CHAPTER 22
Accounting Changes and Error Analysis
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
1.
Differences between change in
principle, change in estimate,
change in entity, errors.
2, 4, 6, 7,
8, 9, 12, 13,
15, 21
2.
Accounting changes:
3.
*4.
Brief
Exercises Exercises
8
Concepts
Problems for Analysis
3
1, 2, 3, 4
3, 6, 7
1, 2, 4, 5
a.
Comprehensive.
b.
Changes in estimate,
changes in depreciation
methods.
8, 9
4, 5, 9
3, 4, 6, 7,
8, 9, 10,
11, 12,
16, 17
1, 2, 4,
6, 7
1, 2, 3,
4, 5, 6
c.
Changes in accounting
for long-term construction
contracts.
2, 10
1, 2, 10
1, 8, 13
3
1, 2
d.
Change from FIFO
to average cost.
e.
Change from FIFO to LIFO. 2, 11
10
f.
Change from LIFO.
8
3
g.
Miscellaneous.
1, 3, 4,
5, 8
8, 9, 10
2, 8, 14
3
1, 2
2, 3, 5,
8, 14
2, 5
1, 5
Correction of an error.
a.
Comprehensive.
8, 14, 15,
17, 19
8, 9, 10
8, 15, 16,
18, 19,
20, 21
3, 6, 7, 8,
9, 10
b.
Depreciation.
2, 18, 21
6, 7
9, 15,
17, 18
1, 6, 8
c.
Inventory.
9, 16, 20
10
7, 17, 18
2, 10
11, 12
22, 23
11, 12
Changes between fair value and
equity methods.
2, 3, 4
1, 2
*This material is dealt with in an Appendix to the chapter.
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22-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Identify the types of accounting
changes.
2. Describe the accounting for
changes
in accounting principles.
1, 2, 3, 4
3. Understand how to account for
retrospective accounting
changes.
5, 6, 7, 8, 9,
10
4. Understand how to account for
impracticable changes.
11
5. Describe the accounting for
changes
in estimates.
12
6. Identify changes in a reporting
entity.
13
7. Describe the accounting for
correction of errors.
15, 16, 17,
18, 19, 20,
21
1, 2, 3,
9, 10
1, 2, 3, 4,
5,
8, 13, 14
1
CA22-5
2, 3, 5
CA22-1,
CA22-2,
CA 22-3,
CA22-4
CA22-5,
CA22-6
2
4, 5, 9
6, 7, 8, 9,
10, 11, 12
1, 2, 3,
4, 6
6, 7, 8, 10
7, 8, 9, 15,
16, 17, 18,
19, 20, 21
1, 2, 3, 6,
7, 8, 9, 10
18, 19, 20,
21
6, 7, 8,
9, 10
22, 23
11, 12
8. Identify economic motives for
changing accounting methods.
9. Analyze the effect of errors.
*10. Make the computations and
prepare the entries necessary
to record a change from or to
the equity method of
accounting.
22-2
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14
11, 12
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ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E22-1
E22-2
E22-3
E22-4
E22-5
E22-6
E22-7
E22-8
E22-9
E22-10
E22-11
E22-12
E22-13
E22-14
E22-15
E22-16
E22-17
E22-18
E22-19
E22-20
E22-21
*E22-22
*E22-23
Change in principle—long-term contracts.
Change in principle—inventory methods.
Accounting change.
Accounting change.
Accounting change.
Accounting changes—depreciation.
Change in estimate and error; financial statements.
Accounting for accounting changes and errors.
Error and change in estimate—depreciation.
Depreciation changes.
Change in estimate—depreciation.
Change in estimate—depreciation.
Change in principle—long-term contracts.
Various changes in principle—inventory methods.
Error correction entries.
Error analysis and correcting entry.
Error analysis and correcting entry.
Error analysis.
Error analysis and correcting entries.
Error analysis.
Error analysis.
Change from fair value to equity.
Change from equity to fair value.
Moderate
Moderate
Difficult
Difficult
Difficult
Difficult
Moderate
Simple
Simple
Moderate
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Moderate
Simple
Moderate
Moderate
Complex
Moderate
10–15
10–15
25–30
25–30
30–35
30–35
25–30
5–10
15–20
20–25
10–15
20–25
10–15
20–25
15–20
10–15
10–15
25–30
20–25
20–25
10–15
25–30
15–20
P22-1
P22-2
P22-3
P22-4
P22-5
P22-6
P22-7
P22-8
P22-9
P22-10
*P22-11
*P22-12
Change in estimate and error correction.
Comprehensive accounting change and error analysis problem.
Error corrections and accounting changes.
Accounting changes.
Change in principle—inventory—periodic.
Accounting change and error analysis.
Error corrections.
Comprehensive error analysis.
Error analysis.
Error analysis and correcting entries.
Fair value to equity method with goodwill.
Change from fair value to equity method.
Moderate
Complex
Complex
Moderate
Moderate
Moderate
Moderate
Difficult
Moderate
Complex
Moderate
Moderate
30–35
30–40
30–40
40–50
30–35
25–30
25–30
30–35
20–25
50–60
20–25
20–25
Analysis of various accounting changes and errors.
Analysis of various accounting changes and errors.
Analysis of three accounting changes and errors.
Analysis of various accounting changes and errors.
Change in principle, estimate.
Change in estimate, ethics.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
25–35
20–30
30–35
20–30
20–30
20–30
CA22-1
CA22-2
CA22-3
CA22-4
CA22-5
CA22-6
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22-3
SOLUTIONS TO CODIFICATION EXERCISES
CE22-1
Master Glossary
(a)
A change that has the effect of adjusting the carrying amount of an existing asset or liability or
altering the subsequent accounting for existing or future assets or liabilities. A change in accounting
estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations
associated with assets and liabilities. Changes in accounting estimates result from new information.
Examples of items for which estimates are necessary are uncollectible receivables, inventory
obsolescence, service lives and salvage values of depreciable assets, and warranty obligations.
(b)
A change from one generally accepted accounting principle to another generally accepted
accounting principle when there are two or more generally accepted accounting principles that
apply or when the accounting principle formerly used is no longer generally accepted. A change
in the method of applying an accounting principle also is considered a change in accounting
principle.
(c)
The process of revising previously issued financial statements to reflect the correction of an error
in those financial statements.
(d)
The application of a different accounting principle to one or more previously issued financial
statements, or to the statement of financial position at the beginning of the current period, as if
that principle had always been used, or a change to financial statements of prior accounting
periods to present the financial statements of a new reporting entity as if it had existed in those
prior years.
CE22-2
According to FASB ASC 250-10-50-7 (Accounting Changes and Error Corrections—Disclosure):
When financial statements are restated to correct an error, the entity shall disclose that its previously
issued financial statements have been restated, along with a description of the nature of the error. The
entity also shall disclose both of the following:
(a)
The effect of the correction on each financial statement line item and any per-share amounts
affected for each prior period presented.
(b)
The cumulative effect of the change on retained earnings or other appropriate components of
equity or net assets in the statement of financial position, as of the beginning of the earliest
period presented.
22-4
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CE22-3
According to FASB ASC 250-10-45-5 (Accounting Changes and Error Corrections—Other Presentation
Matters):
An entity shall report a change in accounting principle through retrospective application of the new
accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application
requires all of the following:
(a)
The cumulative effect of the change to the new accounting principle on periods prior to those
presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of
the first period presented.
(b)
An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or
other appropriate components of equity or net assets in the statement of financial position) for
that period.
(c)
Financial statements for each individual prior period presented shall be adjusted to reflect the
period-specific effects of applying the new accounting principle.
CE22-4
According to FASB ASC 250-10-S99-4 (Accounting Changes and Error Corrections—SEC Materials):
Question 5: If a registrant justified a change in accounting method as preferable under the circumstances, and the circumstances change, may the registrant revert to the method of accounting used
before the change?
Any time a registrant makes a change in accounting method, the change must be justified as preferable
under the circumstances. Thus, a registrant may not change back to a principle previously used unless
it can justify that the previously used principle is preferable in the circumstances as they currently exist.
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22-5
ANSWERS TO QUESTIONS
1.
The major reasons why companies change accounting methods are:
(a) Desire to show better profit picture.
(b) Desire to increase cash flows through reduction in income taxes.
(c) Requirement by Financial Accounting Standards Board to change accounting methods.
(d) Desire to follow industry practices.
(e) Desire to show a better measure of the company’s income.
2.
(a) Change in accounting principle; retrospective application is generally not made because it is
impracticable to determine the effect of the change on prior years. The FIFO inventory amount
is therefore generally the beginning inventory in the current period.
(b) Correction of an error and therefore prior period adjustment; adjust the beginning balance of
retained earnings.
(c) Increase income for litigation settlement, assuming it was not accrued.
(d) Change in accounting estimate; currently and prospectively. Part of operating section of
income statement.
(e) Reduction of accounts receivable and the allowance for doubtful accounts.
(f) Change in accounting principle; retrospective application to prior period financial statements.
3.
The three approaches suggested for reporting changes in accounting principles are:
(a) Currently—the cumulative effect of the change is reported in the current year’s income as
a special item.
(b) Retrospectively—the cumulative effect of the change is reported as an adjustment to retained
earnings. The prior year’s statements are changed on a basis consistent with the newly
adopted principle.
(c) Prospectively—no adjustment is made for the cumulative effect of the change. Previously
reported results remain unchanged. The change shall be accounted for in the period of the
change and in subsequent periods if the change affects future periods.
4.
The FASB believes that the retrospective approach provides financial statement users the most
useful information. Under this approach, the prior statements are changed on a basis consistent
with the newly adopted standard; any cumulative effect of the change for prior periods is recorded
as an adjustment to the beginning balance of retained earnings of the earliest period reported.
5.
The indirect effect of a change in accounting principle reflects any changes in current or future
cash flows resulting from a change in accounting principle that is applied retrospectively. An
example is the change in payments to a profit-sharing plan that is based on reported net income.
Indirect effects are not included in the retrospective application, but instead are reported in the
period in which the accounting change occurs (current period).
6.
A change in an estimate is simply a change in the way an individual perceives the realizability of
an asset or liability. Examples of changes in estimate are: (1) change in the realizability of trade
receivables, (2) revisions of estimated lives, (3) changes in estimates of warranty costs, and
(4) change in estimate of deferred charges or credits. A change in accounting estimate effected
by a change in accounting principle occurs when a change in accounting estimate is inseparable
from the effect of a related change in accounting principle. An example would be switching from
capitalizing advertising expenditures to expensing them if the future benefit of the expenditures
can no longer be estimated with reasonable certainty.
22-6
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Questions Chapter 22 (Continued)
7.
This is an example of a situation in which it is difficult to differentiate between a change in accounting principle and a change in estimate. In such a situation, the change should be considered a
change in estimate, and accordingly, should be handled currently and prospectively. Thus, all
costs presently capitalized and viewed as providing doubtful future values should be expensed
immediately, and costs currently incurred should also be expensed immediately.
8.
(a) Charge to expense—possibly separately disclosed.
(b) Change in estimate that is effected by a change in accounting principle—currently and
prospectively.
(c) Charge to expense—possibly separately disclosed.
(d) Correction of an error and reported as a prior period adjustment—adjust the beginning balance
of retained earnings.
(e) Change in accounting principle—retrospective application to all affected prior-period financial
statements.
(f) Change in accounting estimate—currently and prospectively.
9.
This change is to be handled as a correction of an error. As such, the portion of the change
attributable to prior periods ($23,000) should be reported as an adjustment to the beginning
balance of retained earnings in the 2014 financial statements. If statements for previous years
are presented for comparative purposes, these statements should be restated to correct for the
error. The remainder of the inventory value ($29,000) should be reported in the 2014 income
statement as a reduction of materials cost.
10.
Preferability is a difficult concept to apply. The problem is that there are no basic objectives to
indicate which is the most preferable method, assuming a selection between two generally accepted
accounting practices is possible, such as completed-contract and percentage-of-completion. If a
FASB standard creates a new principle or expresses preference for or rejects a specific accounting
principle, a change is considered clearly acceptable. A more appropriate matching of revenues
and expenses is often given as the justification for a change in accounting principle.
11.
When a company changes to the LIFO method, the base-year inventory for all subsequent LIFO
calculations is the beginning inventory in the year the method is adopted. This assumes that prior
years’ income is not changed because it would be too impractical to do so. The only adjustment
necessary may be to adjust the beginning inventory from a lower-of-cost-or-market approach to a
cost basis. This establishes the beginning LIFO layer.
12.
Where individual company statements were reported in prior years and consolidated financial
statements are to be prepared this year, the following reporting and disclosure practices should
be implemented:
(1) The financial statements of all prior periods presented should be restated to show the
financial information for the new reporting entity for all periods.
(2) The financial statements of the year in which the change in reporting entity is made should
describe the nature of the change and the reason for it.
(3) The effect of the change on income before extraordinary items, net income, and earnings
per share amounts should be disclosed for all periods presented.
13.
This change represents a change in reporting entity. This type of change should be reported by
restating the financial statements of all prior periods presented to show the financial information
for the new reporting entity for all periods. The financial statements of the year in which the
change in reporting entity is made should describe the nature of the change and the reason for it.
The effect of the change on income before extraordinary items, net income, and earnings per
share amounts should be disclosed for all periods presented.
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22-7
Questions Chapter 22 (Continued)
14.
Counterbalancing errors are errors that will be offset or corrected over two periods. Noncounterbalancing errors are errors that are not offset in the next accounting period. An example
of a counterbalancing error is the failure to record accrued wages or prepaid expenses. Failure to
capitalize equipment and record depreciation is an example of a noncounterbalancing error.
15.
A correction of an error in previously issued financial statements should be handled as a priorperiod adjustment. Thus, such an error should be reported in the year that it is discovered as an
adjustment to the beginning balance of retained earnings. And, if comparative statements are
presented, the prior periods affected by the error should be restated. The disclosures need not be
repeated in the financial statements of subsequent periods.
As an illustration, assume that credit sales of $40,000 were inadvertently overlooked at the end of
2014. When the error was discovered in a subsequent period, the appropriate entry to record the
correction of the error would have been (ignoring income tax effects):
Accounts Receivable .................................................................................
Retained Earnings .............................................................................
40,000
40,000
16.
This change represents a change from an accounting principle that is not generally accepted to
an accounting principle that is acceptable. As such, this change should be handled as a
correction of an error. Thus, in the 2014 statements, the cumulative effect of the change should
be reported as an adjustment to the beginning balance of retained earnings. If 2013 statements
are presented for comparative purposes, these statements should be restated to correct for the
accounting error.
17.
Retained earnings is correctly stated at December 31, 2016. Failure to accrue salaries in earlier
years is a counterbalancing error that has no effect on 2016 ending retained earnings.
18.
December 31, 2015
Machinery ..................................................................................................
Accumulated Depreciation—Equipment .............................................
Retained Earnings .............................................................................
(To correct for the error of expensing installation costs
on machinery acquired in January, 2014)
Depreciation Expense [($36,000 – $3,600) ÷ 20] .......................................
Accumulated Depreciation—Equipment .............................................
(To record depreciation on machinery for 2015 based
on a 20-year useful life)
19.
6,000
600
5,400
1,620
1,620
The amortization error decreases net income by $2,700 in 2014. Interest expense related to the
discount should have been charged for $300, but was charged for $3,000. The entry to correct for
this error is as follows:
Discount on Bonds Payable .......................................................................
Interest Expense ................................................................................
2,700
2,700
The entry to record accrued interest on the $100,000 of principal at 11% for 6 months is:
Interest Expense ........................................................................................
Interest Payable .................................................................................
22-8
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5,500
5,500
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Questions Chapter 22 (Continued)
20.
This error has no effect on net income because both purchases and inventory were understated.
The entry to correct for this error, assuming a periodic inventory system, is:
Purchases .................................................................................................
Accounts Payable ..............................................................................
21.
13,000
13,000
This error increases net income by $2,400 in 2014. Depreciation should have been charged to
net income. The entry to correct for this error is as follows:
Depreciation Expense................................................................................
Accumulated Depreciation—Equipment .............................................
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2,400
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2,400
22-9
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 22-1
Construction in Process ($120,000 – $80,000) .........
Deferred Tax Liability
[($120,000 – $80,000) X 35%] ..........................
Retained Earnings ..............................................
40,000
14,000
26,000
BRIEF EXERCISE 22-2
Difference in profit-sharing expense—prior years
Pre-tax income—percentage-of-completion .............
Pre-tax income—completed-contract .......................
$120,000
80,000
$ 40,000
X
1%
$
400
Indirect effect ..............................................................
The indirect effect from prior years will be reported as a profit-sharing expense
for year 2014.
BRIEF EXERCISE 22-3
Inventory .....................................................................
Deferred Tax Liability ($1,200,000 X 40%) .........
Retained Earnings ..............................................
1,200,000
480,000
720,000
BRIEF EXERCISE 22-4
This is a change in estimate effected by a change in accounting principle.
Cost of depreciable assets ........................................
Accumulated depreciation .........................................
Carrying value at January 1, 2014 .............................
Salvage value..............................................................
Depreciable base ........................................................
$250,000
(90,000)
160,000
(40,000)
$120,000
Depreciation in 2014 = $120,000 ÷ 8 = $15,000.
Depreciation Expense .................................................
Accumulated Depreciation ..................................
22-10
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15,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
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BRIEF EXERCISE 22-5
Depreciation Expense .......................................................
Accumulated Depreciation—Equipment ..................
24,000
24,000
 $58,000* – $10,000

=
$24,000


4– 2
*Book value before change
Cost ....................................................
Less: Accumulated depreciation ......
$74,000
16,000**
$58,000
**[($74,000 – $18,000) ÷ 7] X 2
BRIEF EXERCISE 22-6
Equipment..........................................................................
Accumulated Depreciation—Equipment ..................
Deferred Tax Liability ................................................
Retained Earnings .....................................................
($20,000 = $50,000 X 2/5; $9,000 = $30,000 X 30%)
50,000
20,000
9,000
21,000
BRIEF EXERCISE 22-7
BEIDLER COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, as previously reported .......
Less: Correction of depreciation error, net of tax .........
Retained earnings, January 1, as adjusted .....................
Add: Net income .............................................................
Less: Dividends ................................................................
Retained earnings, December 31 .....................................
$2,000,000
240,000*
1,760,000
900,000
250,000
$2,410,000
*$400,000 X (1 – .4)
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22-11
BRIEF EXERCISE 22-8
a.
b.
c.
d.
e.
2014
Overstated
Overstated
Understated
Overstated
No effect
2015
Overstated
Understated
Overstated
Understated
Overstated
BRIEF EXERCISE 22-9
1.
The change to a three-year remaining life for the purpose of computing
depreciation on production equipment is a change in estimate due to a
change in conditions.
2.
This is an expense classification change arising from a change in the
use of the building for a different purpose. Thus, it is not a change in
principle, a change in estimate, or an error.
3.
The change to expensing preproduction costs (writing the costs off in
one year as opposed to several years) is a change in estimate due to a
change in conditions.
BRIEF EXERCISE 22-10
1.
Both FIFO and LIFO are generally accepted accounting principles;
thus, this item is a change in accounting principle.
2.
This oversight is a mistake that should be corrected. Such a correction
is considered a change due to error.
3.
Both the completed-contract method and the percentage-of-completion
method are generally accepted accounting principles; thus, such a change
is a change in accounting principle.
22-12
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*BRIEF EXERCISE 22-11
Cash ($95,000 X 10%) .....................................................
Equity Investments (Available-for-sale) ................
Dividend Revenue ($80,000 X 10%) .......................
9,500
1,500
8,000
*BRIEF EXERCISE 22-12
Equity Investments (Equity Method)
($475,000 + $33,000) ..................................................
Cash.........................................................................
Retained Earnings ..................................................
508,000
475,000
33,000
Equity Investments (Equity Method) .............................
Equity Investments (Available-for-sale) ................
185,000
Unrealized Holding Gain or Loss—Equity ....................
Fair Value Adjustment (Available-for-Sale) ...........
34,000
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185,000
34,000
(For Instructor Use Only)
22-13
SOLUTIONS TO EXERCISES
EXERCISE 22-1 (10–15 minutes)
(a) The net income to be reported in 2015, using the retrospective approach,
would be computed as follows:
Income before income tax
$700,000
Income tax (35% X $700,000)
245,000
Net income
$455,000
(b) Construction in Process.......................................
Deferred Tax Liability ($190,000 X 35%) ........
Retained Earnings .........................................
190,000
66,500
123,500*
*($190,000 X 65% = $123,500)
EXERCISE 22-2 (10–15 minutes)
(a) Inventory ...................................................................
Retained Earnings .............................................
14,000*
14,000
*($19,000 + $23,000 + $25,000) – ($15,000 + $18,000 + $20,000)
(b) Net Income (FIFO)
2012
2013
2014
$19,000
23,000
25,000
(c) Inventory ...................................................................
Retained Earnings .............................................
24,000*
24,000
*($19,000 + $23,000 + $25,000) – ($12,000 + $14,000 + $17,000)
22-14
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EXERCISE 22-3 (25–30 minutes)
(a)
TAVERAS CO.
Income Statement
For the Year Ended December 31
LIFO
Sales ........................................................
Cost of goods sold ..................................
Operating expenses ................................
Net income ........................................
2012
$3,000
800
1,000
$1,200
2013
$3,000
1,000
1,000
$1,000
2014
$3,000
1,130
1,000
$ 870
Income Statement
For the Year Ended December 31
FIFO
Sales ........................................................
Cost of goods sold ..................................
Operating expenses ................................
Net income ........................................
(b)
2012
$3,000
820
1,000
$1,180
2013
$3,000
940
1,000
$1,060
2014
$3,000
1,100
1,000
$ 900
TAVERAS CO.
Income Statement
For the Year Ended December 31
2014
Sales ........................................................
Cost of goods sold ..................................
Operating expenses ................................
Net income ........................................
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$3,000
1,100
1,000
$ 900
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2013
As adjusted (Note A)
$3,000
940
1,000
$1,060
(For Instructor Use Only)
22-15
EXERCISE 22-3 (Continued)
(c) Note A:
Change in Method of Accounting for Inventory Valuation
On January 1, 2014, Taveras elected to change its method of valuing
its inventory to the FIFO method, whereas in all prior years inventory
was valued using the LIFO method. The new method of accounting for
inventory was adopted because it better reflects the current cost of the
inventory on the balance sheet and comparative financial statements
of prior years have been adjusted to apply the new method retrospectively.
The following financial statement line items for fiscal years 2014 and
2013 were affected by the change in accounting principle.
Balance Sheet
Inventory
Retained Earnings
2014
LIFO
FIFO Difference
$ 320 $ 390
$70
3,070 3,140
70
2013
LIFO
FIFO Difference
$ 200 $ 240
$40
2,200
2,240
40
$1,130 $1,100
870
900
$1,000
1,000
Income Statement
Cost of Goods Sold
Net Income
$30
30
$940
1,060
$60
60
Statement of Cash
Flows
(no effect)
(d) Retained earnings statements after retrospective application.
2014
Retained earnings, January 1, as reported
Less: Adjustment for cumulative effect of
applying new accounting method (FIFO)
Retained earnings, January 1, as adjusted
Net Income
Retained earnings, December 31
22-16
Copyright © 2013 John Wiley & Sons, Inc.
$2,240
900
$3,140
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2013
$1,200
20
1,180
1,060
$2,240
(For Instructor Use Only)
EXERCISE 22-4 (25–30 minutes)
(a) Retained earnings, January 1, as reported .................
Cumulative effect of change in accounting
principle to average cost ..........................................
Retained earnings, January 1, as adjusted .................
2011
$160,000
(15,000)*
$145,000
*[$10,000 (2009) + $5,000 (2010)]
(b) Retained earnings, January 1, as reported .................
Cumulative effect of change in accounting
principle to average cost ..........................................
Retained earnings, January 1, as adjusted .................
2014
$590,000
(25,000)*
$565,000
*[$10,000 (2009) + $5,000 (2010) + $10,000 (2011) – $10,000 (2012) +
$10,000 (2013)]
(c) Retained earnings, January 1, as reported .................
Cumulative effect of change in accounting
principle to average cost ..........................................
Retained earnings, January 1, as adjusted .................
2015
$780,000
(20,000)*
$760,000
*($25,000 at 12/31/2013 – $5,000)
(d) Net Income .............................
Copyright © 2013 John Wiley & Sons, Inc.
2012
$130,000
2013
$290,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2014
$310,000
(For Instructor Use Only)
22-17
EXERCISE 22-5 (30–35 minutes)
(a)
KENSETH COMPANY
Income Statement
For the Year Ended
Sales.................................................................
Cost of goods sold ..........................................
Operating expenses
Income before profit sharing ...................
Profit sharing expense ....................................
Net income ................................................
2014
$3,000
1,100
1,000
$ 900
96
$ 804
2013
$3,000
940
1,000
$1,060
100
$ 960
Under GAAP, Kenseth Company should report $100 as the profit
sharing expense in 2013, even though the profit sharing expense
would be $106 if FIFO had been used in 2013.
(b) The profit sharing expense reflects an indirect effect of the change in
accounting principle. Under GAAP, indirect effects from periods before
the change are recorded in the year of the change. In this case, profit
sharing expense recorded in 2014 is composed of:
$900 X 10% = $90 (2014 under FIFO)
$ 60 X 10% = 6 (difference in profit sharing for 2013)
$96 (profit sharing expense for FIFO in 2014)
(c)
Retained Earnings Statement
Retained earnings, January 1, as reported .................
Cumulative effect of change to FIFO ($960 – $900) ......
Retained earnings, January 1, as adjusted .................
Add: Net Income ...........................................................
Deduct: Dividends ........................................................
Retained earnings, December 31 .................................
22-18
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2014
$8,000
60
8,060
804
2,000
$6,864
(For Instructor Use Only)
EXERCISE 22-6 (30–35 minutes)
(a) Depreciation to date on equipment
Sum-of-the-years’-digits depreciation
2012 (5/15 X $510,000)
2013 (4/15 X $510,000)
2014 (3/15 X $510,000)
$170,000
136,000
102,000
$408,000
Cost of equipment
Less: Depreciation to date
Book value (December 31, 2014)
$525,000
408,000
$117,000
Book value – Salvage value = Depreciable cost
$117,000 – $15,000 = $102,000
Depreciation for 2015: $102,000/2 = $51,000
Depreciation Expense ............................................
Accumulated Depreciation—Equipment .......
51,000
51,000
(b) Depreciation to date on building
$693,000/30 years = $23,100 per year
$23,100 X 3 = $69,300 depreciation to date
Cost of building
Less: Depreciation to date
Book value (December 31, 2014)
$693,000
69,300
$623,700
Depreciation for 2015: $623,700/(40 – 3) = $16,856.76
Depreciation Expense ............................................ 16,856.76
Accumulated Depreciation—Buildings .........
16,856.76
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-19
EXERCISE 22-7 (25–30 minutes)
Change from sum-of-the-years digit to straight-line
Cost of depreciable assets.................................
Less: Depreciation in 2014 ($100,000 X 4/10)....
Book value at December 31, 2014......................
$100,000
40,000
$ 60,000
Depreciation for 2015 using straight-line depreciation
Book value at December 31, 2014......................
Estimated useful life ...........................................
Depreciation for 2015 ($60,000 ÷ 3) ...................
$60,000
3 years
$20,000
DENISE HABBE INC.
Retained Earnings Statement
For the Year Ended
2015
Retained earnings, January 1, unadjusted ........... $125,000
Less: Correction of error for inventory
overstatement ..................................................
(24,000)
Retained earnings, January 1, adjusted ............... 101,000
Add: Net income
86,000
Less: Dividends ......................................................
30,000
Retained earnings, December 31 .......................... $157,000
2014
$ 72,000
54,000
25,000
$101,000
Note to instructor:
22-20
1.
2014 Cost of sales increased $24,000; 2015 cost of sales decreased
$24,000. As a result, net income for 2014 is overstated $24,000 and
net income for 2015 is understated $24,000 as a result of the
inventory error.
2.
2014 expenses remained unchanged.
3.
2015 expenses decreased $10,000 ($30,000 – $20,000). Net income
in 2015 is therefore $86,000 ($52,000 + $24,000 + $10,000).
4.
Additional disclosures would be a necessitated as indicated in the
chapter.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 22-8 (5–10 minutes)
1.
2.
3.
4.
5.
a.
b.
a.
b.
b.
6.
7.
8.
9.
10.
a.
b.
a.
b.
b.
EXERCISE 22-9 (15–20 minutes)
December 31, 2015
Retained Earnings ($550,000 X 9/55) ............................
Accumulated Depreciation—Equipment ...............
(To correct for the omission of depreciation
expense in 2013)
Cost of Machine
Less: Depreciation prior to 2015
2012 ($550,000 X 10/55)
2013 ($550,000 X 9/55)
2014 ($550,000 X 8/55)
Book Value at January 1, 2015
90,000
90,000
$550,000
$100,000
90,000
80,000
270,000
$280,000
Depreciation for 2015: $280,000 ÷ 7 = $40,000
Depreciation Expense ....................................................
Accumulated Depreciation—Equipment ...............
(To record depreciation expense for 2015)
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
40,000
40,000
(For Instructor Use Only)
22-21
EXERCISE 22-10 (20–25 minutes)
(a) Computation of depreciation for 2015:
Cost of building
$800,000
Less: Depreciation prior to 2015
2011 ($800,000 – $0)
X .05* $40,000
2012 ($800,000 – $40,000) X .05
38,000
2013 ($800,000 – $78,000) X .05
36,100
2014 ($800,000 – $114,100) X .05
34,295 148,395
Book value, January 1, 2015
$651,605
**(1 ÷ 40) X 2
Depreciation expense for 2015: $16,711 [($651,605 – $50,000) ÷ 36]
Depreciation Expense ...........................................
Accumulated Depreciation—Buildings.........
16,711
16,711
(b) Computation of 2015 depreciation expense on the equipment:
Cost of equipment
Less: Accumulated depreciation
[($100,000 – $10,000) ÷ 12] X 4 years
Book value, 1/1/15
2015 Depreciation expense:
$100,000
30,000
$ 70,000
$70,000 – $5,000 $65,000
= $13,000

(9 – 4)
5
EXERCISE 22-11 (10–15 minutes)
(a) No entry necessary. Changes in estimates are treated prospectively.
(b) Depreciation Expense ..............................................
Accumulated Depreciation—Equipment .........
*Original cost
Accumulated depreciation
[($510,000 – $10,000) ÷ 10] X 7
Book value (1/1/15)
Estimated salvage value
Remaining depreciable basis
Remaining useful life
(15 years – 7 years)
Depreciation expense—2015
22-22
Copyright © 2013 John Wiley & Sons, Inc.
19,375*
19,375
$510,000
(350,000)
160,000
(5,000)
155,000
÷
8
$ 19,375
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 22-12 (20–25 minutes)
(a) Cost of plant assets
$1,600,000
Less: Depreciation prior to 2015
2012 ($1,600,000 X .25) $400,000
2013 ($1,200,000 X .25)
300,000
2014 ($ 900,000 X .25)
225,000
925,000
Book value at January 1, 2015
$675,000
2015 Depreciation: ($675,000 – $100,000) ÷ 5 = $115,000
Depreciation Expense ............................................
Accumulated Depreciation—Equipment .......
(b) Income before depreciation expense
Depreciation expense
Net income
115,000
115,000
2015
$300,000
115,000
$185,000
2014
$270,000
225,000
$ 45,000
EXERCISE 22-13 (10–15 minutes)
(a) The net income to be reported in 2015, using the retrospective approach,
would be computed as follows:
Income before income tax
$900,000
Income tax (40% X $900,000)
360,000
Net income
$540,000
(b) Construction in Process ......................................
Deferred Tax Liability (40% X $290,000) ......
Retained Earnings .........................................
290,000
116,000
174,000*
*($290,000 X 60% = $174,000)
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-23
EXERCISE 22-14 (20–35 minutes)
(a) Retained Earnings ....................................................
Inventory ............................................................
*2012
*2013
*2014
$2,000
5,000
1,000
$8,000
2015
2014
2013
2012
($30,000
$27,000
$25,000
$24,000
(b) Inventory ...................................................................
Retained Earnings .............................................
$ 6,000
9,000
4,000
$19,000
8,000*
($26,000 – $24,000)
($30,000 – $25,000)
($28,000 – $27,000)
Net income
*2012
*2013
*2014
8,000
19,000
19,000*
($26,000 – $20,000)
($30,000 – $21,000)
($28,000 – $24,000)
Net income
2015
2014
2013
2012
($34,000
$28,000
$30,000
$26,000
EXERCISE 22-15 (15–20 minutes)
1.
Accumulated Depreciation—Equipment .................
Depreciation Expense .......................................
Retained Earnings .............................................
Depreciation taken
Less: Depreciation (correct)
25,500
8,500
17,000
2013–2014
2015
$170,000*
* 153,000
*$ 17,000
$85,000
76,500
$ 8,500
*$510,000 X 1/6 X 2
2.
3.
22-24
Retained Earnings ....................................................
Salaries and Wages Expense ...........................
45,000
45,000
No entry necessary.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 22-15 (Continued)
4.
5.
Amortization Expense ............................................
Retained Earnings ..................................................
Copyrights .......................................................
($45,000 ÷ 20 = $2,250;
($2,250 X 2 = $4,500)
2,250
4,500
Write off of Inventories ...........................................
Retained Earnings ...........................................
87,000
6,750
87,000
EXERCISE 22-16 (10–15 minutes)
1.
2.
3.
4.
Salaries and Wages Expense ................................
Salaries and Wages Payable ..........................
3,400
Salaries and Wages Expense ................................
Salaries and Wages Payable ..........................
31,100
Prepaid Insurance ($2,640 X 10/12) .......................
Insurance Expense .........................................
2,200
Sales Revenue ........................................................
[$2,120,000 ÷ (1.00 + .06)] X 6%
Sales Taxes Payable .......................................
120,000
Sales Taxes Payable...............................................
Sales Tax Expense ..........................................
103,400
3,400
31,100
2,200
120,000
103,400
EXERCISE 22-17 (10–15 minutes)
Retained Earnings ..........................................................
Inventory .................................................................
Accumulated Depreciation—Equipment ...............
($38,500 – $17,000)
37,700
16,200
21,500
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2015 ending inventory
Overstatement of 2014 depreciation
Understatement of 2015 depreciation
Total effect of errors on retained earnings
($16,200
( (17,000)
( 38,500
($37,700
Note: The understatement of inventory in 2014 was a self-correcting error at
the end of 2015.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-25
EXERCISE 22-18 (25–30 minutes)
(a) Effect of errors on 2015 net income: $24,700 overstatement
Computations:
Effect on 2015 net income
over (under) statement
Understatement of 2014 ending inventory
Overstatement of 2015 ending inventory
Expensing of insurance premium in 2014
($66,000 ÷ 3)
Failure to record sale of fully depreciated
machine in 2015
Total effect of errors on net income
(overstated)
($ 9,600
8,100
22,000
(
(15,000)
(
$24,700
(b) Effect of errors on working capital: $28,900 understatement
Computations:
Effect on working capital
over (under) statement
Overstatement of 2015 ending inventory
Expensing of insurance premium in 2014
(prepaid insurance)
Sale of fully depreciated machine
unrecorded
Total effect on working capital (understated)
$( 8,100
(22,000)
(15,000)
$(28,900)
(c) Effect of errors on retained earnings: $26,600 understatement
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2015 ending inventory
Understatement of depreciation expense
in 2014
Expensing of insurance premium in 2014
Failure to record sale of fully depreciated
machine in 2015
Total effect on retained earnings
(understated)
22-26
Copyright © 2013 John Wiley & Sons, Inc.
$( 8,100
2,300
(22,000)
(15,000)
$(26,600)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 22-19 (20–25 minutes)
(a) 1.
2.
3.
4.
5.
6.
7.
(b) 1.
2.
3.
4.
5.
6.
7.
Supplies Expense ($2,700 – $1,100) ..................
Supplies .......................................................
1,600
Salary and Wages Expense................................
($4,400 – $1,500)
Salaries and Wages Payable ......................
2,900
Interest Revenue ($5,100 – $4,350) ....................
Interest Receivable on Investments ...........
750
Insurance Expense .............................................
($90,000 – $65,000)
Prepaid Insurance .......................................
25,000
Rent Revenue ($28,000 ÷ 2) ................................
Unearned Rent Revenue .............................
14,000
Depreciation Expense ........................................
($50,000 – $5,000)
Accumulated Depreciation .........................
45,000
Retained Earnings ..............................................
Accumulated Depreciation .........................
7,200
Retained Earnings ..............................................
Supplies .......................................................
1,600
Retained Earnings ..............................................
Salaries and Wages Payable ......................
2,900
Retained Earnings ..............................................
Interest Receivable......................................
750
Retained Earnings ..............................................
Prepaid Insurance .......................................
25,000
Retained Earnings ..............................................
Unearned Rent Revenue .............................
14,000
Retained Earnings ..............................................
Accumulated Depreciation .........................
45,000
1,600
2,900
750
25,000
14,000
45,000
7,200
1,600
2,900
750
25,000
14,000
45,000
Same as in (a).
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-27
EXERCISE 22-19 (Continued)
(c) 6.
7.
Retained Earnings..............................................
Income Taxes Receivable ..................................
Accumulated Depreciation ........................
*($45,000  40%) – less tax expense.
27,000
18,000*
45,000
Retained Earnings..............................................
Income Taxes Receivable ..................................
Accumulated Depreciation ........................
**($7,200  40%) – less tax expense.
4,320
2,880**
7,200
EXERCISE 22-20 (20–25 minutes)
Income before tax
Corrections:
Sales erroneously included in 2014 income
Understatement of 2014 ending inventory
Adjustment to bond interest expense*
Repairs erroneously charged to the
Equipment account
Depreciation recorded on improperly
capitalized repairs (10%)***
Corrected income before tax
2014
2015
$101,000
$77,400
(38,200)
8,640
(1,450)
(8,500)
850
$ 62,340
38,200
(8,640)
(1,552)
(9,400)
1,790
$97,798
*Bond interest expense for 2014 and 2015 was computed as follows:
2014
2015
Book Value of Bonds
Stated Interest
Effective Interest
$235,000
236,450
$15,000
15,000
$16,450**
16,552*
**$235,000 X 7%
Difference between effective interest at 7% and stated interest (6%):
2014:
$1,450
2015:
1,552
22-28
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 22-20 (Continued)
***Erroneous depreciation taken in 2015:
on 2014 addition ($8,500 ÷ 10)
on 2015 addition ($9,400 ÷ 10)
Total excess depreciation 2015
$ 850
940
$1,790
EXERCISE 22-21 (10–15 minutes)
Item
(1)
(2)
(3)
(4)
(5)
2014
OverUnderstatement statement
No
Effect
X
X
2015
OverUnderstatement statement
X
X
No
Effect
X
X
X
X
X
X
*EXERCISE 22-22 (25–30 minutes)
Because Beyonce Co. now has a 30% interest in Elton John Corp. as of
7/1/15, it is necessary to first adjust the investment in Elton John to the
equity method in prior periods. The following schedule provides this
information:
Beyonce’s equity in earnings of Elton John Corp.
(10%)
Dividends received
Adjustment
12/31/14
6/30/15
$70,000
0
$70,000
$50,000
0
$50,000
Note to instructor: Under GAAP, goodwill is not amortized.
A computation of the ending balance in the investment account of Elton
John Corp. can now be made as follows:
Investment in Elton John Corp. 1/1/14
Additional purchase 7/1/15
Adjustment for 2014 income (prior period)
Adjustment for 2015 income to 6/30 (prior period)
Income (7/1/15–12/31/15) $815,000 X 30%
Dividends (7/1/15–12/31/15) $1.55 X 75,000 shares
Investment in Elton John Corp. 12/31/15
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$1,400,000
3,040,000
70,000
50,000
244,500
(116,250)
$4,688,250
(For Instructor Use Only)
22-29
*EXERCISE 22-23 (15–20 minutes)
(a)
Prior to January 2, 2014, Dan Aykroyd Corp. carried the investment in
Martin Company under the equity method of accounting as evidenced
from the entries in the investment account. Use of the equity method
was appropriate because Dan Aykroyd’s interest in Martin exceeded
20%. With the sale of 126,000 shares, Dan Aykroyd’s interest dropped
to 12% and it could no longer use the equity method of accounting for
the investment. Aykroyd must change to the fair value method.
Cessation of the equity method (increasing the investment for the
proportionate share of earnings and decreasing it for dividends
received) occurs immediately. The carrying value of the remaining 12%
interest becomes the carrying amount for the fair value method with
adjustments for cumulative excess dividends received after the
change from the equity method over its share of Steve Martin
Company’s earnings. That carrying amount is transferred from the
investment in Steve Martin account to the Available-for-Sale Securities
account.
(b)
The carrying amount of the investment in Martin as of December 31,
2014, would be computed as follows:
Carrying amount, 12/31/13 (from the given
account information)
Less portion attributable to 126,000 shares
sold 1/2/14
Balance, 1/2/14
Less cumulative excess dividends received
over share of Martin earnings
Carrying amount, 12/31/14
a
(14,400)b
$1,461,600
Computation of Excess Dividends Received over Share of Earnings:
2014
22-30
(2,214,000)a
1,476,000
$3,690,000 X 126/210
b
c
$3,690,000
Dividends
Received
Share of Martin Co.
Income
Excess Dividends Received
Over Share of Earnings
$50,400
$36,000c
$(14,400)
$300,000 X 12% = $36,000
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
*EXERCISE 22-23 (Continued)
Note to instructor: The entry in 2014 to record the receipt of the
dividend would be:
Cash........................................................................
Equity Investments (Available-for-Sale) .......
Dividend Revenue ..........................................
50,400
14,400
36,000
(c) The entry to recognize the excess of fair value over the carrying
amount of the securities is as follows:
December 31, 2014
Fair Value Adjustment (Available-for-Sale) ...........
Unrealized Holding Gain or Loss—
Equity ($1,570,000 – $1,461,600) ................
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
108,400
108,400
(For Instructor Use Only)
22-31
TIME AND PURPOSE OF PROBLEMS
Problem 22-1 (Time 30–35 minutes)
Purpose—to provide a problem that requires the student to: (1) account for a change in estimate,
(2) record a correction of an error, and (3) account for a change in accounting principle. The student is
also required to compute corrected/adjusted net income amounts.
Problem 22-2 (Time 30–40 minutes)
Purpose—to develop an understanding of the way in which accounting changes and error corrections
are handled in accounting records. The problem presents descriptions of various situations for which
the student is required to indicate the correct accounting treatment and to prepare comparative income
statements for a four-year period.
Problem 22-3 (Time 30–40 minutes)
Purpose—to provide a problem that requires the student to: (1) prepare correcting entries for two years’
unrecorded sales commissions, (2) three years’ inventory errors, and (3) prepare entries for two different
accounting changes.
Problem 22-4 (Time 40–50 minutes)
Purpose—to allow the student to see the impact of accounting changes on income and to examine an
ethical situation related to the motivation for change.
Problem 22-5 (Time 30–35 minutes)
Purpose—to develop an understanding of the impact which a change in the method of inventory pricing
(from LIFO to average cost) has on the financial statements during a five-year period. The student
is required to prepare a comparative statement of income and retained earnings for the five years
assuming the change in inventory pricing with an indication of the effects on net income and earnings
per share for the years involved.
Problem 22-6 (Time 25–30 minutes)
Purpose—to develop an understanding of the journal entries and the reporting which are necessitated
by an accounting change or correction of an error. The student is required to prepare the entries to
reflect such changes or errors and the comparative income statements and retained earnings statements for a two-year period.
Problem 22-7 (Time 25–30 minutes)
Purpose—to provide a problem that requires the student to analyze ten transactions and to prepare
adjusting or correcting entries for these transactions.
Problem 22-8 (Time 30–35 minutes)
Purpose—to help a student understand the effect of errors on income and retained earnings. The
student must analyze the effects of errors on the current year’s net income and on the next year’s
ending retained earnings balance.
Problem 22-9 (Time 20–25 minutes)
Purpose—to develop an understanding of the effect that errors have on the financial statements. The
student is required to prepare a schedule portraying the corrected net income for the years involved
with this error analysis.
22-32
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Time and Purpose of Problems (Continued)
Problem 22-10 (Time 50–60 minutes)
Purpose—to develop an understanding of the correcting entries and income statement adjustments that
are required for changes in accounting policies and accounting errors. This comprehensive problem
involves many different concepts such as consignment sales, bonus computations, warranty costs, and
bank funding reserves. The student is required to prepare the necessary journal entries to correct the
accounting records and a schedule showing the revised income before taxes for each of the three
years involved.
*Problem 22-11 (Time 20–25 minutes)
Purpose—to provide the student with a problem involving an investment that grows from 10% to 40%
(from lack of significant influence to significant influence). The student is required to account for the
effect of this change on income.
*Problem 22-12 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the proper entries to reflect a change from
the cost method to the equity method with excess attributable to depreciable assets in accounting for
an investment. The student is required to prepare the necessary journal entries for a three-year period
with respect to this stock investment and the change in reporting methods.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-33
SOLUTIONS TO PROBLEMS
PROBLEM 22-1
(a) 1.
Cost of equipment...........................................................
Less: Salvage value ........................................................
Depreciable cost .............................................................
Depreciation to 2014
2011 ($80,000/10) .........................
2012 ($80,000/10) .........................
2013 ($80,000/10) .........................
Depreciation in 2014
Cost of equipment .......................
Less: Depreciation to 2014 ........
Book value (January 1, 2014) .....
Less: Salvage value ...................
Depreciable cost ..........................
$85,000
5,000
$80,000
$ 8,000
8,000
8,000
$24,000
$85,000
24,000
61,000
3,000
$58,000
Depreciation in 2014
$58,000/4 = $14,500
Depreciation Expense .............................................
Accumulated Depreciation—Equipment........
2.
14,500
14,500
Cost of Building ................................... $300,000
Less: Depreciation to 2014
2012............................................
60,000
2013............................................
48,000
Book value (January 1, 2014) ... $192,000
Less: Salvage value .................
30,000
Depreciable cost ....................... $162,000
Depreciation in 2014
($162,000/8) = $20,250
Depreciation Expense ............................................
Accumulated Depreciation—Buildings .........
22-34
Copyright © 2013 John Wiley & Sons, Inc.
20,250
Kieso, Intermediate Accounting, 15/e, Solutions Manual
20,250
(For Instructor Use Only)
PROBLEM 22-1 (Continued)
3.
Depreciation Expense ($120,000 – $16,000) ÷ 8 .....
Accumulated Depreciation—Machinery .........
13,000
Accumulated Depreciation—Machinery .................
Retained Earnings ............................................
3,000
13,000
3,000
Depreciation recorded in 2012:
1
($120,000 ÷ 8) X = 7,500
2
Depreciation that should be recorded in 2012:
1
([$120,000 – $16,000] ÷ 8) X = 6,500
2
Depreciation recorded in 2013:
(120,000 ÷ 8) = $15,000
Depreciation that should be recorded in 2013:
(120,000 – $16,000) ÷ 8 = 13,000
Depreciation Depreciation that
taken
should be taken Differences
2012
$7,500
$6,500
$1,000
2013
15,000
13,000
2,000
22,500
19,500
$3,000
(b)
HOLTZMAN COMPANY
Comparative Income Statements
For the Years 2014 and 2013
2014
Income before depreciation expense.................... $300,000
Depreciation expense* ...........................................
47,750
Net income .............................................................. $252,250
*Depreciation Expense
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$310,000
69,000
$241,000
2014
Equipment ........................................................ $ 14,500
Buildings ..........................................................
20,250
Machinery.........................................................
13,000
$ 47,750
Copyright © 2013 John Wiley & Sons, Inc.
2013
2013
$
8,000
48,000
13,000
$ 69,000
(For Instructor Use Only)
22-35
PROBLEM 22-2
(a) 1.
Bad debt expense for 2012 should not have been reduced by
$10,000. A change in the experience rate is considered a change
in estimate, which should be handled prospectively.
2.
A change from LIFO to FIFO is considered a change in accounting
principle, which must be handled retrospectively.
3.
(a) The inventory error in 2014 is a prior period adjustment and
the 2014 and 2015 financial statements should be restated.
(b) The lawsuit settlement is correctly treated.
(b)
BOTTICELLI INC.
Comparative Income Statements
For the Years 2012 through 2015
Income before
extraordinary item
Extraordinary gain
Net income (see below)
2012
2013
$145,000
$145,000
$135,000*
30,000
$165,000
2012
2013
Net income (unadjusted) $140,000
1. Bad debt expense
adjustment
(10,000)
2. Inventory adjustment
(FIFO)
15,000
3. Inventory
overstatement
Net income (adjusted)
$145,000
$160,000
5,000
2014
2015
$201,000 $274,000
$201,000 $274,000
2014
2015
$205,000 $276,000
10,000
(16,000)
(14,000)
14,000
$165,000* $201,000 $274,000
*The income before extraordinary item in 2013 is $135,000 ($165,000 –
$30,000).
22-36
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 22-3
1.
2.
Retained Earnings .....................................................
Sales Commissions Payable .............................
Sales Commission Expense ..............................
3,500
Cost of Goods Sold ($19,000 + $6,700) ....................
Retained Earnings ..............................................
Inventory .............................................................
25,700
2,500
1,000
19,000
6,700
Income Overstated (Understated)
Beginning inventory
Ending inventory
3.
2012
2013
2014
$(16,000)
$(16,000)
$ 16,000
(19,000)
$ (3,000)
$19,000
6,700
$25,700
Accumulated Depreciation—Equipment ..................
Depreciation Expense ........................................
4,800
4,800*
*Equipment cost ........................................ $100,000
Depreciation before 2014 .........................
(36,000)
Book value ................................................ $ 64,000
Depreciation recorded ............................. $ 12,800
Depreciation to be taken ($64,000/8) .......
(8,000)
Difference.................................................. $ 4,800
4.
Construction in Process ...........................................
Deferred Tax Liability .........................................
Retained Earnings ..............................................
45,000
18,000*
27,000
*($150,000 – $105,000) X 40%
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-37
PROBLEM 22-4
(a)
ASTON CORPORATION
Projected Income Statement
For the Year Ended December 31, 2014
Sales .....................................................
Cost of goods sold .............................. $14,000,000
Depreciation expense ..........................
1,600,000a
Operating expenses.............................
6,400,000
Income before income taxes ...............
Unrealized holding gain.......................
Income before taxes and bonus .........
President’s bonus ................................
Income before income taxes ...............
Income taxes
Current .......................................... $ 3,000,000
Deferred ........................................
500,000c
Net income ...........................................
$29,000,000
22,000,000
$ 7,000,000
1,000,000b
$ 8,000,000
1,000,000
$ 7,000,000
3,500,000
$ 3,500,000
Conditions met:
1.
2.
Net income before taxes and bonus > $7,000,000.
Payable for income taxes does not exceed $3,000,000.
a
Depreciation for the current year includes $600,000 for the old equipment and $2,000,000 for the robotic equipment. If the robotic equipment
is changed to straight-line, its depreciation is only $1,000,000 and the
total is $1,600,000.
b
By urging the Board of Directors to change the classification of Securities A and D to Trading securities, income is increased by a $1,000,000
recognition of a holding gain.
c
The unrealized holding gain is not currently taxable until the securities
are sold.
22-38
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 22-4 (Continued)
(b) Students’ answers will vary.
There is nothing unethical about changing the first-year election of
depreciation back to the straight-line method provided that it meets with
the approval of appropriate corporate decision makers. Considering the
immediate needs for cash of $1,000,000 for the president’s bonus and
$3,000,000 for income taxes, there may be a need to sell some of the
marketable securities. Therefore, the transfer of $3,000,000 of availablefor-sale securities to trading securities may also be appropriate.
It is naive to believe that corporate officers do no planning for year-end
(or interim) financial statements. The slippery slope arises with manipulation of financial statements. The security reclassification for the selected
securities clearly manipulates the income to the benefit of the president.
While legal and within GAAP guidelines, the ethics of this situation are
borderline. Any auditor would automatically bring this transaction to
the attention of the board of directors.
Some stakeholders and their interests are:
Stakeholder
Interests
President
Personal gain of $1,000,000 bonus.
CFO
Placed in ethical dilemma between the interests
of the president and the corporation.
Board of Directors
May be subject to the manipulations of the CEO
for his personal gain.
Stockholders
Increased income from higher (paper) income
may increase demand for dividends. Also, paying a
bonus may decrease cash available for dividends.
Employees
President takes over 25% of net income for
himself. This could have been used to start a
pension plan for all of the employees.
Creditors
The increased income represents a 17% inflation of
the true net income of the corporation. This may
lead to a miss-representation of creditworthiness.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-39
PROBLEM 22-5
UTRILLO INSTRUMENT COMPANY
Statement of Income and Retained Earnings
For the Years Ended May 31
2010
2011
2012
2013
Sales—net
Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Total
Gross profit
Administrative expenses
Income before taxes
Income taxes (50%)
Net income
Retained earnings—beginning:
As originally reported
Adjustment (See note* and
schedule)
As restated
Retained earnings—ending
$13,964
$15,506
$16,673
$18,221
Earnings per share (100 shares)
2014
$18,898
1,010
13,000
(1,124)
12,886
1,078
700
378
189
189
1,124
13,900
(1,101)
13,923
1,583
763
820
410
410
1,101
15,000
(1,270)
14,831
1,842
832
1,010
505
505
1,270
15,900
(1,500)
15,670
2,551
907
1,644
822
822
1,500
17,100
(1,720)
16,880
2,018
989
1,029
515
514
1,206
1,388
1,759
2,237
3,005
5
1,211
$ 1,400
12
1,400
$ 1,810
51
1,810
$ 2,315
78
2,315
$ 3,137
132
3,137
$ 3,651
$
$
$
$
$
1.89
4.10
5.05
8.22
5.14
*Note to instructor:
The retained earnings balances are usually reported in the above manner.
If desired, only the restated balances might be reported. The adjustments
are simply the cumulative difference in income between the two inventory
methods, net of tax. For example, the $5 in 2010 reflects the difference in
ending inventories in 2009 ($1,000 – $1,010) times the tax rate 50%. In 2011,
the difference in income of $7 between the two methods in 2010 is added
to the $5 to arrive at a $12 adjustment to the beginning balance of retained
earnings in 2011.
22-40
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 22-5 (Continued)
In 2014, the Company changed its method of pricing inventory from the
last-in, first out (LIFO) to the average cost method in order to more fairly
present the financial operations of the company. The financial statements
for prior years have been restated to retrospectively reflect this change,
resulting in the following effects on net income and related per share
amounts:
Increase in
Net income
Earnings per share
2010
2011
2012
2013
2014
$ 7
$0.07
$ 39
$0.39
$ 27
$0.27
$ 54
$0.54
$ 44
$0.44
2013
2014
Schedule of Income Reconciliation
and Retained Earnings Adjustments
2010–2014
2009
2010
Beginning Inventory LIFO
Average Cost
Difference
Tax Effect (50%)
Effect on Income*
2011
2012
$1,000
1,010
(10)
5
$
(5)
$1,100.00 $1,000.00 $1,115.00 $1,237.00
1,124.00
1,101.00
1,270.00
1,500.00
(24.00)
(101.00)
(155.00)
(263.00)
†
†
12.00
50.50
77.50
131.50†
$ (12.00) $ (50.50)† $ (77.50)† $ (131.50)
Ending Inventory LIFO
Average Cost
Difference
Tax Effect (50%)
Effect on Income**
$1,000
1,010
(10)
5
$
5
$1,100
1,124
(24)
12
$ 12
$1,000.00 $1,115.00 $1,237.00 $1,369.00
1,101.00
1,270.00
1,500.00 1,720.00
(101.00)
(155.00)
(263.00)
(351.00)
†
†
†
50.50
77.50
131.50
175.50
†
†
†
$ 50.50 $ 77.50 $ 131.50 $ 175.50
Net Effect on Income
$
$
7
$
38.50† $
27.00
$
12
$
50.50† $
77.50† $ 131.50 $ 175.50
Cumulative Effect on
Beginning Retained
Earnings
5
$
54.00
$
44.00†
*Larger (smaller) beginning inventory has negative (positive) effect on net income.
**Larger (smaller) ending inventory has positive (negative) effect on net income.
†
The tax effects are rounded up to the next whole dollar in the problem. Therefore, the net
effects on income and retained earnings are effectively rounded down to the next whole dollar.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-41
PROBLEM 22-6
(a) 1.
Depreciation Expense .......................................
Accumulated Depreciation—Equipment..
94,500
94,500
Computations:
Cost of Equipment ........................................
Less: Depreciation prior to 2014 ..................
Book value, January 1, 2014.........................
$540,000
162,000*
$378,000
*($540,000 ÷ 10) X 3
Depreciation for 2014: $378,000 X 7/28** = $94,500
**[7(7 + 1)] ÷ 2 = 28
2.
Depreciation Expense .......................................
Accumulated Depreciation—
Equipment ..............................................
25,800
25,800
Computations:
Original cost ..............................................
Accumulated depreciation (1/1/14)
$12,000 X 4 .............................................
Book value (1/1/14) ....................................
Estimated salvage value ...........................
Remaining depreciable base ....................
Remaining useful life
(9 years—4 years taken)........................
Depreciation expense—2014 ....................
3.
22-42
$180,000
(48,000)
132,000
(3,000)
129,000
÷
5
$ 25,800
Equipment (Asset C) .........................................
Accumulated Depreciation—Equipment
(4 X $16,000)...........................................
Retained Earnings .....................................
160,000
Depreciation Expense .......................................
Accumulated Depreciation—
Equipment ..............................................
16,000
Copyright © 2013 John Wiley & Sons, Inc.
64,000
96,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
16,000
(For Instructor Use Only)
PROBLEM 22-6 (Continued)
(b)
MADRASA INC.
Comparative Retained Earnings Statements
For the Years Ended
2014
Retained earnings, January 1, as previously
reported
Add: Error in recording equipment (Asset C)
Retained earnings, January 1, as adjusted
Add: Net income
Retained earnings, December 31
$666,000
208,700**
$874,700
2013
$200,000
112,000*
312,000
354,000***
$666,000
*Amount expensed incorrectly in 2010 ....................
Depreciation to be taken to January 1, 2013
($16,000 X 3) ..........................................................
Prior period adjustment for income ........................
$160,000
**Income before depreciation expense (2014)
Depreciation for 2014
Equipment (Asset A)
$94,500
Equipment (Asset B)
25,800
Equipment (Asset C)
16,000
Other
55,000
Income after depreciation expense
$400,000
***Net income as reported ...........................................
Depreciation (Asset C) ............................................
Net income as adjusted...........................................
$370,000
(16,000)
$354,000
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(48,000)
$112,000
(191,300)
$208,700
(For Instructor Use Only)
22-43
PROBLEM 22-7
(1)
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ..............
3,200
(2)
Cost of Goods Sold .......................................................
Retained Earnings .................................................
19,000
(3)
Cash ...............................................................................
Accounts Receivable .............................................
5,600
(4)
Accumulated Depreciation—Equipment......................
Equipment ..............................................................
Gain on Disposal of Plant Assets .........................
3,200
19,000
5,600
25,000
21,300
3,700
(5)
Lawsuit Loss..................................................................
Lawsuit Liability .....................................................
125,000
(6)
Unrealized Holding Gain or Loss—Income .................
Fair Value Adjustment (Trading) ...........................
2,000
(7)
Salaries and Wages Payable ($16,000 – $12,200)........
Salaries and Wages Expense ................................
3,800
(8)
Depreciation Expense ...................................................
Equipment ......................................................................
Maintenance and Repairs Expense ......................
Accumulated Depreciation—Equipment ..............
22-44
Copyright © 2013 John Wiley & Sons, Inc.
125,000
2,000
3,800
5,000
40,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
40,000
5,000
(For Instructor Use Only)
PROBLEM 22-7 (Continued)
(9)
Insurance Expense ($12,000 ÷ 3).......................................
Prepaid Insurance ..............................................................
Retained Earnings ......................................................
4,000
6,000
(10)
Amortization Expense ($50,000 ÷ 10) ................................
Retained Earnings ..............................................................
Trademarks .................................................................
5,000
5,000
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
10,000
10,000
(For Instructor Use Only)
22-45
PROBLEM 22-8
Net Income for 2013
Retained Earnings 12/31/14
Item
Understated
Overstated
Understated
Overstated
1.
2.
3.
4.
5.
6.
$14,100
$ 3,500
0
$28,000
0
$18,200
0
0
$22,000
0
$24,000
0
0
$ 2,500
0
$28,000
0
0
0
0
$11,000
0
$12,000
0
Although explanations were not required in answering the question, they
are included below for your interest.
Explanations:
1.
The net income would be understated in 2013 because interest income
is understated. The net income would be overstated in 2014 because
interest income is overstated. The errors, however, would counterbalance (wash) so that the Balance Sheet (Retained Earnings) would
be correct at the end of 2014.
2.
The depreciation expense in 2013 should be $500 for this machine.
Since the machine was bought on July 1, 2013, only one-half of a year’s
depreciation should be taken in 2013 ($4,000/4 X 1/2 = $500). The
company expensed $4,000 instead of $500 so net income is understated
by $3,500 in 2013. An additional $1,000 of depreciation expense should
have been taken in 2014. At the end of 2014, retained earnings would
be understated by $2,500 ($3,500 – $1,000).
3.
GAAP requires that all research and development costs should be expensed when incurred. Net income in 2013 is overstated $22,000 ($33,000
research and development costs capitalized less $11,000 amortized). By
the end of 2014, only $11,000 of the research and development costs
would remain as an asset. Therefore, retained earnings would be overstated by $11,000 ($33,000 research and development costs – $22,000
amortized).
22-46
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 22-8 (Continued)
4.
The security deposit should be a long-term asset, called refundable
deposits. The $8,000 of the last month’s rent is also an asset, called
prepaid rent. The net income of 2013 is understated by $28,000
($20,000 + $8,000) because these amounts were expensed. Retained
earnings will continue to be understated by $28,000 until the last year
of the lease. The security deposit will then be refunded, and the last
month’s rent should be expensed.
5.
$12,000 or one-third of $36,000 should be reported as income each
year. In 2013, $36,000 was reported as income when only $12,000
should have been reported. Because $24,000 too much was reported, the
net income of 2013 is overstated. By the end of 2014, $24,000 should
have been reported as income, so retained earnings is still overstated
by $12,000 ($36,000 – $24,000).
6.
The ending inventory would be understated since the merchandise was
omitted. Because ending inventory and net income have a direct relationship, net income in 2013 would be understated. The ending inventory
of 2013 becomes the beginning inventory of 2014. If beginning inventory
of 2014 is understated, then net income of 2014 is overstated (inverse
relationship). The omission in inventory over the two-year period will
counterbalance, and retained earnings at the end of 2014 will be correct.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
22-47
PROBLEM 22-9
Net income, as reported
Rent received in 2013, earned in 2014
Salaries and Wages not accrued, 12/31/12
Salaries and Wages not accrued, 12/31/13
Salaries and Wages not accrued, 12/31/14
Inventory of supplies, 12/31/12
Inventory of supplies, 12/31/13
Inventory of supplies, 12/31/14
Corrected net income
22-48
Copyright © 2013 John Wiley & Sons, Inc.
2013
$29,000
(1,000)
1,100
(1,200)
(1,300)
940
$27,540
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2014
$37,000
1,000
1,200
(940)
(940)
1,420
$38,740
(For Instructor Use Only)
Copyright © 2013 John Wiley & Sons, Inc.
(a)
ROBERTS COMPANY
Schedule of Revised Net Income
For the Years Ended March 31, 2011, 2012, and 2013
SUMMARY
COMPUTATIONS
Increases (Decreases) in Income
2013
(For Instructor Use Only)
8. Adjustment for bonus, 1%
of income before taxes and bonus
Income before income taxes
*$1,400 – $900
**$900 – $1,120
2015
2013
$71,600
$
÷
$
6,500
125%
5,200
1,300
$940,000
(6,500)
$
÷
$
1,300
$
5,590
125%
4,472
1,118
$933,500
$ 4,668
760
$ 3,908
$1,010,000
6,500
6,100
$1,022,600
$
5,113
1,670
$
3,443
$1,795,000
(5,590)
(6,100)
$1,783,310
$
8,917
3,850
$
5,067
$
$
$
$
2,334
750
1,584
$
2,557
1,320
1,237
$
4,458
3,850
608
2014
$111,400
2015
$103,580
(1,300)
1,300
6,100
(1,118)
(6,100)
(3,908)
(3,443)
(5,067)
(1,584)
3,000
(1,400)
66,408
(1,237)
3,900
500*
118,520
(664)
(1,185)
$65,744
$117,335
(608)
5,100
(220)**
95,567
(956)
$ 94,611
PROBLEM 22-10
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1. Income before income taxes, as reported
2. Elimination of profit on consignments:
Billed
at 125% of cost
Cost
Profit error
3. To correct C.O.D. sale
4. Adjustment of warranty expense:
Sales per books
Correction for consignments
Correction for C.O.D. sale
Corrected sales
Normal warranty expense, one-half of 1%
Less costs charged to expense
Additional expense
5. Bad debt adjustments:
Normal bad debt expense, one-quarter of
1% of sales
Less previous write-offs
Additional expense
6. Adjustment for contract financing
7. Adjustment for commissions
2014
22-49
PROBLEM 22-10 (Continued)
(b) Sales Revenue ..........................................................
Inventory on Consignment .......................................
Cost of Goods Sold ...........................................
Accounts Receivable ........................................
(To adjust for consignments treated
as sales, 3/31/13)
5,590
4,472
Sales Revenue ..........................................................
Retained Earnings .............................................
(To adjust for C.O.D. sales not
recorded, 3/31/12)
6,100
Warranty Expense.....................................................
Retained Earnings ($3,908 + $3,443) .......................
Warranty Liability ..............................................
(To record accrued warranty
expense)
5,067
7,351
Retained Earnings ($1,584 + $1,237) .......................
Bad Debt Expense ....................................................
Allowance for Doubtful Accounts ....................
(To set up allowance for uncollectible
accounts)
2,821
608
Due to Customer .......................................................
Finance Expense ...............................................
Retained Earnings ($3,000 + $3,900) ................
(To record finance charge reserve
held by bank)
12,000
Salaries and Wages Expense ...................................
Retained Earnings ($1,400 – $500) ..........................
Salaries and Wages Payable ............................
(To adjust for accrued commissions)
220
900
Retained Earnings ($664 + $1,185) ..........................
Salaries and Wages Expense ...................................
Salaries and Wages Payable ............................
(To set up accrued bonus payable
to manager)
1,849
956
22-50
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4,472
5,590
6,100
12,418
3,429
5,100
6,900
1,120
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2,805
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*PROBLEM 22-11
(a)
MILLAY INC.
Schedule of Income or Loss from Investment
For Year Ending December 31, 2014
Dividend revenue .......................................................................
(10,000 shares X $1.50 dividend/share)
(b)
$15,000
MILLAY INC.
Schedule of Income or Loss from Investment
For Years Ending December 31, 2015 and 2014
Income from investment in Genso
(Schedule 1)
Schedule 1
2015
2014
$170,000
$55,000
Millay’s Share of Investee’s Income
2015
Income for 2014 ($550,000 X 10%)
Income for 2015
First half ($300,000* X 10%)
Second half ($350,000 X 40%)
2014
$55,000
$ 30,000
140,000
$170,000
$55,000
*($650,000 – $350,000)
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22-51
*PROBLEM 22-12
January 3, 2013
Equity Investments (Available-for-sale) .......................
Cash ........................................................................
(To record the purchase of a 10% interest in
Renner Corp.)
500,000
500,000
December 31, 2013
Cash ...............................................................................
Dividend Revenue ..................................................
(To record the receipt of cash dividends from
Renner Corp.)
15,000
15,000
December 31, 2013
Fair Value Adjustment (Available-for-Sale) .................
Unrealized Holding Gain or Loss—Equity ...........
(To recognize as part of stockholders’ equity
the increase in fair value of available-for-sale
securities)
60,000
60,000
December 31, 2014
Cash ...............................................................................
Dividend Revenue ..................................................
(To record the receipt of cash dividends from
Renner Corp.)
20,000
20,000
December 31, 2014
Unrealized Holding Gain or Loss—Equity ...................
Fair Value Adjustment (Available-for-Sale) ..........
(To recognize as part of stockholders’ equity
the decrease in fair value of available-for-sale
securities)
22-52
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45,000
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45,000
(For Instructor Use Only)
*PROBLEM 22-12 (Continued)
January 2, 2015
Equity Investments (Renner Corp.).........................
Cash...................................................................
Retained Earnings ............................................
(To record purchase of additional interest
in Renner and to reflect retroactively
a change from the fair value to the equity
method)
1,564,000
1,545,000
19,000
Computation of Prior Period Adjustment
2013
Martin equity in earnings of
Renner (10%)
Amortization of excess of purchase
price over underlying equity
[$500,000 – ($3,700,000 X 10%) ÷ 10]
Dividend received
Prior period adjustment
2014
Total
$35,000*
$45,000
$80,000
(13,000)
(15,000)
$ 7,000
(13,000)
(20,000)
$12,000
(26,000)
(35,000)
$19,000
*$350,000 X 10%
January 2, 2015
Equity Investments (Renner Corp.).........................
Equity Investments (Available-for-sale) ..........
(To reclassify investment carried under
fair value method to investment carried
under equity method)
500,000
Unrealized Holding Gain or Loss—Equity ..............
Fair Value Adjustment (Available-for-Sale) .....
(To eliminate accounts and balances used
under fair value method accounting)
15,000
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500,000
15,000
(For Instructor Use Only)
22-53
*PROBLEM 22-12 (Continued)
December 31, 2015
Equity Investments (Renner Corp.). .............................
Investment Revenue .............................................
(To record equity in net income of
Renner—40% of $550,000 less $50,500
amortization of excess cost over
underlying equity)
Computation of amortization:
2013 purchase
($130,000 ÷ 10 years)
2015 purchase
[$1,545,000 – ($4,150,000
X 30%) ÷ 8 years]
Total
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169,500
$13,000
37,500
$50,500
Cash ...............................................................................
Equity Investments (Renner Corp.). .....................
(To record the receipt of cash dividends
from Renner Corp.)
22-54
169,500
70,000
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TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 22-1 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the applications of GAAP related to
accounting changes. This case describes several proposed accounting changes with which the student
is required to identify whether the change involves an accounting principle, accounting estimate, or
correction of an error, plus the necessary reporting requirements for each proposal.
CA 22-2 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the application and reporting requirements of
GAAP. This case describes many different accounting changes with which the student is required to
identify the type of change involved and to indicate which changes necessitate the restatement of prior
years’ financial statements when presented in comparative form with the current year’s statement.
CA 22-3 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of GAAP and its respective applications. This case
describes three independent situations with which the student is required to identify the type of
accounting change involved, the reporting which is necessitated under current generally accepted
accounting principles, and the effects of each change on the financial statements.
CA 22-4 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of how changes in accounting can be reflected
in the accounting records to facilitate analysis and understanding of financial statements. This case
involves several situations with which the student is required to indicate the appropriate accounting
treatment that each should be given.
CA 22-5 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain how to account for various accounting
change situations. Explanations for a change in estimate, change in principle, and change in entity are
communicated in a written letter.
CA 22-6 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain the ethical issues related to changes in
estimates.
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22-55
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 22-1
(a)
1.
Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement
of prior periods is not appropriate.
2.
Depreciation.
a. This is a change in accounting estimate. Restatement of opening retained earnings is
not appropriate.
b. This is a new method for a new class of assets. No change is involved.
(b)
3.
Mathematical Error. This is a correction of an error and prior period treatment would be in
order.
4.
Preproduction Costs—Furniture Division. This should probably be construed as an
inseparability situation in that the change in accounting estimate (period benefited by
deferred costs) has been affected by a change in accounting principle (amortization on a
per-unit basis). Consequently, it is treated as a change in accounting estimate. Restatement
of opening retained earnings is not appropriate.
5.
FIFO to LIFO Change. This is a change in accounting principle. Restatement of December 31,
2013 retained earnings is not appropriate, given that the effect on net income in prior periods
cannot be determined. Note that a LIFO to FIFO change does qualify for restatement of
opening retained earnings, but FIFO to LIFO does not qualify in most cases because it is
impracticable to determine prior year’s income under LIFO.
6.
Percentage of Completion. This is a change in accounting principle. Retained earnings
should be adjusted.
The adjustment to the December 31, 2013 retained earnings balance would be computed as
follows:
Item 3 ..................................................................................................
Item 6 ..................................................................................................
Increase in 12/31/13—Retained Earnings ...........................................
22-56
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$ (235,000)
1,075,000
$ 840,000
(For Instructor Use Only)
CA 22-2
Item
Change
Should Prior
Years’ Statements
Be Retrospectively
Applied or Restated?
Type of Change
1.
A change in accounting principle.
Yes
2.
A change in an accounting estimate.
No
3.
An accounting change involving both a change in accounting
principle and a change in accounting estimate. Referred to as an
change in accounting estimate effected by a change in principle.
Handle as a change in estimate.
No
4.
Not an accounting change but rather a change in classification.
Yes
5.
An error correction not involving a change in accounting principle.
Yes
6.
An accounting change involving a change in the reporting entity
which is a special type of change in accounting principle.
Yes
7.
Not a change in accounting principle. Simply, a change in tax
accounting.
No
8.
An accounting change from one generally accepted accounting
principle to another generally accepted accounting principle.
No*
*Generally impracticable to determine what LIFO inventory would
be in prior periods.
CA 22-3
Situation 1.
(a)
A change from an accounting principle not generally accepted to one generally accepted is a
correction of an error.
(b)
When comparative statements are presented, net income, components of net income, retained
earnings, and any other affected balances for all periods presented should be restated to correct
for the error. When single period statements are presented, the required adjustments should be
reported in the opening balance of retained earnings. A description of the change and its effect on
income before extraordinary items, net income, and the related per share amounts should be
disclosed in the period of the change. Financial statements of subsequent periods need not repeat
the disclosures.
(c)
The beginning balance of retained earnings in the balance sheet is restated. The income statement for the current year should report the correct approach for revenue recognition. If prior
years’ financial statements are presented, they should be restated directly.
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22-57
CA 22-3 (Continued)
Situation 2.
(a)
The change in method of inventory pricing represents a change in accounting principle, as
defined by GAAP.
(b)
Changes in accounting principle are accounted for through retrospective application. Under this
approach, the cumulative effect of the new method on the financial statements at the beginning of
the period is computed (and recorded in retained earnings at the beginning of the period). Prior
statements are changed to be reported on a basis consistent with the new standard.
(c)
As a result of the change to weighted-average costing, the current year balance sheet will reflect
weighted-average costing (at relatively higher prices in times of rising prices). Cost of goods sold
will also be different (higher), resulting in lower income.
Situation 3.
(a)
A change in the depreciable lives of fixed assets is a change in accounting estimate.
(b)
In accordance with GAAP, the change in estimate should be reported in the current period and in
future periods. Unlike a change in accounting principle, the change in accounting estimate should
not be accounted for by presenting prior earnings data giving effect to the change as if it had
been applied retrospectively.
(c)
This change in accounting estimate will affect the balance sheet in that the accumulated
depreciation in the current and future years will increase at a different rate than previously
reported, and this will also be reflected in depreciation expense in the income statement in the
current and future years.
CA 22-4
1.
This situation is a change in estimate. Whenever it is impossible to determine whether a change
in principle or a change in estimate has occurred, the change should be considered a change in
estimate. This is often referred to as a change in accounting estimate effected by a change in
accounting principle. A change in estimate employs the current and prospective approach by:
(a)
Reporting current and future financial statements on the new basis.
(b)
Presenting prior periods’ financial statements as previously reported.
(c)
Making no adjustments to current opening balances for purposes of catch-up.
2.
This situation is considered a change in estimate because new events have occurred which call
for a change in estimate. The accounting should be the same as discussed in 1.
3.
This situation is considered a correction of an error. The general rule is that careful estimates
which later prove to be incorrect should be considered changes in estimates. Where the estimate
was obviously computed incorrectly because of lack of expertise or in bad faith, the adjustment
should be considered an error. Changes due to error should employ the retroactive approach by:
(a)
22-58
Restating, via a prior period adjustment, the beginning balance of retained earnings for the
current period.
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CA 22-4 (Continued)
(b)
Correcting all prior period statements presented in comparative financial statements. The
amount of the error related to periods prior to the earliest year’s statement presented for
comparative purposes should be included as an adjustment to the beginning balance of
retained earnings of that earliest year’s statement.
4.
No adjustment is necessary—a change in accounting principle is not considered to have happened
if a new principle is adopted in recognition of events that have occurred for the first time.
5.
This situation is considered a change in estimate because new events have occurred which call
for a change in estimate. The accounting should be the same as discussed in 1.
6.
This situation is considered a change in accounting principle. A change in accounting principle
should employ the retrospective approach by:
(a)
Reporting current results on the new basis.
(b)
Presenting prior period financial statements on a basis consistent with the newly adopted
method.
(c)
Computing the cumulative effect of the new method in beginning retained earnings on the
earliest year presented.
CA 22-5
Mr. Joe Davison, CEO Sports-Pro Athletics, Inc.
Dear Mr. Davison:
You recently contacted me about several accounting changes made at Sports-Pro Athletics, Inc. in
2014. This letter details how you should account for each change.
Your change from one method of depreciation to another constitutes a change in accounting estimate
effected by a change in accounting principle. A change in estimate employs the prospective approach
by reporting current and future financial statements on the new basis. Prior periods financial statements
are presented as previously reported.
Your change in salvage values for your office equipment is considered a change in estimate. This type
of change does not really affect previous financial statements and is thus accounted for prospectively.
The change is included in the most current period being reported. There is no need to restate prior
periods’ financial statements.
Finally, your change in specific subsidiaries results in a change in reporting entity which must be reported
by restating the financial statements for all periods presented. The effect of this change should be shown
on income before extraordinary items, net income, and earnings per share amounts. In addition, you must
disclose in a footnote the nature of the change as well as the reasons for it.
I hope that this information helps you account for the various changes which have taken place at
Sports-Pro Athletics. If you need further information, please contact me.
Sincerely,
Copyright © 2013 John Wiley & Sons, Inc.
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22-59
CA 22-6
(a)
The ethical issues are the honesty and integrity of Frost’s financial reporting practices versus the
Corporation’s and the accounting manager’s profit motives. Shortening the life of fixed assets
from 10 to 6 years may be evidence that depreciation expense during the first five years were
understated. Such a practice distorts Frost’s operating results and misleads users of Frost’s
financial statements. If this practice is intentional, it is unethical.
(b)
The primary stakeholders in the above situation include Frost’s stockholders and creditors. Crane
and his auditing firm are stakeholders because they know of the depreciation practices at Frost.
(c)
Crane should report his finding to the partner-in-charge of the Frost engagement. If this practice
is deemed to be intentional and fraudulent, then Crane’s firm has a professional responsibility to
report this incident to the highest levels of management within Frost (the Audit Committee of the
Board of Directors).
22-60
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FINANCIAL REPORTING PROBLEM
(a)
New Accounting Pronouncements and Policies
Derivative Instruments and Hedging Activites
On January 1, 2009 we adopted new accounting guidance on
disclosures about derivative instruments and hedging activities. The
new guidance impacted disclosures only and requires additional
qualitative and quantitative information on the use of derivatives and
their impact on an entity’s financial position, results of operations and
cash flows.
Business Combinations
On July 1, 2009, we adopted new accounting guidance on business
combinations. The new guidance revised the method of accounting
for a number of aspects of business combinations including
acquisition costs, contingencies (including contingent assets,
contingent liabilities and contingent purchase price) and postacquisition exit activities of acquired businesses.
Noncontrolling Interests in Cosolidated Financial Statements
On July 1, 2009, we adopted new accounting guidance on
noncontrolling interests in consolidated financial statements. The
new accounting guidance requires that a noncontrolling interest in
the equity of a subsidiary be accounted for and reported as equity,
provides revised guidance on the treatment of net income and losses
attributable to the noncontrolling interest and changes in ownership
interests in a subsidiary and requires additional disclosures that
identify and distinguish between the interests of the controlling and
noncontrolling owners.
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22-61
FINANCIAL REPORTING PROBLEM (Continued)
(b)
Use of Estimates
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S.
GAAP) requires management to make estimates and assumptions
that affect the amounts reported in the Consolidated Financial
Statements and accompanying disclosures. These estimates are
based on management’s best knowledge of current events and
actions the Company may undertake in the future. Estimates are used
in accounting for, among other items, consumer and trade promotion
accruals, pensions, post-employment benefits, stock options,
valuation of acquired intangible assets, useful lives for depreciation
and amortization of long-lived assets, future cash flows associated
with impairment testing for goodwill, indefinite-lived intangible assets
and other long-lived assets, deferred tax assets, uncertain income tax
positions and contingencies. Actual results may ultimately differ from
estimates, although management does not generally believe such
differences would materially affect the financial statements in any
individual year. However, in regard to ongoing impairment testing of
goodwill and indefinite-lived intangible assets, significant
deterioration in future cash flow projections or other assumptions
used in valuation models, versus those anticipated at the time of the
valuations, could result in impairment charges that may materially
affect the financial statements in a given year.
22-62
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COMPARATIVE ANALYSIS CASE
THE COCA-COLA COMPANY VS. PEPSICO, INC.
(a) and (c) for Coca-Cola Company:
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Issued Accounting Guidance
In June 2011, the FASB issued an amendment to an existing accounting
standard which requires companies to present net income and other
comprehensive income in one continuous statement or in two separate, but
consecutive, statements. In addition, in December 2011, the FASB issued
an amendment to an existing accounting standard which defers the
requirement to present components of reclassifications of other
comprehensive income on the face of the income statement. This new
accounting pronouncement is effective for our first quarter of 2012 and we
do not expect any material impact on our financial statements from its
adoption.
As previously discussed, in June 2009, the FASB amended its guidance on
accounting for VIEs. Please refer to the heading “Principles of
Consolidation” above.
(b) and (c) for Pepsi:
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) amended
its accounting guidance on the consolidation of variable interest entities
(VIE). Among other things, the new guidance requires a qualitative rather
than a quantitative assessment to determine the primary beneficiary of a
VIE based on whether the entity (1) has the power to direct matters that
most significantly impact the activities of the VIE and (2) has the obligation
to absorb losses or the right to receive benefits of the VIE that could
potentially be significant to the VIE. In addition, the amended guidance
requires an ongoing reconsideration of the primary beneficiary. The
provisions of this guidance were effective as of the beginning of our 2010
fiscal year, and the adoption did not have a material impact on our financial
statements.
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22-63
COMPARATIVE ANALYSIS CASE (Continued)
In the second quarter of 2010, the Patient Protection and Affordable Care
Act (PPACA) was signed into law. The provisions of the PPACA required us
to record the effect of this tax law change beginning in our second quarter
of 2010, and consequently we recorded a onetime related tax charge of $41
million in the second quarter of 2010.
In June 2011, the FASB amended its accounting guidance on the
presentation of comprehensive income in financial statements to improve
the comparability, consistency and transparency of financial reporting and
to increase the prominence of items that are recorded in other
comprehensive income. We do not expect the adoption of this guidance to
have a material impact on our financial statements.
In September 2011, the FASB issued new accounting guidance that permits
an entity to first assess qualitative factors of whether it is more likely than
not that a reporting unit’s fair value is less than its carrying amount before
applying the two- step goodwill impairment test. We are currently
evaluating the impact of the new guidance on our financial statements.
In September 2011, the FASB amended its guidance regarding the
disclosure requirements for employers participating in multiemployer
pension and other postretirement benefit plans (multiemployer plans) to
improve transparency and increase awareness of the commitments and
risks involved with participation in multiemployer plans. We have reviewed
our level of participation in multiemployer plans and determined that the
impact of adopting this new guidance did not have a material impact on our
financial statements.
In December 2011, the FASB issued new disclosure requirements that are
intended to enhance current disclosures on offsetting financial assets and
liabilities. We are currently evaluating the impact of the new guidance on
our financial statements.
In the first quarter of 2011, Quaker Foods North America (QFNA) changed
its method of accounting for certain U.S. inventories from the last- in, firstout (LIFO) method to the average cost method. This change is considered
preferable by management as we believe that the average cost method of
accounting for all U.S. foods inventories will improve our financial reporting
by better matching revenues and expenses and better reflecting the current
value of inventory.
22-64
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COMPARATIVE ANALYSIS CASE (Continued)
In addition, the change from the LIFO method to the average cost method
will enhance the comparability of QFNA’s financial results with our other
food businesses, as well as with peer companies where the average cost
method is widely used. The impact of this change on consolidated net
income in the first quarter of 2011 was approximately $9 million (or less
than a penny per share). Prior periods were not restated as the impact of
the change on previously issued financial statements was not considered
material.
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22-65
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
ABC CO.
Statement of Financial Position
at December 31
Cash
Inventory
PPE
Accumulated depreciation
Total assets
2014
2013
$ 548 $ 365 Share capital
580
560 Retained earnings
400
400
(120)
(80)
1,408 1,245 Total equity
2014
2013
$ 500 $ 500
908
745
$1,408 $1,245
ABC CO.
Income Statement
for the Year Ended December 31,
Sales .................................................................................
Cost of goods sold ..........................................................
Depreciation expense .....................................................
Compensation expense ..................................................
Net income .......................................................................
2014
$550
330
40
17
$163
2013
$500
290
40
15
$155
2013 purchases: $480 + P – $300 = $500; P = $320
2013 Beginning inventory using FIFO = $480 + $50 = $530
2013 Ending inventory using FIFO = $500 + $60 = $560
2013 Cost of goods sold using FIFO = $530 + $320 – $560 = $290
2013 Retained Earnings = $685 + $60 = $745
2014 Retained Earnings = $745 + $163 = $908
2014 Cost of goods sold = $560 + $350 – $580 = $330
2014 Depreciation Expense = $400/10 = $40
2014 Accumulated Depreciation = $80 + $40 = $120
2014 Cash = $365 + $550 – $350 – $17 = $548
22-66
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ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
Inventory turnover:
LIFO
FIFO
2014
N/A LIFO information not available
$330 ÷ $570 = 0.58
2013
$300 ÷ $490 = 0.61
$290 ÷ $545 = 0.53
Inventory turnover is lower under FIFO, which leads to ROA being slightly
higher. Under FIFO (in this example) COGS is lower because older costs
that had been deferred in the inventory balance under average cost were
brought to COGS. The inventory balance is higher because FIFO leaves the
most recent inventory costs in the inventory account.
Principles
The issue is consistency across time. When a company changes accounting
policies, financial statements from one period are not really comparable to
the financial statements of the next period because they are based on
different accounting policies. GAAP requires restating past results presented
for comparison to the new accounting policy so that financial statement
readers can see how the company’s financial position and performance
have changed without the effects of an accounting change.
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22-67
PROFESSIONAL RESEARCH
(a) According to FASB ASC 250-10-20 (Glossary), a change in accounting
estimate that is inseparable from the effect of a related change in
accounting principle is a change in estimate effected by a change in
principle. An example of a change in estimate effected by a change in
principle is a change in the method of depreciation, amortization, or
depletion for long-lived, nonfinancial assets.
Under FASB ASC 250-10-45
45-17, A change in accounting estimate shall be accounted for in the
period of change if the change affects that period only or in the
period of change and future periods if the change affects both. A
change in accounting estimate shall not be accounted for by
restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts
for prior periods.
45-19 Like other changes in accounting principle, a change in
accounting estimate that is effected by a change in accounting
principle may be made only if the new accounting principle is
justifiable on the basis that it is preferable. For example, an entity
that concludes that the pattern of consumption of the expected
benefits of an asset has changed, and determines that a new
depreciation method better reflects that pattern, may be justified
in making a change in accounting estimate effected by a change
in accounting principle. (See paragraph 250-10-45-12.)
(b) According to FASB ASC 250-10-45-18, distinguishing between a change
in an accounting principle and a change in an accounting estimate is
sometimes difficult. In some cases, a change in accounting estimate is
effected by a change in accounting principle. One example of this type
of change is a change in method of depreciation, amortization, or
depletion for long-lived, nonfinancial assets (hereinafter referred to as
depreciation method). The new depreciation method is adopted in
partial or complete recognition of a change in the estimated future
benefits inherent in the asset, the pattern of consumption of those
benefits, or the information available to the entity about those benefits.
The effect of the change in accounting principle, or the method of
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PROFESSIONAL RESEARCH (Continued)
applying it, may be inseparable from the effect of the change in
accounting estimate. Changes of that type often are related to the
continuing process of obtaining additional information and revising
estimates and, therefore, shall be considered changes in estimates for
purposes of applying this Subtopic.
(c) According to FASB ASC 250-10-S50—Disclosure of the Impact that
Recently Issued Accounting Standards Will Have on the Financial
Statements of the Registrant when Adopted in a Future Period
S50-1 See paragraph 250-10-S99-5, SAB Topic 11.M, for SEC Staff
views regarding disclosure of the impact of recently issued
accounting standards.
SAB Topic 11.M, Disclosure of the Impact that Recently Issued
Accounting Standards Will Have on the Financial Statements of
the Registrant when Adopted in a Future Period
S99-5 The following is the text of SAB Topic 11.M, Disclosure of the
Impact that Recently Issued Accounting Standards Will Have on
the Financial Statements of the Registrant when Adopted in a
Future Period.
Facts: An accounting standard has been issued that does not
require adoption until some future date. A registrant is required
to include financial statements in fillings with the Commission
after the Issuance of the standard but before it is adopted by the
registrant.5
– 5Some registrants may want to disclose the potential effects
of proposed accounting standards not yet issued, (e.g.,
exposure drafts). Such disclosures, which generally are not
required because the final standard may differ from the
exposure draft, are not addressed by this SAB. See also
FRR 26.
Question 1: Does the staff believe that these filings should
include disclosure of the impact that the recently issued
accounting standard will have on the financial position and
results of operations of the registrant when such standard is
adopted in a future period?
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PROFESSIONAL RESEARCH (Continued)
Interpretive Response: Yes. The commission addressed a
similar issue with respect to Statement 52 and concluded that
“The Commission also believes that registrants that have not yet
adopted Statement 52 should discuss the potential effects of
adoption in registration statements and reports filed with the
Commission.”6 The staff believes that this disclosure guidance
applies to all accounting standards which have been issued but
not yet adopted by the registrant unless the impact on its
financial position and results of operations is not expected to be
material.7 MD&A8 requires registrants to provide information
with respect to liquidity, capital resources and results of
operations and such other information that the registrant
believes to be necessary to understand its financial condition
and results of operations. In addition, MD&A requires disclosure
of presently known material changes, trends and uncertainties
that have had or that the registrant reasonably expects will have
a material impact on future sales, revenues or income from
continuing operations. The staff believes that disclosure of
impending accounting changes is necessary to inform the
reader about expected impacts on financial information to be
reported in the future and, therefore, should be disclosed in
accordance with the existing MD&A requirements. With respect to
financial statement disclosure, GAAS9 specifically address the
need for the auditor to consider the adequacy of the disclosure
of impending changes in accounting principles if (a) the financial
statements have been prepared on the basis of accounting
principles that were acceptable at the financial statement date
but that will not be acceptable in the future and (b) the financial
statements will be restated in the future as a result of the
change. The staff believes that recently issued accounting
standards may constitute material matters and, therefore,
disclosure in the financial statements should also be considered
in situations where the change to the new accounting standard
will be accounted for in financial statements of future periods,
prospectively or with a cumulative catch-up adjustment.
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PROFESSIONAL RESEARCH (Continued)
– 6FRR 6, Section 2.
– 7In those instances where a recently issued standard will
impact the preparation of, but not materially affect, the
financial statements, the registrant is encouraged to disclose
that a standard has been issued and that its adoption will
not have a material effect on its financial position or results
of operations.
– 8Item 303 of Regulation S-K.
– 9See AU 9410.13-18.
Question 2: Does the staff have a view on the types of
disclosure that would be meaningful and appropriate when a
new accounting standard has been issued but not yet adopted
by the registrant?
Interpretive Response: The staff believes that the registrant
should evaluate each new accounting standard to determine the
appropriate disclosure and recognizes that the level of information
available to the registrant will differ with respect to various
standards and from one registrant to another. The objectives of
the disclosure should be to (1) notify the reader of the disclosure
documents that a standard has been issued which the registrant
will be required to adopt in the future and (2) assist the reader in
assessing the significance of the impact that the standard will
have on the financial statements of the registrant when adopted.
The staff understands that the registrant will only be able to
disclose information that is known.
The following disclosures should generally be considered by the
registrant:
– A brief description of the new standard, the date that
adoption is required and the date that the registrant plans to
adopt, if earlier.
– A discussion of the methods of adoption allowed by the
standard and the method expected to be utilized by the
registrant, if determined.
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PROFESSIONAL RESEARCH (Continued)
– A discussion of the impact that adoption of the standard is
expected to have on the financial statements of the
registrant, unless not known or reasonably estimable. In
that case, a statement to that effect may be made.
– Disclosure of the potential impact of other significant
matters that the registrant believes might result from the
adoption of the standard (such as technical violations of
debt covenant agreements, planned or intended changes in
business practices, etc.) is encouraged.
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PROFESSIONAL SIMULATION
Note: This assignment is available on the Kieso website.
Journal Entries
(a)
Inventory .........................................................
Retained Earnings ...................................
18,000*
18,000
*($20,000 + $24,000 + $27,000) –
($15,000 + $18,000 + $20,000)
(b) Inventory .........................................................
Retained Earnings ...................................
28,000*
28,000
*($20,000 + $24,000 + $27,000) –
($12,000 + $14,000 + $17,000)
Financial Statements
Computation of EPS for 2015
Basic EPS
Net income ...................................................
Outstanding shares.....................................
Basic EPS ....................................................
$30,000
10,000
$3.00 ($30,000 ÷ 10,000)
Diluted EPS
Net income ...................................................
Add: Interest savings ($200,000 X 6%) .....
Adjusted net income ...................................
$30,000
12,000
$42,000
Adjusted net income ...................................
Outstanding shares.....................................
Shares upon conversion.............................
Diluted EPS ..................................................
$42,000
10,000
6,000*
$2.63 ($42,000 ÷ 16,000)
*$200,000 ÷ $1,000 = 200 bonds; 200 bonds X 30 = 6,000 shares
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PROFESSIONAL SIMULATION (Continued)
Computation of EPS for 2014
Basic EPS
Net income ................................................
Outstanding shares ..................................
Basic EPS .................................................
Diluted EPS
Net income ................................................
Add: Interest savings
($200,000 X 6%).....................................
Adjusted net income ................................
Adjusted net income ...............................
Outstanding shares .................................
Shares upon conversion .........................
Diluted EPS ...............................................
$27,000
10,000
$2.70 ($27,000 ÷ 10,000)
$27,000
12,000
$39,000
$39,000
10,000
6,000
$2.44 ($39,000 ÷ 16,000)
EPS Presentation
Net income
Basic EPS
Diluted EPS
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2015
2014
$30,000
$ 3.00
$ 2.63
$27,000
$ 2.70
$ 2.44
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IFRS CONCEPTS AND APPLICATION
IFRS22-1
The IFRS standard addressing accounting and reporting for changes in
accounting principles, changes in estimates, and errors is IAS 8
(“Accounting Policies, Changes in Accounting Estimates and Errors”).
Various presentation issues related to restatements are addressed in IAS 1.
IFRS22-2
FASB has issued guidance on changes in accounting principles, changes
in estimates, and corrections of errors, which essentially converges U.S.
GAAP to IAS 8. Key remaining differences are as follows.
 One area in which IFRS and U.S. GAAP differ is the reporting of
error corrections in previously issued financial statements. While
both GAAPs require restatement, U.S. GAAP is an absolute
standard—that is, there is no exception to this rule.
 Under U.S. GAAP and IFRS, if determining the effect of a change
in accounting principle is considered impracticable, then a
company should report the effect of the change in the period in
which it believes it practicable to do so, which may be the current
period. Under IFRS, the impracticality exception applies to both
changes in accounting principles and to the correction of errors.
Under U.S. GAAP, this exception only applies to changes in accounting principle.
 IAS 8 does not specifically address the accounting and reporting
for indirect effects of changes in accounting principles. As
indicated in the chapter, U.S. GAAP has detailed guidance on the
accounting and reporting of indirect effects.
IFRS22-3
Currently, under U.S. GAAP, when a company prepares financial
statements on a new basis, comparative information must be provided for a
three-year period. Under IFRS, up to two years of comparative data must be
provided. Use of the shorter comparative data period must be addressed
before U.S. companies can adopt IFRS.
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IFRS22-4
The indirect effect of a change in accounting policy reflects any changes in
current or future cash flows resulting from a change in accounting policy
that is applied retrospectively. An example is the change in payments to a
profit-sharing plan that is based on reported net income. While IFRS does
not address indirect effects, under U.S. GAAP, indirect effects are not
included in the retrospective application, but instead are reported in the
period in which the accounting change occurs (current period).
IFRS22-5
The company prospectively applies the new accounting policy as of the
earliest date it is practicable to do so.
IFRS22-6
(a)
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1.
Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement of prior periods is not appropriate.
2.
Depreciation.
a.
This is a change in accounting estimate. Restatement of
opening retained earnings is not appropriate.
b.
This is a new method for a new class of assets. No change
is involved.
3.
Mathematical Error. This is a correction of an error and prior
period adjustment treatment would be in order.
4.
Preproduction Costs—Furniture Division. This should probably
be construed as an inseparability situation in that the change in
accounting estimate (period benefited by deferred costs) has
been affected by a change in accounting policy (amortization on
a per-unit basis). Consequently, it is treated as a change in
accounting estimate. Restatement of opening retained earnings
is not appropriate.
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IFRS22-6 (Continued)
(b)
5.
FIFO to Average-Cost Change. This is a change in accounting
policy. Restatement of December 31, 2013 retained earnings is
not appropriate, given that the effect on net income in prior
periods cannot be determined. Note that a FIFO to Average Cost
change does qualify for restatement of opening retained earnings
in most cases.
6.
Percentage-of-Completion. This is a change in accounting policy.
Retained earnings should be adjusted.
The adjustment to the December 31, 2013 retained earnings balance
would be computed as follows:
Item 3
Item 6
Increase in 12/31/13 Retained Earnings
$ (235,000)
1,075,000
$ 840,000
IFRS22-7
(a) The guidelines for reporting a change in accounting principle related to
depreciation methods can be found in IAS 8, paragraphs 32-38, under
the heading “Changes in accounting estimates.”
(b) According to paragraph 14, “An entity shall change an accounting policy
only if the change:
(1) is required by an IFRS; or
(2) results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events
or conditions on the entity’s financial position, financial performance or cash flows.”
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IFRS22-8
(a)
There are no IFRS or IFRS IC interpretations that are effective for the
first time in this financial period that have had a material impact on
the Group. The following IFRS, IFRS IC interpretations and
amendments have been issued but are not yet effective and have not
been early adopted by the Group:
IAS 19, ‘Employee benefits’ was amended in June 2011 and is
effective for periods beginning on or after 1 January 2013. The impact
will be to replace interest cost and expected return on plan assets
with a net interest amount that is calculated by applying the discount
rate to the net defined benefit liability/asset. The Group is yet to
assess the full impact of this amendment.
(b)
Critical accounting estimates and judgements
The preparation of consolidated financial statements requires the
Group to make estimates and assumptions that affect the application
of policies and reported amounts. Estimates and judgements are
continually evaluated and are based on historical experience and
other factors, including expectations of future events that are
believed to be reasonable under the circumstances. Actual results
may differ from these estimates. The estimates and assumptions
which have a significant risk of causing a material adjustment to the
carrying amount of assets and liabilities are:
A.
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Impairment of goodwill and brands – The Group is required to
test, at least annually, whether the goodwill or brands have
suffered any impairment. The recoverable amount is determined
based on value in use calculations. The use of this method
requires the estimation of future cash flows and the choice of a
suitable discount rate in order to calculate the present value of
these cash flows. Where there is a noncontrolling interest,
goodwill is tested for the business as a whole. This involves a
notional increase to goodwill, to reflect the non-controlling
shareholders’ interest. Actual outcomes could vary from those
calculated. See note 14 for further details.
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IFRS22-8 (Continued)
B.
Impairment of property, plant and equipment and computer
software – Property, plant and equipment and computer
software are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount may not be
recoverable. When a review for impairment isconducted, the
recoverable amount is determined based on value in use
calculations prepared on the basis of management’s
assumptions and estimates. See notes 14 and 15 for further
details.
C.
Depreciation of property, plant and equipment and amortisation
of computer software – Depreciation and amortisation is
provided so as to write down the assets to their residual values
over their estimated useful lives as set out above. The selection
of these residual values and estimated lives requires the
exercise of management judgement. See notes 14 and 15 for
further details.
D.
Post-retirement benefits – The determination of the pension cost
and defined benefit obligation of the Group’s defined benefit
pension schemes depends on the selection of certain
assumptions which include the discount rate, inflation rate,
salary growth, mortality and expected return on scheme assets.
Differences arising from actual experiences or future changes in
assumptions will be reflected in subsequent periods. See note
11 for further details of assumptions and note 12 for critical
judgements associated with the Marks & Spencer UK Pension
Scheme interest in the Marks and Spencer Scottish Limited
Partnership.
E.
Refunds and loyalty scheme accruals – Accruals for sales
returns and loyalty scheme redemptions are estimated on the
basis of historical returns and redemptions and these are
recorded so as to allocate them to the same period as the
original revenue is recorded. These accruals are reviewed
regularly and updated to reflect management’s latest best
estimates, however, actual returns and redemptions could vary
from these estimates.
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