Whittier Construction Co. had followed the practice of expensing all materials assigned to a construction job without recognizing any salvage inventory. On December 31, 2012, it was determined that salvage inventory should be valued at $52,000. Of this amount,$29,000 arose during the current year. How does this information affect the financial statements to be prepared at the end of 2012?

What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.

Listed below are various types of accounting changes and errors.

_____ 1. Change in a plant asset's salvage value.

_____ 2. Change due to overstatement of inventory.

_____ 3. Change from sum-of-the-years' digits to straight-line method of depreciation.

_____ 4. Change from presenting unconsolidated to consolidated financial statements.

_____ 5. Change from LIFO to FIFO inventory method.

_____ 6. Change in the rate used to compute warranty costs.

_____ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.

_____ 8. Change in a patent's amortization period.

_____ 9. Change from completed-contract to percentage-of-completion method on construction contracts.

_____ 10. Change from FIFO to average-cost inventory method.

For each change or error, indicate how it would be accounted for using the following code letters:

a. Accounted for prospectively.

b. Accounted for retrospectively.

c. Neither of the above.

Indicate how the following items are recorded in the accounting records in the current year of Coronet Co.

a. Impairment of goodwill.

b. A change in depreciating plant assets from accelerated to the straight-line method.

c. Large write-off of inventories because of obsolescence.

d. Change from the cash basis to accrual basis of accounting.

e. Change from LIFO to FIFO method for inventory valuation purposes.

f. Change in the estimate of service lives for plant assets.

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation's annual audit engagement. Frost has been a client of Crane's firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost's accounting manager, "I don't really see your problem. After all, it's perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!"

Answer the following questions.

a. What are the ethical issues concerning Frost's practice of changing the useful lives of fixed assets?

b. Who could be harmed by Frost's unusual accounting changes?

c. What should Crane do in this situation?

Carpenter Company uses standard costing. The company has a manufacturing plant in Georgia. Standard labor-hours per unit are 0.50, and the variable overhead rate for the Georgia plant is $3.50 per direct labor-hour. Fixed overhead for the Georgia plant is budgeted at$1,800,000 for the year. Firm management has always used variance analysis as a performance measure for the plant. Tom Saban has just been hired as a new controller for Carpenter Company. Tom is good friends with the Georgia plant manager and wants him to get a favorable review. Tom decides to underestimate production, and budgets annual output of 1,200,000 units. His explanation for this is that the economy is slowing and sales are likely to decrease. At the end of the year, the plant reported the following actual results: output of 1,500,000 using 760,000 labor-hours in total, at a cost of $2,700,000 in variable overhead and$1,850,000 in fixed overhead. 1. Compute the budgeted fixed cost per labor-hour for the fixed overhead. 2. Compute the variable overhead spending variance and the variable overhead efficiency variance. 3. Compute the fixed overhead spending and volume variances. 4. Compute the budgeted fixed cost per labor-hour for the fixed overhead if Tom Saban had estimated production more realistically at the expected sales level of 1.500.000 units. 5. Summarize the fixed overhead variance based on both the projected level of production of 1.200.000 units and 1.500.000 units. 6. Did Tom Saban's attempt to make his friend, the plant manager, look better work? Why or why not? 7. What do you think of Tom Saban's behavior overall?

Identify the lease classifications for lessors and the criteria that must be met for each classification. What is the relevance of revenue recognition criteria for lessor accounting for leases?

Morgan Handley and Tricia Holbrook are discussing the new leasing standard. Morgan believes the standard requires that the lessee use the implicit rate of the lessor in computing the present value of its lease liability. Tricia is not sure if Morgan is correct. Explain the discount rate that the lessee should use to compute its lease liability.

Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets, or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer this question:

What are the possible disadvantages of leasing the assets instead of owning them?

Sesame Company purchased a computer system for $74,000 on January 1, 2011. It was depreciated based on a 7-year life and an$18,000 salvage value. On January 1, 2013, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2013 depreciation expense.

Veldre Company provides the following information about its defined benefit pension plan for the year 2020.

$$\begin{array} {lrrrrr} \text{Service cost}& \hspace{10pt}\text{\$\hspace{10pt}90,000}&\\ \text{Contribution to the plan }& \hspace{10pt}\text{105,000}&\\ \text{Prior service cost amortization}& \text{10,000}&\\ \text{Actual and expected return on plan assets}& \hspace{10pt}\text{64,000}&\\ \text{Benefits paid }& \hspace{10pt}\text{40,000}&\\ \text{Plan assets at January 1, 2020}& \text{640,000}&\\ \text{Projected benefit obligation at January 1, 2020}& \text{700,000}&\\ \text{Accumulated OCI (PSC) at January 1, 2020}& \text{150,000}&\\ \text{Interest/discount (settlement) rate}& \text{10\\\%}&\\ \end{array}$$

Prepare a pension worksheet inserting January 1, 2020, balances, showing December 31, 2020, balances, and the journal entry recording pension expense.

Sesame Company purchased a computer system for $74,000 on January 1, 2011. It was depreciated based on a 7-year life and an$18,000 salvage value. On January 1, 2013, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2013 depreciation expense.