(Analysis o f Various Accounting Changes and Errors ) Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Conse- quently, she has proposed the following accounting changes in connection with Mathys Inc.’s 2014 finan- cial statements.

 

1. At December 31, 2013, the client had a receivable of $820,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item.

^{2. The client p r oposes the following changes in dep r eciation policies.}

^{(a) For o f fice furnitu r e and fixtu r es, it p r oposes to change f r om a 10-year useful life to an 8-year life.}

^{If this change had been made in prior years, r etained earnings at December 31, 2013, would}

^{have been $250,000 less. The e f fect of the change on 2014 income alone is a r eduction of $60,000.}

^{(b) For its new equipment in the leasing division, the client p r oposes to adopt the sum-of-the-}

^{years’-digits dep r eciation method. The client had never used SYD befo r e. The first year the cli-}

^{ent operated a leasing division was 2014. If straight-line dep r eciation we r e used, 2014 income}

^{would be $ 1 10,000 g r eate r .}

^{3. In p r eparing its 2013 statements, one of the client’s bookkeepers overstated ending inventory by}

^{$235,000 because of a mathematical er r o r . The client p r oposes to t r eat this item as a prior period}

^adjustment.

^{4. In the past, the client has sp r ead p r ep r oduction costs in its furnitu r e division over 5 years. Because}

^{its latest furnitu r e is of the “fad” type, it appears that the la r gest volume of sales will occur during}

^{the first 2 years after int r oduction. Consequentl y , the client p r oposes to amortize p r ep r oduction}

^{costs on a pe r -unit basis, which will r esult in expensing most of such costs during the first 2 years}

^{after the furnitu r e’s int r oduction. If the new accounting method had been used prior to 2014,}

^{r etained earnings at December 31, 2013, would have been $375,000 less.}

^{5. For the nursery division, the client p r oposes to switch f r om FIFO to LIFO inventories because it}

^{believes that LIFO will p r ovide a better matching of cur r ent costs with r evenues. The e f fect of mak-}

^{ing this change on 2014 earnings will be an inc r ease of $320,000. The client says that the e f fect of the}

^{change on December 31, 2013, r etained earnings cannot be determined.}

^{6 . T o achiev e a n app r opriat e r ecognitio n o f r evenue s an d expense s i n it s buildin g const r uction}

^{division , th e clien t p r opose s t o switc h f r o m th e completed-contrac t metho d o f accountin g to}

^{th e pe r centage-of-completion method. Had the pe r centage-of-completion method been employed}

^{in all prior years, r etained earnings at December 31, 2013, would have been $1,075,000 g r eate r .}

 

Instructions

^{(a) For each of the changes described above, decide whether:}

^{(1) The change involves an accounting principle, accounting estimate, or cor r ection of an er r o r .}

^{(2) Restatement of opening r etained earnings is r equi r ed.}

^{(b) What would be the p r oper adjustment to the December 31, 2013, r etained earnings?}