Internal auditors discovered that ending inventories


Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2011 and 2012, reported the following amounts and subtotals ($ in millions):

 

Assets

Liabilities

Shareholders'

Equity

Net Income

Expenses

  2011

$

760

 

$

340

 

$

420

 

$

220

 

$

152

 

  2012

 

840

   

410

   

430

   

240

   

177

 

In 2013 the following situations occurred or came to light:

a. Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts:

  2011 inventory

Overstated by

$

12.2

million

  2012 inventory

Understated by

$

10.2

million

b. A liability was accrued in 2011 for a probable payment of $7.4 million in connection with a lawsuit ultimately settled in December 2013 for $4.2 million.

c. A patent costing $19.2 million at the beginning of 2011, expected to benefit operations for a total of six years, has not been amortized since acquired.

d. Whaley's conveyer equipment was depreciated by the sum-of-the-years'-digits (SYD) basis since it was acquired at the beginning of 2011 at a cost of $33.0 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2013, Whaley decided to switch to straight-line depreciation.

Required:

For each situation:

1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2013 related to the situation described. (Ignore tax effects.)

2. Determine the amounts to be reported for each of the five items shown below from the 2011 and 2012 financial statements when those amounts are reported again in the 2011-2013 comparative financial statements.

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Finance Basics: Internal auditors discovered that ending inventories
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