Question - Thor Corp.'s reported pretax incomes for 2017 and the previous two years as follows:
2017 2016 2015
$150,000 $125,000 $95,000
2017's income was correctly determined after taking into account the following accounting changes and error corrections made during the year (the errors were made in previous years but were not discovered until 2017). The incomes for 2015 and 2016do not take these items into account and are stated at the amounts determined at the time.
1. Early in 2017, Thor determined that equipment purchased in January 2015 for$136,000, with an estimated life of eight years and residual value of $6,000, is now estimated to have a total eleven-year life (from the date of purchase), but will have only a $1,800 residual value. Thor is using straight-line depreciation for this equipment.
2. Thor discovered that depreciation expense had been understated by $17,000 in2016, owing to the fact that an adjusting entry for depreciation on machinery was not recorded.
3. Thor, in reviewing its allowance for doubtful accounts during 2017, has determined that 1% is the appropriate amount of bad debt expense to be recorded. The company had been using 1.5% as its rate in 2016 and 2015 when the expense had been $14,000 and $10,000, respectively. Thor would have recorded $24,000 in bad debt expense for 2017 if they had used the old rate.
4. At the beginning of 2017, Thor decided to change from the average cost method of valuing inventories to FIFO, and used FIFO all during 2017 (perpetual system).They have determined that the opening inventory at January 1, 2017, which was$55,500 using average cost, would have been $52,500 using FIFO. Assume this change will make their financial statements as reliable and more relevant.
Instructions -
a. For each of the situations above, prepare the journal entry or entries Thor Corp. would have prepared to adjust for them during 2017. If you think no entry was prepared, write "none." Ignore income taxes.
b. After recording each situation in part a., prepare the appropriate year-end adjusting entry (entries) that should have been made at December 31, 2017. If you think no entry would be required, write "none." Ignore income taxes.