The Diamond Glitter Company Is In The Process Of Preparing

The Diamond Glitter Company Is In The Process Of Preparing Its Financi

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. The company has not recorded any depreciation entries for that year. The provided information includes details about depreciation related to its assets: equipment and building, as well as inventory errors that impact reported inventory balances over the past three years.

Specifically, the company purchased equipment on January 2, 2009, for $165,000, with an estimated useful life of 7 years and a salvage value of $25,000. Depreciation is calculated on a straight-line basis. In 2012, the company revised its estimate of the equipment’s remaining useful life to 3 years with a salvage value of $15,000. This revision requires adjusting depreciation expense for 2012 onward.

Regarding its building, originally acquired at a cost of $625,000, the company initially depreciated it using the double-declining-balance method. During 2012, it switched to the straight-line method. The building has an estimated useful life of 10 years and a salvage value of $50,000. Depreciation expenses for 2010 and 2011 under both methods have been provided, showcasing the change in accounting method for the building.

Further, the company identified errors in inventory accounting, resulting in understated inventories in 2010 and 2011, and an overstated inventory in 2012. The associated corrections need to be made to ensure accurate financial reporting.

Paper For Above instruction

The preparation of accurate and compliant financial statements is critical for any company, including the Diamond Glitter Company. The adjustments necessary due to depreciation and inventory errors have significant implications for recognized assets, expenses, and net income in 2012. This discussion will analyze and compute the necessary adjustments, following relevant accounting standards such as GAAP and IFRS, to present a fair view of the company’s financial position and performance for 2012.

Depreciation Adjustment for Equipment

Initially, the equipment purchased on January 2, 2009, was depreciated on a straight-line basis over 7 years with a salvage value of $25,000. The annual depreciation expense under the original estimate was:

Annual depreciation (2009–2012) = (Cost - Salvage Value) / Useful Life = ($165,000 - $25,000) / 7 = $20,000 per year.

From January 2, 2009, to December 31, 2011, depreciation totaled 3 years, amounting to $60,000. The book value at the start of 2012 would be:

Book value at January 2, 2012 = $165,000 - $60,000 = $105,000.

However, in 2012, the company re-estimated the remaining useful life to 3 years with a salvage value of $15,000. Therefore, the new annual depreciation expense for 2012–2014 should be calculated as:

Remaining book value at January 2, 2012 = $105,000. New depreciation per year = (Remaining book value - new salvage value) / new useful life = ($105,000 - $15,000) / 3 = $30,000.

This indicates an increase in depreciation expense for 2012 compared to the previously recorded expense. Since no depreciation entries were made in 2012, the adjustment will be an increase in depreciation expense of $30,000 for 2012.

Adjustment for Building Depreciation Method Change

The building, originally depreciated using double-declining balance (DDB) for 2010 and 2011, is now switched to straight-line depreciation in 2012. The previously calculated depreciation expenses are:

• 2010: $92,000 (DDB)
• 2011: $115,000 (DDB)

Under straight-line depreciation, annual expense is calculated as:

Annual depreciation = (Cost - Salvage value) / Useful life = ($625,000 - $50,000) / 10 = $57,500.

The adjustment involves removing the prior DDB depreciation expenses from the books and replacing them with straight-line depreciation for the same periods, plus continuing the straight-line expense in subsequent periods.

Since the company already recorded $92,000 in 2010 and $115,000 in 2011 via DDB, total accumulated depreciation as of December 31, 2011, is $207,000. The total depreciation under straight-line for two years (2010–2011) is $115,000 ($57,500 per year). The excess depreciation due to using DDB must be added back, and then depreciation under straight-line should be recorded for 2012 onward.

Inventory Errors and Corrections

Inventory overstated or understated affects the cost of goods sold (COGS) and net income. The errors identified are:

• 2010: understated by $32,000
• 2011: understated by $51,000
• 2012: overstated by $9,500

The cumulative effect of these errors, when corrected, impacts current retained earnings and prior period financial statements. Correcting prior year's inventory errors involves adjusting retained earnings at the beginning of each period, and restating prior periods' financials as needed for comparability and compliance.

Conclusion

In conclusion, the adjustments for depreciation and inventory errors are vital for accurate financial reporting. The equipment’s revised depreciation expense results in an additional $30,000 of expense in 2012. Switching the building from declining-balance to straight-line depreciation requires recalculating accumulated depreciation to reflect the new approach, aligning depreciation expense with useful life and salvage value. Correcting past inventory errors ensures that the company's balance sheet and income statement accurately reflect the economic reality of its operations. Properly addressing these factors aligns the financial statements with GAAP standards, providing clarity and transparency to stakeholders.

References

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