LP5 Comprehensive Practice Exam Part V

LP5 Comprehensive Practice Exam Part V
Accounting Changes, Error Corrections, and Prior Period Adjustments. (Chapter 22)
Molina Company’s reported net incomes for 2015 and the previous two years are presented
below.
2015
2014
2013
$105,000
$95,000
$70,000
2015’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 2013 and 2014 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, errors, or prior period adjustment situations described below, prepare the
journal entry or entries Molina Company should record during 2015. 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, 2015. If no
entry, write “none.”

1.

Early in 2015, Molina determined that equipment purchased in January, 2013 at a cost of $1,075,000, with an
estimated life of 5 years and salvage value of $75,000 is now estimated to continue in use until December 31, 2019
and will have a $25,000 salvage value. Molina recorded its 2015 depreciation at the end of 2015.

(a)
(b)
2.

Molina determined that it had understated its depreciation by $20,000 in 2014 owing to the fact that an adjusting
entry did not get recorded.

(a)
(b)
3.
(a)

Molina bought a truck January 1, 2012 for $60,000 with a $6,000 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 2017. Molina uses straight-line depreciation for its trucks.

(b)
4.

During 2015, Molina changed from the straight-line method of depreciating its cement plant to the doubledeclining-balance method. The following calculations present depreciation on both bases. (Ignore income taxes.)
The 2015 amount applies double-declining balance to the 1/1/15 carrying amount after straight-line was used.
Straight-line
Double-declining

2015
$100,000
$200,000

2014
$100,000
$160,000

2013
$100,000
$200,000

(a)
(b)
5.

(a)

Molina, in reviewing its provision for uncollectibles during 2015, 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 2014 and 2013
when the expense had been $20,000 and $14,000, respectively. The company would have recorded $60,000 of bad
debt expense on December 31, 2015 under the old rate.

(b)
6.

During 2015, Molina decided to change from the LIFO method of valuing inventories to average cost. The net
incomes involved under each method were as follows:
2015
2014
2013
LIFO
$51,000
$59,000
$42,000
Average cost
$63,000
$67,000
$48,000
Assume no difference between LIFO and average cost inventory values in years prior to 2013.

(a)
(b)