Change in principle; change in inventory methods
During 2014 (its first year of operations) and 2015, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2016, Batali decided to change to the average method for both financial reporting and tax purposes.
Income components before income tax for 2016, 2015, and 2014 were as follows ($ in millions):
Dividends of $20 million were paid each year. Batali’s fiscal year ends December 31.
Change in depreciation methods
For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2013 for $2,560,000. Its useful life was estimated to be six years with a $160,000 residual value. At the beginning of 2016, Clinton decides to change to the straight-line method. The effect of this change on depreciation for each year is as follows ($ in 000s):
Change in estimate; useful life and residual value of equipment
Wardell Company purchased a mini computer on January 1, 2014, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,000. On January 1, 2016, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.
For each of the following inventory errors occurring in 2016, determine the effect of the error on 2016’s cost of goods sold, net income, and retained earnings. Assume that the error is not discovered until 2017 and that a periodic inventory system is used. Ignore income taxes.