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Gray Company S Financial Statements Showed Income Before Income Taxes of

Gray Company's financial statements showed income before income taxes of $4,030,000 for 2017 and $3,330,000 for 2016. Several adjustments need to be made to the financial statements, including changing the estimated life of equipment from 10 to 8 years, correcting an insurance expense error, adjusting provisions for doubtful accounts and warranty liabilities, and changing the accounting treatment for relining costs of blast furnaces from expensing to capitalizing. A worksheet is required to reconcile income before taxes for both years based on the additional information provided.

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106 views1 page

Gray Company S Financial Statements Showed Income Before Income Taxes of

Gray Company's financial statements showed income before income taxes of $4,030,000 for 2017 and $3,330,000 for 2016. Several adjustments need to be made to the financial statements, including changing the estimated life of equipment from 10 to 8 years, correcting an insurance expense error, adjusting provisions for doubtful accounts and warranty liabilities, and changing the accounting treatment for relining costs of blast furnaces from expensing to capitalizing. A worksheet is required to reconcile income before taxes for both years based on the additional information provided.

Uploaded by

Freelance Worker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Gray Company s financial statements showed income

before income taxes of #2636


Gray Company’s financial statements showed income before income taxes of $4,030,000 for
the year ended December 31, 2017, and $3,330,000 for the year ended December 31, 2016.
Additional information is as follows:Capital expenditures were $2,800,000 in 2017 and
$4,000,000 in 2016. Included in the 2017 capital expenditures is equipment purchased for
$1,000,000 on January 1, 2017, with no salvage value. Gray used straight-line depreciation
based on a 10-year estimated life in its financial statements. As a result of additional information
now available, it is estimated that this equipment should have only an 8-year life.Gray made an
error in its financial statements that should be regarded as material. A payment of $180,000
was made in January 2017 and charged to expense in 2017 for insurance premiums applicable
to policies commencing and expiring in 2016. No liability had been recorded for this item at
December 31, 2016.The allowance for doubtful accounts reflected in Gray’s financial
statements was $7,000 at December 31, 2017, and $97,000 at December 31, 2016. During
2017, $90,000 of uncollectible receivables were written off against the allowance for doubtful
accounts. In 2016, the provision for doubtful accounts was based on a percentage of net sales.
The 2017 provision has not yet been recorded. Net sales were $58,500,000 for the year ended
December 31, 2017, and $49,230,000 for the year ended December 31, 2016. Based on the
latest available facts, the 2017 provision for doubtful accounts is estimated to be 0.2% of net
sales.A review of the estimated warranty liability at December 31, 2017, which is included in
“other liabilities” in Gray’s financial statements, has disclosed that this estimated liability should
be increased $170,000.Gray has two large blast furnaces that it uses in its manufacturing
process. These furnaces must be periodically relined. Furnace A was relined in January 2011 at
a cost of $230,000 and in January 2016 at a cost of $280,000. Furnace B was relined for the
first time in January 2017 at a cost of $300,000. In Gray’s financial statements, these costs
were expensed as incurred. Since a relining will last for 5 years, Gray’s management feels it
would be preferable to capitalize and depreciate the cost of the relining over the productive life
of the relining. Gray has decided to make a change in accounting principle from expensing
relining costs as incurred to capitalizing them and depreciating them over their productive life on
a straight-line basis with a full year’s depreciation in the year of relining. This change meets the
requirements for a change in accounting principle under GAAP.Required:1. For the years ended
December 31, 2017 and 2016, prepare a worksheet reconciling income before income taxes as
given previously with income before income taxes as adjusted for the preceding additional
information. Show supporting computations in good form. Ignore income taxes and deferred tax
considerations in your answer. The worksheet should have the following format:2. As of January
1, 2017, compute the retrospective adjustment of retained earnings for the change in
accounting principle from expensing to capitalizing relining costs. Ignore income taxes and
deferred tax considerations in your answer.View Solution:
Gray Company s financial statements showed income before income taxes of

ANSWER
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