Share
Explore BrainMass

Saluki Company Accounting Changes and Error Corrections

Saluki Company's reported net incomes for 2007 and the previous two years presented: year: 2007 2006 2005
$105,000 $95,000 $780,000

2007's net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The income for 2005 and 2006 do not take these items into account and are stated at the amounts determined in those years.

Instructions
a. For each of the six accounting changes errors, or prior period adjustment situations described below, give the journal entry or entries Saluki Company made to record them during 2007. If no entry is required, write "none".

b. After recording the situation in part (a) above, give the year-end adjusting entry for December 31, 2007. If no entry, write"none".

1. Early in 2007, Saluki determined that equipment purchased in January 2005 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, 2011 and will have a $10,000 salvage value. Saluki recorded its 2007 depreciation at the end of 2007.

a)

B)

2. Saluki determined that it had understated its depreciation by $20,000 in 2006 owing to the fact that an adjusting entry did not get recorded.

a)

b)

3. Saluki bought a truck January 1, 2004 for $40,000 with a $4,000 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 2009. Saluki uses straight-line depreciation for its trucks.

a)

b)

4. During 2007 Saluki changed from the straght-lin method of depreciation for its cement plant to the double-declining-balance method. The following calculations present depreciation on both bases. (ignore income taxes)

a)

b)

[[[Question 4
NOTE: QUESTION 4 is not answered since no information was provided for the depreciation expense]]]]]]]]]]]

5. Saluki in reviewing its provision for uncollectibles during 2007, 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 2006 and 2005 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, 2007 under the old rate.

a)

b)

6. During 2007, Saluki decided to change from the LIFO method of valuing inventories to average cost. The net income involved under each method were as follows:

2007 2006 2005
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $69,000 $48,000

Assume no difference between LIFO and average cost inventory values in years prior to 2005.

a)

b)

Solution Preview

ANSWERS

Question 1
Instructions A
DR: Depreciation expense 52,000
CR: Accumulated depreciation 52,000

Book value of asset as of January 1, 2007
Historical cost: 430,000
Estimated life: 5 years
Salvage value: 30,000
Accumulated depreciation as of December 31, 2006: (430,000-30,000)/5*2=160,000
Book value = 430,000-160,000=270,000
New depreciation: ...

Solution Summary

Accounting changes, error corrections, and prior period adjustment for Saluki Company.

$2.19