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net income each period by knowingly making low estimates
related to the write-off of receivables and inventory.
4. In 2014, 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 Lotan 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 2014, because of a production
breakthrough, it is now estimated that 1/2 of 1% of sales is
sufficient. In 2012 and 2013, 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 2014, 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 2012 income by $65,000 and
increase 2013 income by $20,000
Instructions Katherine Irving has come to you, as her CPA, for
advice about the situations above. Prepare a report, indicating the
appropriate accounting treatment that should be given for each of
these situations.
Create a 16- to 24-slide presentation in which you respond to the
following Discussion Question from the text: