P 20-1 Change in inventory costing methods; comparative income statements ? LO2 The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2011. At December 31, 2010, inventories were $120,000 (average cost basis) and were $124,000 a year earlier. Cecil-Booker's accountants determined that the inventories would have totaled $155,000 at December 31, 2010, and $160,000 at December 31, 2009, if determined on a FIFO basis. A tax rate of 40% is in effect for all years. One hundred thousand common shares were outstanding each year. Income from continuing operations was $400,000 in 2010 and $525,000 in 2011. There were no extraordinary items either year. Required: 1. Prepare the journal entry to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.) 2. Prepare the 2011?2010 comparative income statements beginning with income from continuing operations. Include per share amounts. P 20-3 Change in inventory costing methods; comparative income statements ? LO2 LO3 p. 1171 Shown below are net income amounts as they would be determined by Weihrich Steel Company by each of three different inventory costing methods ($ in 000s). Required: 1. Assume that Weihrich used FIFO before 2011, and then in 2011 decided to switch to average cost. Prepare the journal entry to record the change in accounting principle and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.) 2. Assume that Weihrich used FIFO before 2011, and then in 2011 decided to switch to LIFO. Assume accounting records are inadequate to determine LIFO information prior to 2011. Therefore, the 2010 ($540) and pre-2010 ($2,280) data are not available. Prepare the journal entry to record the change in accounting principle and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.) 3. Assume that Weihrich used FIFO before 2011, and then in 2011 decided to switch to LIFO cost. Weihrich's records of inventory purchases and sales are not available for several previous years. Therefore, the pre-2010 LIFO information ($2,280) is not available. However, Weihrich does have the information needed to apply LIFO on a prospective basis beginning in 2010. Prepare the journal entry to record the change in accounting principle and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.) P 20-14 Errors; change in estimate; change in principle; restatement of previous financial statements ? LO1 LO3 LO4 LO6 Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2009 and 2010, reported the following amounts and subtotals ($ in millions): In 2011 the following situations occurred or came to light: a. Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2009 inventory Overstated by $12 million 2010 inventory Understated by $10 million b. A liability was accrued in 2009 for a probable payment of $7 million in connection with a lawsuit ultimately settled in December 2011 for $4 million. c. A patent costing $18 million at the beginning of 2009, expected to benefit operations for a total of six years, has not been amortized since acquired. d. Whaley's conveyer equipment was depreciated by the sum-of-the-years'-digits (SYD) basis since it was acquired at the beginning of 2009 at a cost of $30 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2011, Whaley decided to switch to straight-line depreciation. Required: For each situation: 1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2011 related to the situation described. (Ignore tax effects.) 2. Determine the amounts to be reported for each of the five items shown above from the 2009 and 2010 financial statements when those amounts are reported again in the 2009?2011 comparative financial statements. Student Name: Class: Problem 20-01 Requirement 1: CECIL-BOOKER VENDING COMPANY General Journal Account To record the change: Inventory Deferred tax liability Cumulative effect of accounting change Debit Credit Requirement 2: CECIL-BOOKER VENDING COMPANY Comparative Income Statements 2009 Income before taxes Income tax expense Net income Earnings per share: Earnings per common share 2008 Given P20-01: CECIL-BOOKER VENDING COMPANY Inventories (average cost basis), 12/31/08 Inventories (average cost basis), 12/31/07 Inventories (FIFO basis), 12/31/08 Inventories (FIFO basis), 12/31/07 Tax rate Shares outstanding Income from continuing operations, 2008 Income from continuing operations, 2009 $120,000 124,000 155,000 160,000 40% 100,000 400,000 525,000 Problem 20-3 1. Retained Earnings Inventory Brief Explanation: 2. Brief Explanation: 3. Retained earnings Inventory Brief Explanation: Student Name: Class: Problem 20-14 Requirement 1: WHALEY DISTRIBUTORS General Journal ($ in millions) Account a. Inventory Retained earnings b. Liability - litigation Gain - litigation Cash c. Retained earnings Patent 2009 adjusting entry: Patent amortization expense Patent d. No entry to record the change Debit Credit 2009 adjusting entry: Depreciation expense Accumulated depreciation Calculation of annual depreciation after the change: Cost Previous depreciation (calculated below) Undepreciated cost Estimated residual value To be depreciated Estimated remaining life New annual depreciation years *Cumulative effect of the change: SYD 2007 depreciation 2008 depreciation Accumulated depreciation Requirement 2: WHALEY DISTRIBUTORS Financial Statements Assets 2007 2007 inventory Loss contingency Patent amortization Depreciation 2008 2007 inventory 2008 inventory Loss contingency Patent amortization Depreciation Liabilities Shareholders' Net Equity Income Expenses Given Data P20-14: WHALEY DISTRIBUTORS Financial Statements, 12/31/08 (in millions): 2007 2008 Shareholders' Net Assets Liabilities Equity Income Expenses $740 $330 $410 $210 $150 820 400 420 230 175 Other information: (a) Errors in inventory (in millions) 2007 2008 (b) Liability accrued Lawsuit settlement (c) Patent cost Patent benefit to operations (d) Conveyor equipment cost Conveyor equip. useful life $12 $10 $7 $4 $18 6 $30 5 overstated understated million million million years million years