Problem -
Molina Company's reported net incomes for 2011 and the previous two years are presented below.
2011 2010 2009 $105,000 $95,000 $70,000
2011'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 2009 and 2010 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 and/or errors described below, prepare the journal entry or entries Molina Company should record during 2011 to adjust for the change and/or error. 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, 2011. If no entry is required, write "none."
1. Early in 2011, Molina determined that equipment purchased in January, 2009 at a cost of $430,000, with an estimated life of 5 years and salvage value of $30,000 is now estimated to continue in use until December 31, 2015 and will have a $10,000 salvage value. Molina records its 2011 depreciation at the end of 2011
2. Molina, in reviewing its provision for uncollectibles during 2011, 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 2010 and 2009 when the expense had been $20,000 and $14,000, respectively. The company would have recorded $30,000 of bad debt expense on December 31, 2011 under the old rate.
3. During 2011, Molina decided to change from the LIFO method of valuing inventories to average cost. The net incomes involved under each method were as follows:
201120102009LIFO$51,000$59,000$42,000Average Cost$63,000$69,000$48,000Assume no difference between LIFO and average cost inventory values in years prior to 2009.