Jeremy Meadow Corporation has hired you to review its accounting records prior to the closing of the
Question:
Jeremy Meadow Corporation has hired you to review its accounting records prior to the closing of the revenue and expense accounts as of December 31, the end of the current fiscal year. The following information comes to your attention.
1. During the current year, Jeremy Meadow Corporation changed its policy in regard to expensing purchases of small tools. In the past, it had expensed these purchases because they amounted to less than 2% of net income. Now, the president has decided that the company should follow a policy of capitalization and subsequent depreciation. It is expected that purchases of small tools will not fluctuate greatly from year to year.
2. The company constructed a warehouse at a cost of $1,000,000. It had been depreciating the asset on a straight-line basis over 10 years. In the current year, the controller doubled depreciation expense because the replacement cost of the warehouse had increased significantly.
3. When the balance sheet was prepared, the preparer omitted detailed information as to the amount of cash on deposit in each of several banks. Only the total amount of cash under a caption “Cash in banks” was presented.
4. On July 15 of the current year, Jeremy Meadow Corporation purchased an undeveloped tract of land at a cost of $320,000. The company spent $80,000 in subdividing the land and getting it ready for sale. An appraisal of the property at the end of the year indicated that the land was now worth $500,000. Although none of the lots were sold, the company recognized revenue of $180,000, less related expenses of $80,000, for a net income on the project of $100,000.
5. For a number of years, the company used the FIFO method for inventory valuation purposes. During the current year, the president noted that all the other companies in the industry had switched to the LIFO method. The company decided not to switch to LIFO because net income would decrease $830,000. Instructions State whether or not you agree with the decisions made by Jeremy Meadow Corporation. Support your answers with reference, whenever possible, to the generally accepted principles, assumptions, and cost constraint applicable in the circumstances.
Accounting Information Systems
ISBN: 978-0132552622
12th edition
Authors: Marshall B. Romney, Paul J. Steinbart