Question

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2017.

(a) The service life of certain equipment was changed from 8 to 5 years. If a 5-year life had been used previously, additional depreciation of \(425,000 would have been charged.

(b) In 2017, a flood destroyed a warehouse that had a book value of \)1,600,000. Floods are rare in this locality.

(c) In 2017, the company wrote off $1,000,000 of inventory that was considered obsolete.

(d) In 2014, a supply warehouse with an expected useful life of 7 years was erroneously expensed.

(e) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.

Short answer

The recording of the financial items should be done according to the rules of accounting. For instance, the purchase of an asset should be reported in the balance sheet and cash flow statement.

Step-by-step solution

Meaning of Financial Transactions

Financial transaction refers to the monetary data associated with a business’s activities. Financial transactions are recorded in the books of accounts and summarized annually to draft financial statements.

Reporting of various financial items

Serial No.	Treatment	Explanation
(a)	Balance sheet as a decrease in equipment’s book value.	The remaining value of the equipment should be depreciated according to the life of an asset.
(b)	Income statement as an extraordinary loss.	As theloss is nonrecurring, hence should be reported as an extraordinary loss.
(c)	Income statement as an unusual expense.	Written off expenses areconsidered unusual; therefore should be reported as an unusual expense in the income statement.
(d)	The opening balance of retained earnings as adjustment.	The error committed by the management should be corrected by restating the retained earnings.
(e)	The beginning balance of retained earnings as adjustment.	The impact of changing method should be adjusted with the opening balance of the retained earnings accordingly.