FIFO to weighted average
retained earnings
Dec 31, 2023 - inventory
$31,800,000
FIFO
Dec 31, 2023 - inventory
$23,700,000
Average weighted
Record change in inventory methods
FIFO to weighted average
retained earnings
Dec 31, 2023 - inventory
$32,600,000
FIFO
Dec 31, 2023 - inventory
$24,100,000
Average weighted
Record change in inventory methods
$8,100,000
inventory
$8,100,000
$8,500,000
inventory
$8,500,000
machine
$57,000,000
constructed completed
2020
placed in service
2021
depreciated
10
years
residual value
$2,000,000
machine
$45,000,000
constructed completed
2020
placed in service
2021
depreciated
10
years
residual value
$1,000,000
beginning of 2024 changed to straight-line method
record entry related to machine in 2024
beginning of 2024 changed to straight-line method
record entry related to machine in 2024
Assets cost
$57,000,000
SYD calculation
numerator
27
accumulated depreciation to date
$27,000,000
denomator
55
undepreciated cost, 1-1-24
$30,000,000
depr amount
$27,000,000
estimated residual value
$2,000,000
to be depreciated for 7 years
$28,000,000
7
annual straight-line depr
$4,000,000
Assets cost
$45,000,000
SYD calculation
numerator
27
accumulated depreciation to date
$21,600,000
denomator
55
undepreciated cost, 1-1-24
$23,400,000
depr amount
$21,600,000
estimated residual value
$1,000,000
to be depreciated for 7 years
$22,400,000
7
annual straight-line depr
$3,200,000
Depr expense
$4,000,000
accumulated depr
$4,000,000
Depr expense
$3,200,000
accumulated depr
$3,200,000
royalties
12%
of net sales
royalties payable
1-Feb
31-Dec-24
$400,000
accrued royalty revenue
$48,000
31-Dec
received royalties
$48,600
1-Feb-25
royalties
12%
of net sales
royalties payable
1-Feb
31-Dec-24
$340,000
accrued royalty revenue
$40,800
31-Dec
received royalties
$41,340
1-Feb-25
record adjustments to be made to retained earnings for 2024 financial statements
record adjustments to be made to retained earnings for 2024 financial statements
No journal entry required
No journal entry required
debited expense account
$444,000
cost of machine
1-Jan-21
correct entries
useful life
6
years
2021
residual value
$0
straight-line depreciation
2021
Record entry to correct error
2022
2023
debited expense account
$340,000
cost of machine
1-Jan-21
correct entries
useful life
5
years
2021
residual value
$0
straight-line depreciation
2021
Record entry to correct error
2022
2023
Incorrect entries
Equipment
$444,000
2021
Expense
$444,000
Cash
$444,000
Cash
Depr expense
$74,000
No entry
Accum depr
$74,000
Depr expense
$74,000
No entry
Accum depr
$74,000
Depr expense
$74,000
No entry
Accum depr
$74,000
Incorrect entries
Equipment
$340,000
2021
Expense
$340,000
Cash
$340,000
Cash
Depr expense
$68,000
No entry
Accum depr
$68,000
Depr expense
$68,000
No entry
Accum depr
$68,000
Depr expense
$68,000
No entry
Accum depr
$68,000
Equipment
$444,000
Accum depr
$222,000
$444,000
Retained earnings
$222,000
Equipment
$340,000
Accum depr
$204,000
$340,000
Retained earnings
$136,000
switch from LIFO to FIFO
beginning of 2024
inventory at end of 2023
$56,000
higher using FIFO
retained earnings
$740,000
tax rate
35%
switch from LIFO to FIFO
beginning of 2024
inventory at end of 2023
$50,000
higher using FIFO
retained earnings
$680,000
tax rate
35%
1. Calculate balance of retained earnings at time of change
2. Prepare journal entry at beginning of 2024 to record change in accounting principle
1. Calculate balance of retained earnings at time of change
2. Prepare journal entry at beginning of 2024 to record change in accounting principle
1
Impact on balance sheet
assets
liabilities
equity
change to FIFO
$56,000
$19,600
$36,400
impact on earnings
cost of goods sold
($56,000)
income before taxes
$56,000
tax expense
$19,600
net income
$36,400
retained earnings
begin
$740,000
change
$36,400
end
$776,400
2
inventory
$56,000
income tax payable
$19,600
retained earnings
$36,400
1
Impact on balance sheet
assets
liabilities
equity
change to FIFO
$50,000
$17,500
$32,500
impact on earnings
cost of goods sold
($50,000)
income before taxes
$50,000
tax expense
$17,500
net income
$32,500
retained earnings
begin
$680,000
change
$32,500
end
$712,500
2
inventory
$50,000
income tax payable
$17,500
retained earnings
$32,500
mini computer
1-Jan-22
$40,850
straight-line method
useful life
5
years
residual value
$4,100
change
useful life
10
years
residual value
$990
mini computer
1-Jan-22
$40,850
straight-line method
useful life
5
years
residual value
$4,100
change
useful life
10
years
residual value
$990
1 Record adjusting entry for depreciation in 2024
2 Record adjusting entry for depreciation in 2024 using sum-of-the-years'-digits method
1 Record adjusting entry for depreciation in 2024
2 Record adjusting entry for depreciation in 2024 using sum-of-the-years'-digits method
Cost
$40,850
Depr expense
$3,145
Old Depr
$7,350
Accum depr
$3,145
Depr to date
$14,700
Book value
$26,150
Revised residual value
$990
Revised Depr Base
$25,160
estimated useful life
8
New annual depr
$3,145
Cost
$40,850
Depr expense
$3,958
2022 Depr
$12,250
Accum depr
$3,958
2023 Depr
$9,800
Depr to date
$22,050
Book Value
$18,800
Revised residual value
$990
Revised Depr Base
$17,810
estimated useful life
8
New annual depr
$3,958
Cost
$40,850
Depr expense
$3,145
Old Depr
$7,350
Accum depr
$3,145
Depr to date
$14,700
Book value
$26,150
Revised residual value
$990
Revised Depr Base
$25,160
estimated useful life
8
New annual depr
$3,145
Cost
$40,850
Depr expense
$3,958
2022 Depr
$12,250
Accum depr
$3,958
2023 Depr
$9,800
Depr to date
$22,050
Book Value
$18,800
Revised residual value
$990
Revised Depr Base
$17,810
estimated useful life
8
New annual depr
$3,958
dec 31, 2023 failed to accrue salaries expense
$1,400
Jan-24
for dec 27 to jan 2 workweek
salaries expense
cash
31-Dec-23
$82,000
recorded as rent revenue
error discovered midway through 2024
failed to accrue interest on note receivable
$7,200
dec 31, 2023 failed to accrue salaries expense
$1,700
Jan-24
for dec 27 to jan 2 workweek
salaries expense
cash
31-Dec-23
$88,000
recorded as rent revenue
error discovered midway through 2024
failed to accrue interest on note receivable
$7,800
Effect on each error
recorded following entry
Error A
$1,400
Income Statement
$1,400
Balance Sheet
Error B
prepayment of rent from tenant for 2024
Income Statement
Balance Sheet
received cash, recorded as interest revenue
Error C
Income Statement
Balance Sheet
A
Retained earnings
B
Retained earnings
C
Interest revenue
Effect on each error
recorded following entry
Error A
$1,700
Income Statement
$1,700
Balance Sheet
Error B
prepayment of rent from tenant for 2024
Income Statement
Balance Sheet
received cash, recorded as interest revenue
Error C
Income Statement
Balance Sheet
A
Retained earnings
B
Retained earnings
C
Interest revenue
expenses understated
net income overstated
liabilities understated
retained earnings overstated
revenue overstated
net income overstated
liabilities understated
retained earnings overstated
revenue understated
net income understated
assets understated
retained earnings understated
$1,400
Salaries expense
$1,400
$82,000
Rent revenue
$41,000
Deferred rent revenue
$41,000
$7,200
Retained earnings
$7,200
expenses understated
net income overstated
liabilities understated
retained earnings overstated
revenue overstated
net income overstated
liabilities understated
retained earnings overstated
revenue understated
net income understated
assets understated
retained earnings understated
$1,700
Salaries expense
$1,700
$88,000
Rent revenue
$44,000
Deferred rent revenue
$44,000
$7,800
Retained earnings
$7,800
FIFO
Average cost
LIFO
Pre-2023
$2,880
$2,620
$2,360
2023
$790
$560
$560
$3,670
$3,180
$2,920
8 used FIFO before 2024, then 2024 switch to average cost
FIFO
Average cost
LIFO
Pre-2023
$2,900
$2,640
$2,380
2023
$800
$550
$565
$3,700
$3,190
$2,945
8 used FIFO before 2024, then 2024 switch to average cost
9 used FIFO before 2024, then 2024 switch to LIFO does not have records before 2024
10 used FIFO before 2024, then 2024 switch to LIFO Pre-2023 records not available
9 used FIFO before 2024, then 2024 switch to LIFO does not have records before 2024
10 used FIFO before 2024, then 2024 switch to LIFO Pre-2023 records not available
8
Retained earnings
$490
inventory
$490
9
No journal entry
10
Retained earnings
$230
inventory
$230
8
Retained earnings
$510
inventory
$510
9
No journal entry
10
Retained earnings
$235
inventory
$235
in 2022 and 2023 used sum-of-the-years'-digits method
1
beginning of 2024 change to straight-line
tax rate
25%
year
straight-line
SYD
Difference
2022
$2,400
$4,364
$1,964
2023
$2,400
$3,927
$1,527
$4,800
$8,291
$3,491
2
Asset cost
$25,100
residual value
$1,100
useful life
10
years
1 Prepare journal entry for 2024 related to change
2 used straight-line and changed to SYD in 2024
prepare journal entry for 2024 related to change
in 2022 and 2023 used sum-of-the-years'-digits method
1
beginning of 2024 change to straight-line
tax rate
25%
year
straight-line
SYD
Difference
2022
$2,200
$4,000
$1,800
2023
$2,200
$3,600
$1,400
$4,400
$7,600
$3,200
2
Asset cost
$23,200
residual value
$1,200
useful life
10
years
1 Prepare journal entry for 2024 related to change
2 used straight-line and changed to SYD in 2024
prepare journal entry for 2024 related to change
Asset cost
$25,100
Depr expense
$1,964
Accum depr SYD
$8,291
Accum depr
$1,964
Undepr cost, 1-1-24
$16,809
residual value
$1,100
Depr over remaining 8 years
$15,709
8
Annual SL Depr
$1,964
Asset cost
$25,100
Depr expense
$4,267
Accum depr SL
$4,800
Accum depr
$4,267
Undepr cost, 1-1-24
$20,300
residual value
$1,100
Depr over remaining 8 years
$19,200
0.222222222
SYD depr
$4,267
Asset cost
$23,200
Depr expense
$1,800
Accum depr SYD
$7,600
Accum depr
$1,800
Undepr cost, 1-1-24
$15,600
residual value
$1,200
Depr over remaining 8 years
$14,400
8
Annual SL Depr
$1,800
Asset cost
$23,200
Depr expense
$3,911
Accum depr SL
$4,400
Accum depr
$3,911
Undepr cost, 1-1-24
$18,800
residual value
$1,200
Depr over remaining 8 years
$17,600
0.222222222
SYD depr
$3,911
in 2024
event
tax rate
25%
a
b
a. warranty 2023
2%
of sales
c
sales in 2023
$2,900,000
d
warranty expenditures 2023
$58,000
e
warrant 2024
1%
of sales
f
sales in 2024
$3,400,000
warranty expenditures 2024
$77,350
b Dec 30, 2020 acquired building
$880,000
Straight-line depr
useful life
40
years
salvage value
$0
finalize in 2024 to relocate in 2028
salvage value 2028
$640,000
c changed inventory to LIFO from FIFO
under FIFO inventory 1-1-24
$630,000
d begin 2021 purchased office equipment
$264,000
SYD depr
useful life
10
years
salvage value
$0
Jan 1, 2024 change to straight-line
e Nov 2022 filed suit seeking penalties
2023 had not reached settlement
probable have to pay
$140,000
2024 settlement to pay
$284,000
f beginning 2024 used SYD depr changed to SL
changed increased net earnings by
$379,000
in 2024
event
tax rate
25%
a
b
a. warranty 2023
3%
of sales
c
sales in 2023
$3,800,000
d
warranty expenditures 2023
$114,000
e
warrant 2024
2%
of sales
f
sales in 2024
$4,300,000
warranty expenditures 2024
$97,825
b Dec 30, 2020 acquired building
$1,060,000
Straight-line depr
useful life
40
years
salvage value
$0
finalize in 2024 to relocate in 2028
salvage value 2028
$730,000
c changed inventory to LIFO from FIFO
under FIFO inventory 1-1-24
$720,000
d begin 2021 purchased office equipment
$363,000
SYD depr
useful life
10
years
salvage value
$0
Jan 1, 2024 change to straight-line
e Nov 2022 filed suit seeking penalties
2023 had not reached settlement
probable have to pay
$230,000
2024 settlement to pay
$383,000
f beginning 2024 used SYD depr changed to SL
changed increased net earnings by
$478,000
type of change
change in estimate
change in estimate
change in accounting principle
change in accounting estimate resulting from change in accounting principle
change in estimate
change in accounting principle
Cost
$880,000
Old depr
$22,000
Depr to date
$66,000
Undepr cost
$814,000
New salvage value
$640,000
to be depr
$174,000
estimated remaining life
5
years
new annual depr
$34,800
Cost
$264,000
Accum Depr SYD
$129,600
Undepr cost
$134,400
residual value
$0
to be depreciated over remaining 7 years
$134,400
7
Annual SL depr
$19,200
type of change
change in estimate
change in estimate
change in accounting principle
change in accounting estimate resulting from change in accounting principle
change in estimate
change in accounting principle
Cost
$1,060,000
Old depr
$26,500
Depr to date
$79,500
Undepr cost
$980,500
New salvage value
$730,000
to be depr
$250,500
estimated remaining life
5
years
new annual depr
$50,100
Cost
$363,000
Accum Depr SYD
$178,200
Undepr cost
$184,800
residual value
$0
to be depreciated over remaining 7 years
$184,800
7
Annual SL depr
$26,400
a(1)
No journal entry
a(2)
Warranty expense
$34,000
Warranty liability
$34,000
b(1)
No journal entry
b(2)
Depr expense
$34,800
Accum Depr
$34,800
c(1)
No journal entry
c(2)
No journal entry
d(1)
No journal entry
d(2)
Depr expense
$19,200
Accum Depr
$19,200
e(1)
Loss-litigation
$144,000
Liability-litigation
$144,000
f(1)
No journal entry
f(2)
No journal entry
a(1)
No journal entry
a(2)
Warranty expense
$86,000
Warranty liability
$86,000
b(1)
No journal entry
b(2)
Depr expense
$50,100
Accum Depr
$50,100
c(1)
No journal entry
c(2)
No journal entry
d(1)
No journal entry
d(2)
Depr expense
$26,400
Accum Depr
$26,400
e(1)
Loss-litigation
$153,000
Liability-litigation
$153,000
f(1)
No journal entry
f(2)
No journal entry
