(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 $1150000 in penalties. The following entry was recorded:
Losslitigation 1150000
Liabilitylitigation 1150000
Late in 2016 a settlement was reached with state authorities to pay a total of $720000 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 $950000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $190000 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.
Losslitigation
190000
Liabilitylitigation
190000
Late in 2016 a settlement was reached with state authorities to pay a total of $339000 in penalties.
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.
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 $2150. In January 2016 when it received the bill from its supplier Wolfe-Bache made the following entry:
Office supplies expense
2150
Cash
2150
b. On the last day of 2015 Midwest Importers received a $97000 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 $8700 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.)