Problem:
Prepare the disclosure notes required for the entries made in the problem, detailing the errors in and the changes you have made to the journal entries, and the changes will affect the financial statements.
(Accounting Change and Error Analysis) On December 31, 2008, before the books were closed, the management and accountants of Keltner Inc. made the following determinations about three depreciable assets.
Depreciable asset A was purchased January 2, 2005. It originally cost $495,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2008, the decision was made to change the depreciation method from straight-line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged.
Depreciable asset B was purchased January 3, 2004. It originally cost $120,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2008, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.
Depreciable asset C was purchased January 5, 2004. The asset's original cost was $140,000, and this amount was entirely expensed in 2004. This particular asset has a 10-year useful life and no salvage value. The straight-line method was chosen for depreciation purposes.
Additional data:
1. Income in 2008 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2008.
3. Income in 2007 was reported at $370,000.
4. Ignore all income tax effects.
5. 100,000 shares of common stock were outstanding in 2007 and 2008.
Instructions:
1. Prepare all necessary entries in 2008 to record these determinations.
2. Prepare comparative retained earnings statements for Eloise Keltner Inc. for 2007 and 2008. The company had retained earnings of $200,000 at December 31, 2006.
KREITER INSTRUMENT COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED MAY 31
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2003
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2004
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2005
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2006
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2007
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Sales-net
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$13,964
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$15,506
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$16,673
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$18,221
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$18,898
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Cost of goods sold
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Beginning inventory
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1,000
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1,100
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1,000
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1,115
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1,237
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Purchases
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13,000
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13,900
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15,000
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15,900
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17,100
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Ending inventory
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(1,100)
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(1,000)
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(1,115)
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(1,237)
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(1,369)
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Total
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12,900
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14,000
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14,885
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15,778
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16,968
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Gross profit
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1,064
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1,506
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1,788
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2,443
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1,930
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Administrative expenses
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700
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763
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832
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907
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989
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Income before taxes
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364
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743
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956
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1,536
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941
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Income taxes (50%)
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182
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372
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478
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768
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471
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Net income
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182
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371
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478
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768
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470
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Retained earnings-beginning
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1,206
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1,388
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1,759
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2,237
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3,005
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Retained earnings-ending
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$ 1,388
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$ 1,759
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$ 2,237
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$ 3,005
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$ 3,475
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Earnings per share
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$1.82
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$3.71
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$4.78
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$7.68
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$4.70
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SCHEDULE OF INVENTORY BALANCES USING AVERAGE COST METHOD FOR THE YEARS ENDED MAY 31
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2002
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2003
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2004
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2005
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2006
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2007
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$950
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$1,124
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$1,091
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$1,270
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$1,480
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$1,699
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