Integrating Case :
Errors; change in estimate; change in principle; inventory, patent, and equipment
Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the year ended December 31, 2016, reported the following amounts and subtotals ($ in millions):
Shareholders'
Assets Liabilities Equity Net Income Expenses
2015 $640 $330 $310 $210 $150
2016 $820 $400 $420 $230 $175
In 2017 the following situations occurred or came to light:
a. Internal auditors discovered that ending inventories reported in the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts:
2015 inventory Overstated by $12 million
2016 inventory Understated by $10 million
b. A patent costing $18 million at the beginning of 2015, expected to benefit operations for a total of six years, has not been amortized since acquired.
c. Whaley's conveyer equipment has been depreciated by the sum-of-the-years'-digits (SYD) method since constructed at the beginning of 2015 at a cost of $30 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2017, 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 2017 related to the situation described. (Ignore tax effects.)
2. Determine the amounts to be reported for each of the items shown above from the 2015 and 2016 financial statements when those amounts are reported again in the 2017, 2016, and 2015 comparative financial statements.