Week Five – Homework Exercises E20-1, E20-10, E20-17, and E20-24E20-1 “During 2011 (its first year of operations) and 2012, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2013, Batali decided to change to the average method for both financial reporting and tax purposes.Income components before income tax for 2013, 2012, and 2011 were as follows ($ in millions):” 2013 2012 2011Revenues $420 $390 $380Cost of goods sold (FIFO) (46) (40) (38)Cost of goods sold (average) (62) (56) (52)Operating expenses (254) (250) (242) Dividends of $20 million were paid each year. Batali’s fiscal year ends December 31. Required: 1. Prepare the journal entry at the beginning of 2013 to record the change in accounting principle. (Ignore income taxes.) 2. Prepare the 2013–2012 comparative income statements. 3. Determine the balance in retained earnings at January 1, 2012, as Batali reported previously using the FIFO method. 4. Determine the adjustment to the January 1, 2012, balance in retained earnings that Batali would include in the 2013–2012 comparative statements of retained earnings or retained earnings column of the statements of shareholders’ equity to revise it to the amount it would have been if Batali had used the average method. E20-10 For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2010 for $2,560,000. Its useful life was estimated to be six years with a $160,000 residual value. At the beginning of 2013, Clinton decides to change to the straight-line method. The effect of this change on depreciation for each year is as follows ($ in 000s): Year Straight-Line Declining Balance Difference 2010 $400 $852 $453 2011 400 569 169 2012 400 379 (21) $1,200 $1,801 $601 Required: 1. Briefly describe the way Clinton should report this accounting change in the 2012–2013 comparative financial statements. 2. Prepare any 2013 journal entry related to the change. E20-17 Wardell Company purchased a mini computer on January 1, 2011, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,000. On January 1, 2013, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900. Required: 1. Prepare the appropriate adjusting entry for depreciation in 2013 to reflect the revised estimate. 2. Repeat requirement 1 assuming that the company uses the sum-of-the-years’-digits method instead of the straight-line method. E20-24 For each of the following inventory errors occurring in 2013, determine the effect of the error on 2013’s cost of goods sold, net income, and retained earnings. Assume that the error is not discovered until 2014 and that a periodic inventory system is used. Ignore income taxes. U = Understated O = Overstated NE = No effect (Example) 1. Overstatement of ending inventory 2. Overstatement of purchases 3. Understatement of beginning inventory 4. Freight-in charges are understated 5. Understatement of ending inventory 6. understatement of purchases 7. Overstatement of beginning inventory 8. Understatement of purchases and understatement of ending inventory, by the same amount
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