax effects should be adjusted through the deferred tax liability account. a. Fleming Home Products introduced a new line of commercial awnings in 2023 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 2023 were $3,400,000. Accordingly, warranty expense and a warranty liability of $136,000 were recorded in 2023 . In late 2024 , 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 2024 were $3,900,000, and warranty expenditures in 2024 totaled $88,725. b. On December 30,2020, 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 2024 to relocate the company headquarters at the end of 2028 . The vacated office building will have a salvage value at that time of $690,000. c. Hobbs-Barto Merchandising, Incorporated, changed inventory cost methods to LIFO from FIFO at the end of 2024 for both financial statement and income tax purposes. Under FIFO, the inventory at January 1,2024 , is $680,000. d. At the beginning of 2021 , 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 1,2024 , the company changed to the straight-line method. e. In November 2022, 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 2023 , 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: Late in 2024 , a settlement was reached with state authorities to pay a total of $339,000 in penalties. f. At the beginning of 2024, 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 2024 related to the situation described.

Answer 1

a. Change in estimated warranty liability. Journal entry: Debit Warranty Expense $91,350, Credit Warranty Liability $91,350. Adjusting entry for 2024: Debit Warranty Liability $46,275, Credit Deferred Tax Liability $11,569.
b. Change in estimated salvage value. Journal entry: Debit Accumulated Depreciation $441,000, Credit Office Building $441,000.
c. Change in inventory cost method. No journal entry necessary.
d. Change in depreciation method. No journal entry necessary.
e. Change in estimated liability. Journal entry: Debit Legal Expense $149,000, Credit Liability for Legal Penalties $149,000.
f. Change in depreciation method. Journal entry: Debit Retained Earnings $434,000, Credit Accumulated Depreciation $434,000.

1. Situation a:
- Type of change: Change in estimated warranty liability
- Journal entry necessary as a direct result of the change:
- Debit Warranty Expense for $91,350 (3% of $3,900,000 in sales)
- Credit Warranty Liability for $91,350 (to adjust the liability)
- Adjusting entry for 2024:
- Debit Warranty Liability for $46,275 (to record the remaining liability at the end of 2024)
- Credit Deferred Tax Liability for $11,569 (25% of $46,275)

2. Situation b:
- Type of change: Change in estimated salvage value
- Journal entry necessary as a direct result of the change:
- Debit Accumulated Depreciation for $441,000 ($980,000 - $690,000)
- Credit Office Building for $441,000 (to remove the building from the books)
- Adjusting entry for 2024:
- No adjusting entry is needed since the change occurs in 2024.

3. Situation c:
- Type of change: Change in inventory cost method
- Journal entry necessary as a direct result of the change:
- No journal entry is necessary since the change occurs at the end of 2024.
- Adjusting entry for 2024:
- No adjusting entry is needed since the change occurs at the end of 2024.

4. Situation d:
- Type of change: Change in depreciation method
- Journal entry necessary as a direct result of the change:
- No journal entry is necessary since the change occurs on January 1, 2024.
- Adjusting entry for 2024:
- No adjusting entry is needed since the change occurs on January 1, 2024.

5. Situation e:
- Type of change: Change in estimated liability
- Journal entry necessary as a direct result of the change:
- Debit Legal Expense for $149,000 ($339,000 - $190,000)
- Credit Liability for Legal Penalties for $149,000 (to record the liability)
- Adjusting entry for 2024:
- No adjusting entry is needed since the change occurs in late 2024.

6. Situation f:
- Type of change: Change in depreciation method
- Journal entry necessary as a direct result of the change:
- Debit Retained Earnings for $434,000 (to increase net earnings)
- Credit Accumulated Depreciation for $434,000 (to adjust the accumulated depreciation)
- Adjusting entry for 2024:
- No adjusting entry is needed since the change occurs at the beginning of 2024.

Answer 2

Here are the journal entries for each situation:

a. Fleming Home Products

Type of change: Change in accounting estimate

Journal entry to correct the warranty expense and warranty liability in 2023:

Debit: Warranty Expense ($136,000 - $117,000) = $19,000

Credit: Warranty Liability = $19,000

Adjusting entry for 2024:

Debit: Warranty Expense ($3,900,000 * 3%) = $117,000

Credit: Warranty Liability = $117,000

b. Rival Industries

Type of change: Change in accounting estimate

Journal entry to revise depreciation expense in 2024:

Debit: Depreciation Expense ($980,000 - $735,000) = $245,000

Credit: Accumulated Depreciation = $245,000

c. Hobbs-Barto Merchandising, Incorporated

Type of change: Change in accounting principle

Journal entry to adjust the inventory balance at the beginning of 2024:

Debit: Cost of Goods Sold ($680,000 - $520,000) = $160,000

Credit: Inventory = $160,000

d. The Hoffman Group

Type of change: Change in accounting method

Journal entry to correct the accumulated depreciation balance at the beginning of 2024:

Debit: Accumulated Depreciation ($53,800 - $39,260) = $14,540

Credit: Depreciation Expense = $14,540

e. Huggins Manufacturing Company

Type of change: Correction of an error

Journal entry to adjust the accrual for clean air law penalties:

Debit: Loss from Clean Air Law Violations ($339,000 - $190,000) = $149,000

Credit: Clean Air Law Penalties Payable = $149,000

f. Jantzen Specialties

Type of change: Change in accounting method

No journal entry is required in 2024 as the change has already been reflected in the company's financial statements.