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Recently, however, the time differential has considerably shortened,
and Lotan is now expensing the marketing costs as incurred.
2. In 2014, the company examined its entire policy relating to the
depreciation of plant equipment. Plant equipment had normally been
depreciated over a 15-year period, but recent experience has indicated
that the company was incorrect in its estimates and that the assets
should be depreciated over a 20-year period.
3. One division of Lotan Corp., Hawthorne Co., has consistently
shown an increasing net income from period to period. On closer
examination of its operating statement, it is noted that bad debt
expense and inventory obsolescence charges are much lower than in
other divisions. In discussing this with the controller of this division, it
has been learned that the controller has increased his net income each
period by knowingly making low estimates related to the write-off of
receivables and inventory.
4. In 2014, the company purchased new machinery that should
increase production dramatically. The company has decided to
depreciate this machinery on an accelerated basis, even though other
machinery is depreciated on a straight-line basis.
5. All equipment sold by Lotan is subject to a 3-year warranty. It has
been estimated that the expense ultimately to be incurred on these
machines is 1% of sales. In 2014, because of a production
breakthrough, it is now estimated that 1/2 of 1% of sales is sufficient.
In 2012 and 2013, warranty expense was computed as $64,000 and
$70,000, respectively. The company now believes that these warranty
costs should be reduced by 50%.
6. In 2014, the company decided to change its method of inventory
pricing from average-cost to the FIFO method. The effect of this
change on prior years is to increase 2012 income by $65,000 and
increase 2013 income by $20,000