Janice Tamagi is the accountant for Thin Dime Ltd., which retails low-priced household products through over 20 retail stores across Canada. The company's year-end is December 31 and Janice is preparing the financial statements for the current year end. At this time, tension between management and staff is extremely high because a new collective agreement with the union representing most of the company's retail staff is being renegotiated. Management is pleading with the union representatives to reduce their request for a salary increase, claiming that the company simply cannot afford it. Janice showed the draft financial statements with a profit before income tax of $2.8 million to her boss, Anna Chen, who is the corporate controller. The reported profit had increased by 10% compared with the prior year. After reviewing the statements and discussing them with Janice, Anna asked her to do the following:

1. Most of the furniture and fixtures owned by the company are depreciated over a 12-year life and depreciation expense this year was $600,000. Anna wants the useful life to be revised to 8 years, which would result in a revised depreciation expense of $900,000. Janice believes that it is possible for these assets to have a useful life of anywhere from 8 to 12 years.

2. One of the company's stores will probably be shut down next spring. The final decision to do so has not yet been made. If the store is to be shut down, severance pay for the employees who work there would be $400,000. Anna would like this amount accrued as salary expense in the current financial statements because it is highly likely to occur.

3. When Janice was preparing the financial statements, there were a few office expenses that related to December that she had not yet received the invoices for. For example, none of the stores had received their utility bills yet for the month of December. Because the financial statements had to be finalized promptly due to the negotiations with the union, Janice estimated the amount of these bills and recorded them in December. The total amount of this accrual was $150,000. Anna felt that it was more prudent to accrue $230,000 rather than $150,000 just to be safe.

4. At the end of every year, the management team always received a bonus of $200,000, which Janice recorded as bonus expense in the income statement. Anna believes that since this amount has been paid in each of the preceding five years, it is really just a form of regular salary for these employees and is suggesting that it be shown within salary expense, with no bonus expense showing on the income statement this year.

Instructions

(a) Prepare the journal entries to adjust the financial statements as Anna has proposed.

(b) If Janice records these entries, what will the profit before income tax for the current year now be?

(c) Why do you think Anna suggested that the useful lives of furniture and fixtures be reduced?

(d) Do you think that it is appropriate to accrue an expense for the store closure? Why or why not?

(e) Do you think that the increase in the office expense accrual is justified? Why was it done?

(f) Is it appropriate to classify the management bonus to salary expense? Why or why not?