Problem NO: 1

Holtzman Company is in the process of preparing its financial statements for 2014. Assume that no entries for depreciation have been recorded in 2014.

Holtzman Company is in the process of preparing its financial statements for 2014. Assume that no entries for depreciation have been recorded in 2014. The following information related to depreciation of fixed assets is provided to you.

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1. Holtzman purchased equipment on January 2, 2011, for $85,000. At that time, the equipment had an estimated useful life of 10 years with a $5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2014, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,000 salvage value.

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2. During 2014, Holtzman changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $300,000. It had a useful life of 10 years and a salvage value of $30,000. The following computations present depreciation on both bases for 2012 and 2013. 2013 2012

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Straight-line $27,000 $27,000

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Declining-balance 48,000 60,000

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2012 2013 2014 2015

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Net income unadjusted—LIFO basis $140,000 $160,000 $205,000 $276,000

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Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000

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$ 15,000 $ 5,000 $ 10,000 $ (16,000)

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3. In 2015, the auditor discovered that:

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(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2014.

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(b) A dispute developed in 2013 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2012, the company was not permitted these deductions, but a tax settlement was reached in 2015 that allowed these expenses. As a result of the court’s finding, tax expenses in 2015 were reduced by $60,000.

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Instructions

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(a) Indicate how each of these changes or corrections should be handled in the accounting records.

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(Ignore income tax considerations.)

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(b) Present comparative income statements for the years 2012 to 2015, starting with income before extraordinary items. (Ignore income tax considerations.)

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