Question
Molina Company's reported net incomes for 2011 and the previous two years are presented below. 2011 2010 2009 $105,000 $95,000 $70,000 2011's net income was
Molina Company's reported net incomes for 2011 and the previous two years are presented below.
2011 2010 2009
$105,000 $95,000 $70,000
2011's net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2009 and 2010 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes.
Instructions:
(a.) For each of the six accounting changes and/or errors described below, prepare the journal entry or entries Molina Company should record during 2011 to adjust for the change and/or error. If no entry is required, write "none."
(b.) After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2011. If no entry is required, write "none."
1. Early in 2011, Molina determined that equipment purchased in January, 2009 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2015 and will have a $10,000 salvage value. Molina records its 2011 depreciation at the end of 2011.
2.Molina determined that it had understated its depreciation by $20,000 in 2010 owing to the fact that an adjusting entry did not get recorded.
3.Molina bought a truck January 1, 2008 for $40,000 with a $4,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2013. Molina uses straight-line depreciation for its trucks.
4. During 2011, Molina changed from the straight-line method of depreciating its cement plant to the double-declining-balance method. The following calculations present depreciation on both bases. (Ignore income taxes.) The 2011 amount applies double-declining balance to the 1/1/11 carrying amount after straight-line was used.
2011 2010 2009
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000
5. Molina, in reviewing its provision for uncollectible during 2011, has determined that 1/2 of 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1% as its rate in 2010 and 2009 when the expense had been $20,000 and $14,000, respectively. The company would have recorded $30,000 of bad debt expense on December 31, 2011 under the old rate.
6. During 2011, Molina decided to change from the LIFO method of valuing inventories to average cost. The net incomes involved under each method were as follows:
2011 2010 2009
LIFO $51,000 $59,000 $42,000
Average Cost $63,000 $69,000 $48,000
Assume no difference between LIFO and average cost inventory values in years prior to 2009.
Step by Step Solution
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