In 2017, Ogoki Ltd. announced a major restructuring of its operations. The restructuring was in response to several years of poor performance and declining net income, the result of increased competition from Asia. The company announced that it would be downsizing its production facilities and reducing its workforce by 20 percent. Management estimated that the cost of reducing the work force would be about $75 million. The reduction in the workforce and the related costs are to take place in 2018.
In 2018, Ogoki carried out its restructuring. When it was completed, the actual cost of reducing the workforce was $50 million. All of these costs were related to severance packages paid to and retraining of employees. Ogoki's year-end is December 31.
a. Provide the journal entry that Ogoki would make in 2017 to record the estimated cost of reducing the workforce. Why do you think the entry would be made in 2017 when the reduction in the workforce was actually to take place in 2018? How would the amount be shown on the income statement? Explain.
b. What entry would be made to record the $50 million in cash costs incurred in 2018 to reduce the workforce? What effect would this entry have on the income statement in 2018? Explain.
c. What additional entry or entries would be needed in 2018 to adjust for the fact that management estimated the cost of reducing the workforce to be $75 million whereas the actual cost proved to be only $50 million? What is the effect of this difference on the financial statements in 2017 and 2018? Provide some possible explanations for the error in the estimate in 2017. When answering, consider the managers' financial reporting objectives.