Josephine Keller, controller of Kingh Corp., is aware that a pronouncement on accounting changes has been issued. After reading the pronouncement, she is confused about what action should be taken on the following items related to Kingh Corp. for the year 2010.
1.In 2010, Kingh decided to change its policy on accounting for certain marketing costs. Previously, the company had chosen to defer and amortize all marketing costs over at least 5 years because Kingh believed that a return on these expenditures did not occur immediately. Recently, however, the time differential has considerably shortened, and Kingh is now expensing the marketing costs as incurred.
2.In 2010, the company examined its entire policy relating to the depreciation of plant equipment. Plant equipment had normally been depreciated over a 15-year period, but recent experience has indicated that the company was incorrect in its estimates and that the assets should be depreciated over a 20-year period.
3.One division of Kingh Corp., Hawthorne Co., has consistently shown an increasing net income from period to period. On closer examination of their operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventory.
4.In 2010, the company purchased new machinery that should increase production dramatically. The company has decided to depreciate this machinery on an accelerated basis, even though other machinery is depreciated on a straight-line basis.
5.All equipment sold by Kingh is subject to a 3-year warranty. It has been estimated that the expense ultimately to be incurred on these machines is 1% of sales. In 2010, because of a production break through, it is now estimated that 1%u20442 of 1% of sales is sufficient. In 2008 and 2009, warranty expense was computed as $64,000 and $70,000, respectively. The company now believes that these warranty costs should be reduced by 50%.
6.In 2010, the company decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2008 income by $65,000 and increase 2009 income by $20,000.