CHAPTER 20 – Restatements
Student Solutions
Assignment 20-8 (WEB)
Requirement 1
This is a change in estimate; therefore, the prospective approach should be used. Revision of accounting estimates are normal and
expected; therefore, their effects should be allocated to the current and future periods.
20x1
20x1–20x4
20x5
Analysis:
Cost .......................................................... $24,000
$24,000
Amortization to date ................................
($1,800 × 4 yrs.)
(7,200)
Residual value .......................................... ( 6,000)
( 6,000)
To be depreciated ..................................... $18,000
$10,800
Annual depreciation (SL):
Ten year life—per year ...................... $ 1,800
Life (14 – 4 yrs)—per year ................
$ 1,080
Requirement 2
No correction or adjusting entry is necessary at the date of change because (under the prospective approach) the unamortized balance
is amortized over the remaining life.
To record amortization at year-end, 20x5
Amortization expense [$10,800  (14 – 4 years)] .................... 1,080
Accumulated amortization, equipment ...............................
1,080
Requirement 3
Comparative balance sheet, 31 December:
20x5
20x4
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Intermediate Accounting, 4th edition - Beechy/Conrod
Equipment .................................................................................... $24,000
Accumulated amortization .......................................................... ( 8,280)*
Net book value ....................................................................... $15,720
*$7,200 + $1,080 = $8,280
Comparative income statement for year:
Income prior to amortization and tax ........................................... $52,800
Amortization expense .................................................................. ( 1,080)
Net income before tax .................................................................. $51,720
$24,000
( 7,200)
$16,800
$49,800
( 1,800)
$48,000
No note disclosure is required because the change is very ordinary. However, if the company wishes to make disclosures:
Note X: Change in accounting estimate—Effective in 20x5, the company revised the estimated life on equipment. In 20x5, this change
in estimated useful life caused net income to be higher than under the prior basis by $720.
Assignment 20-9 (WEB)
Requirement 1
Gunnard Company
Income Statement—Successful Efforts
For the Years Ended 31 December
20x5
Revenues ................................................................................. $7,100,000
Expenses:
Resource exploration costs ............................................... 4,700,000
Amortization .....................................................................
200,000
Other ................................................................................. 2,050,000
Total ........................................................................................ 6,950,000
NI before tax ...........................................................................
150,000
Income tax expense (30%) ......................................................
45,000
20x4
$4,400,000
3,200,000
40,000
720,000
3,960,000
440,000
132,000
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Intermediate Accounting, 4th edition - Beechy/Conrod
Net income .............................................................................
$105,000
$308,000
Requirement 2
Resource exploration costs to be capitalized ............................
Additional amortization expense, 20x4 ($240,000 – $40,000) .
Net effect on 20x4 income, pre-tax...........................................
Additional resource exploration costs, asset, 20x4
($3,200,000 – $200,000) .....................................................
$(3,200,000)
200,000
$(3,000,000)
$ 3,000,000
Journal entry:
Resource exploration costs (see above) .................................... 3,000,000
Future income tax liability ($3,000,000 × .3) .....................
Retained earnings, ($3,000,000 × .7) ..................................
Cumulative effect of accounting change
Amortization expense, 20x5 .....................................................
Resource exploration costs .................................................
900,000
2,100,000
850,000
850,000
This assumes that the $4,700,000 resource development costs incurred in 20x5, that would have been expensed under SE, have been
correctly capitalized. If not, the following entry is needed:
Resource exploration costs (asset) ..........................................
Resource exploration expense...........................................
4,700,000
4,700,000
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod
Requirement 3
Gunnard Company
Income Statement—Full Costing
For the Years Ended 31 December
20x5
20x4
Revenues ................................................................................ $7,100,000
$4,400,000
Expenses:
Exploration cost amortization ..........................................
850,000
240,000
Other ................................................................................ 2,050,000
720,000
Total ....................................................................................... 2,900,000
960,000
NI before tax .......................................................................... 4,200,000
3,440,000
Income tax expense (30%) ..................................................... 1,260,000
1,032,000
Net income ............................................................................. $2,940,000
$2,408,000
In 20x5, the Company changed from SE to FC for accounting for resource exploration costs. The change increased 20x4 net income
by $2,100,000 and 20x5 income by $2,835,000*. The 20x4 comparative statements are restated to reflect the change.
* Reduced resource exploration costs ............................................................ $(4,700,000)
Increased amortization expense ($850,000 – $200,000) ............................
650,000
Net effect on income ................................................................................... (4,050,000)
After-tax effect (1 – .3) ............................................................................... $(2,835,000)
Requirement 4
Gunnard Company
Retained Earnings Statement
For the Years Ended 31 December
20x5
20x4
Opening retained earnings, as previously reported ................ $ 308,000
$
-Cumulative effect of accounting policy change, net of
income tax of $900,000.................................................... 2,100,000
-Opening retained earnings, as restated................................... 2,408,000
--
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod
Net income ............................................................................. 2,940,000
Closing retained earnings ...................................................... $5,348,000
2,408,000
$2,408,000
Requirement 5
Under successful efforts, expenditures for exploration costs would be an outflow under the operations section. Under FC, such costs
would be an investing outflow. Using the indirect method to present the operations section, the amortization would be a non-cash
expense add-back.
The change in policy is not disclosed on the CFS.
Assignment 20-27 (WEB)
Requirement 1
This is a change in accounting principle to conform with industry practices, from completed-contract to percentage-of-completion. It
should be applied retrospectively with restatement.
Requirement 2
Construction in progress inventory ($195 – $180) ............................ 15,000
Future income tax liability (1) ....................................................
Retained earnings: cumulative effect of change in accounting
principles (1).............................................................................
(1) CC Income, 20x3-20x6: ($60,000 + $120,000) .........................
PC Income, 20x3-20x6: ($40,000 + $65,000 + $50,000 +
$40,000) ....................................................................................
Increase in net income ................................................................
Tax effect (40%) .........................................................................
Impact on retained earnings .......................................................
6,000
9,000
$180,000
195,000
15,000
6,000
$ 9,000
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod
Requirement 3
KLB Corporation
Retained Earnings Statement
For the Year Ended 31 December 20x7
20x7
20x6
Opening retained earnings, 1 January .......................................... $440,000
$320,000
Cumulative effect of a change in accounting principle (2) ..........
9,000
57,000
Opening retained earnings, as restated......................................... 449,000
377,000
Net income (1) ............................................................................. 160,000
92,000
Dividends ..................................................................................... (20,000)
(20,000)
Closing retained earnings, 31 December ..................................... $589,000
$449,000
(1) CC income, 20x6 .................................................. $120,000
PC income, 20x6 ...................................................
40,000
Decrease in income ...............................................
80,000
Tax effect (40%) ...................................................
32,000
Change in 20x6 income ........................................
48,000
20x6 income, as reported ...................................... 140,000
Revised 20x6 income ............................................ $ 92,000
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod
(2) Cumulative effect (increase) .................................
20x6 effect (see #1) (decrease) .............................
$ 9,000
48,000
$57,000
Proof: CC income 20x3-20x5...................................................................... $ 60,000
PC income, 20x3-20x5 ($40,000 + $65,000 + $50,000) .................. 155,000
Increase in income ............................................................................
95,000
After tax (1 – 40%) ........................................................................... $ 57,000
Requirement 4
KLB Corporation
Retained Earnings Statement
For the Year Ended 31 December 20x7
20x7
20x6
Opening retained earnings, 1 January, as previously
reported ...................................................................................... $440,000
$320,000
Cumulative effect of a change in accounting principles ..............
9,000
—
Opening retained earnings, as restated......................................... 449,000
320,000
Net income ................................................................................... 160,000
140,000
Dividends ..................................................................................... (20,000)
(20,000)
Closing retained earnings, 31 December ..................................... $589,000
$440,000
Requirement 5
If it were impossible to restate any opening balances, the change would be made in 20X8. Information could then be gathered to
restate closing 20X7 (opening 20X8) balances and the change could be accounted for retrospectively with no restatement in 20X8.
Assignment 20-31 (WEB)
Case A:
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Intermediate Accounting, 4th edition - Beechy/Conrod
1.
Change in accounting “estimate”—prospective basis. Amortization policies are “principles” and some will automatically respond
that this is a change in policy. However, amortization methods must be reviewed regularly and changes applied prospectively if
based on a different pattern of expected benefit. Thus, the classification is a change in estimate.
2.
a)
Amortization expense ............................................................ 5,500
Accumulated amortization ...............................................
$60,000 – $5,000 = $55,000 ÷ 10 = $5,500
5,500
b) No entry is required for a prospective change.
c)
3.
Amortization expense ............................................................. 7,600
Accumulated amortization ...............................................
Net book value = $60,000 – ($5,500 × 4) = $38,000
$38,000 × 20% = $7,600
7,600
20x4 balances reflect straight-line amortization and are not changed.
Case B:
1.
Change in accounting policy to conform to revised accounting standards—retrospective approach with no restatement. No
restatement is possible because prior opening balances cannot be restated. Report the effect of the accounting change as an
adjustment to the beginning balance of retained earnings.
2.
Entry to record the effect of the change:
1 January 20x5:
Inventory ($17,000 – $12,000) ...................................................... 5,000
Retained earnings, accounting change ...................................
3.
a)
5,000
The effect of the change is reported on the 20x5 comparative statement of retained earnings as an adjustment to the beginning
balance of 20x5 retained earnings.
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod
b) On the 20x5 comparative statements, the 20x4 income statement amounts are unchanged, and are reported on the LIFO basis, as
data is not available to retrospectively restate balances.
Case C:
1.
This is a change in estimate; the prospective approach is used. Revision of accounting estimates are normal and expected;
therefore, their effects should be apportioned to the current and future periods.
2.
a)
31 December 20x4, adjusting entry (based on the prior estimates):
Amortization expense, patent.................................................
850
Patent................................................................................
$17,000  20 yrs = $850
b)
No entry is made to record the cumulative effect of the change in estimate.
c)
31 December 20x5, adjusting entry (based on the new estimates and the unamortized balance):
Amortization expense, patent................................................. 1,700
Patent................................................................................
3.
850
Computation:
Patent cost .........................................................
Amortization to date ($17,000 x 4/17 yrs.) .......
Residual value ...................................................
Unamortized balance ........................................
$17,000
(3,400)
(0)
$13,600
Amortization each year:
[$13,600  (12 – 4) = $13,600 ÷ 8 yrs.] ............
$ 1,700
1,700
The 20x4 financial statement amounts as originally reported in 20x4 are reported in the 20x5 comparative financial statements.
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4th edition - Beechy/Conrod