Reference no: EM131756407

Question: Errors and Accounting Changes Ryker Ltd. began operations in 2002. the company follows ASPE. During the annual financial statement audit for the year ended December 31, 2015, the external auditor uncovered the following information:

a. In July 1,2013, the company began leasing a piece of equipment and incorrectly classified the contract as an operating lease. According to an analysis of the leasing criteria, the lease should be classified as a capital lease. the present value of the minimum lease payments at the time the lease commenced was $260,000. the amount of the lease payments expensed was $32,000 in 2013, $64,000 in 2014, and $64,000 in 2015. the asset is expected to have a five-year useful life with no salvage value, and the company uses straight-line depreciation for this type of asset. the amount of interest implicit in the lease is $12,000 for 2013, $18,000 for 2014, and $13,000 for 2015.

b. The company offers a one-year warranty on the products it sells, and uses the expense approach to account for these warranties. in 2015, it was determined that the total anticipated costs for warranty claims were expected to increase to 3% of sales from the original estimate of 2%. This change was due to an engineering review of the manufacturing process and past claims history. Total sales were $ 2,300,000 in 2014 and $2,600,000 in 2015. No journal entry has yet been made for the accrual of warranty liabilities in 2015.

c. A tax lawsuit related to the 2013 tax year was settled in 2015. the lawsuit was successful and the company received a refund of $51,000 of tax previously paid in the 2013 year. the company did not record any amount receivable in prior years due to uncertainty regarding the lawsuit.

d. In 2015, the company credited retained earnings for the $51,000 as a correction of a prior period error. in 2015, the company changed its depreciation method on computers from double-declining-balance to straight-line. This change is considered a voluntary policy change that provides more relevant information, and should be accounted for using retrospective application. the computers had an original cost of $50,000 when purchased on January 1, 2013. the equipment is expected to have a five-year useful life with no salvage value. Total depreciation expense reported prior to 2015 was $32,000. Depreciation expense for 2015 has already been recorded using the double-declining-balance method.

Required: Prepare any adjusting entries required for the above items at December 31,2015. Assume the books for 2015 are still open, but all previous years are closed. Ignore any income lax effects of the above items, except for part (c). Assume that all amounts are considered material. For any items where alternative treatments are available, provide the reasons for your approach.