You are hired to review the accounting records of Sheridan Inc. (a public corporation) before it closes its revenue and expense accounts as at December 31, 2020, the end of its current fiscal year. The following information comes to your attention.
1. During the current year, Sheridan Inc. changed its shipment policy from f.o.b. destination to f.o.b. shipping point. This would result in an additional $50,000 of revenue being recorded for fiscal 2020.
2. The estimated remaining useful life of its manufacturing equipment was reviewed by management and increased by five years. This reduced depreciation expense by $30,000 during fiscal 2020.
3. Due to the recent deterioration in the age of outstanding Sheridan’s controller changed the percentage of from 4.5% to 6% when arriving at the allowance for doubtful accounts for the year ended December 31, 2020. This revision in the percentage used was applied to the previous year and an additional $50,000 was recorded as bad debt expense for the year ended December 31, 2019.
4. The controller changed the classification of one expense on the comprehensive income statements for 2020 and 2019. The expense had been previously reported as a selling expense and is now reclassified as an administrative expense. The controller didn’t agree with the treatment given in prior years. Nothing was mentioned in the concerning implementing this change as he reasoned that net income and any key remained unaffected.
5. During the year, Sheridan had an opportunity to buy equipment at an auction when its competitor went bankrupt. The equipment had to be purchased as bundles. Some of the equipment in the bundle purchased could be used by Sheridan immediately. Some of the equipment in the bundle did not fit the company’s operations and had to be held for resale. The resale was expected to take place early in 2021. The purchase price of the bundle of equipment was added to property, plant, and equipment and depreciated in 2020. The controller mentioned that the price paid for the equipment was such a bargain that any future gain or loss from the resale of equipment will not have any material effect on net income.
6. During fiscal 2020, new government legislation was passed requiring companies like Sheridan to install additional health and safety devices in their offices by 2025. Although Sheridan does not intend to retrofit the required new devices until 2025, an accrual for $375,500 has been established in the year-end for the future installation costs.
7. To maintain customer goodwill, Sheridan voluntarily recalled some products during the year. Sheridan has not established an accrual and is recording the sales returns as they happen.
Instructions
State whether or not you agree with each of the accounting decisions made by Sheridan Inc. Explain your reasoning and, wherever possible, support your answers by referring to the generally accepted accounting principles that apply to the circumstances.
