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Test Bank for Intermediate Accounting, Fifteenth Edition
22 - 20
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Accounting Changes and Error Analysis
22 - 21
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Test Bank for Intermediate Accounting, Fifteenth Edition
22 - 22
BRIEF EXERCISES
BE. 22-77—Matching accounting changes to situations.
The four types of accounting changes, including error correction, are:
Code
a. Change in accounting principle.
b. Change in accounting estimate.
c. Change in reporting entity.
d. Error correction.
Instructions
Following are a series of situations. You are to enter a code letter to the left to indicate the type of
change.
____ 1. Change from presenting nonconsolidated to consolidated financial statements.
____ 2. Change due to charging a new asset directly to an expense account.
____ 3. Change from expensing to capitalizing certain costs, due to a change in periods
benefited.
____ 4. Change from FIFO to LIFO inventory procedures.
____ 5. Change due to failure to recognize an accrued (uncollected) revenue.
____ 6. Change in amortization period for an intangible asset.
____ 7. Changing the companies included in combined financial statements.
____ 8. Change in the loss rate on warranty costs.
____ 9. Change due to failure to recognize and accrue income.
____ 10. Change in residual value of a depreciable plant asset.
____ 11. Change from an unacceptable to an acceptable accounting principle.
____ 12. Change in both estimate and acceptable accounting principles.
____ 13. Change due to failure to recognize a prepaid asset.
____ 14. Change from straight-line to sum-of-the-years'-digits method of depreciation.
____ 15. Change in life of a depreciable plant asset.
____ 16. Change from one acceptable principle to another acceptable principle.
____ 17. Change due to understatement of inventory.
____ 18. Change in expected recovery of an account receivable.
Solution 22-77
Accounting Changes and Error Analysis
22 - 23
BE. 22-78—How changes or corrections are recognized.
For each of the following items, indicate the type of accounting change and how each is
recognized in the accounting records in the current year.
(a) Change from straight-line method of depreciation to sum-of-the-years'-digits
(b) Change from the cash basis to accrual basis of accounting
(c) Change from FIFO to LIFO method for inventory valuation purposes (retrospective
application impractical)
(d) Change from presentation of statements of individual companies to presentation of
consolidated statements
(e) Change due to failure to record depreciation in a previous period
(f) Change in the realizability of certain receivables
(g) Change from LIFO to FIFO method for inventory valuation purposes
Test Bank for Intermediate Accounting, Fifteenth Edition
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BE. 22-79—Matching disclosures to situations.
In the blank to the left of each question, fill in the letter from the following list which best describes
the presentation of the item on the financial statements of Helton Corporation for 2015.
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above
____ 1. In 2015, the company changed its method of recognizing income from the
completed-contract method to the percentage-of-completion method.
____ 2. At the end of 2015, an audit revealed that the corporation's allowance for doubtful
accounts was too large and should be reduced to 2%. When the audit was made in
2014, the allowance seemed appropriate.
____ 3. Depreciation on a truck, acquired in 2012, was understated because the service life
had been overestimated. The understatement had been made in order to show
higher net income in 2013 and 2014.
____ 4. The company switched from a LIFO to a FIFO inventory valuation method during the
current year.
____ 5. In the current year, the company decides to change from expensing certain costs to
capitalizing these costs, due to a change in the period benefited.
____ 6. During 2015, a long-term bond with a carrying value of $3,600,000 was retired at a
cost of $4,100,000.
____ 7. After negotiations with the IRS, income taxes for 2013 were established at $42,900.
They were originally estimated to be $28,600.
____ 8. In 2015, the company incurred interest expense of $29,000 on a 20-year bond issue.
____ 9. In computing the depreciation in 2013 for equipment, an error was made which
overstated income in that year $75,000. The error was discovered in 2015.
____ 10. In 2015, the company changed its method of depreciating plant assets from the
double-declining balance method to the straight-line method.
Accounting Changes and Error Analysis
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EXERCISES
Ex. 22-80—Change in accounting principle.
In 2015, Fischer Corporation changed its method of inventory pricing from LIFO to FIFO. Net
income computed on a LIFO as compared to a FIFO basis for the four years involved is: (Ignore
income taxes.)
LIFO FIFO
2012 $78,200 $85,700
2013 84,500 88,100
2014 87,000 91,400
2015 92,500 92,700
Instructions
(a) Indicate the net income that would be shown on comparative financial statements issued at
12/31/15 for each of the four years, assuming that the company changed to the FIFO
method in 2015.
(b) Assume that the company had switched from the average cost method to the FIFO method
with net income on an average cost basis for the four years as follows: 2012, $80,400; 2013,
$86,120; 2014, $90,300; and 2015, $93,600. Indicate the net income that would be shown
on comparative financial statements issued at 12/31/15 for each of the four years under
these conditions.
(c) Assuming that the company switched from the FIFO to the LIFO method, what would be the
net income reported on comparative financial statements issued at 12/31/15 for 2012, 2013,
and 2014?
Ex. 22-81—Change in estimate, change in reporting entity, correction of errors.
Discuss the accounting procedures for and illustrate the following:
(a) Change in estimate
(b) Change in reporting entity
(c) Correction of an error
Test Bank for Intermediate Accounting, Fifteenth Edition
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warranty costs. Changes in estimates are handled prospectively; that is, in current and
future periods. No restatement of previous financial statements is made.
Accounting Changes and Error Analysis
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Solution 22-81 (cont.)
Ex. 22-82—Changes in depreciation methods, estimates.
On January 1, 2010, Powell Company purchased a building and machinery that have the
following useful lives, salvage value, and costs.
Building, 25-year estimated useful life, $6,000,000 cost, $600,000 salvage value
Machinery, 10-year estimated useful life, $800,000 cost, no salvage value
The building has been depreciated under the straight-line method through 2014. In 2015, the
company decided to switch to the double-declining balance method of depreciation for the
building. Powell also decided to change the total useful life of the machinery to 8 years, with a
salvage value of $40,000 at the end of that time. The machinery is depreciated using the straight-
line method.
Instructions
(a) Prepare the journal entry necessary to record the depreciation expense on the building in
2015.
(b) Compute depreciation expense on the machinery for 2015.
Solution 22-82
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 22-82 (cont.)
Ex. 22-83—Noncounterbalancing error.
Quigley Co. bought a machine on January 1, 2013 for $1,400,000. It had a $120,000 estimated
residual value and a ten-year life. An expense account was debited on the purchase date.
Quigley uses straight-line depreciation. This was discovered in 2015.
Instructions
Prepare the entry or entries related to the machine for 2015.
Solution 22-83
Ex. 22-84—Effects of errors.
Show how the following independent errors will affect net income on the Income Statement and
the stockholders' equity section of the Balance Sheet using the symbol + (plus) for overstated, –
(minus) for understated, and 0 (zero) for no effect.
2014 2015
Income Balance Income Balance
Statement Sheet Statement Sheet
1. Ending inventory in 2014 overstated.
2. Failed to accrue 2014 interest
revenue.
3. A capital expenditure for factory
equipment (useful life, 5 years) was
erroneously charged to Maintenance
Expense in 2014.
Accounting Changes and Error Analysis
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Ex. 22-84 (cont.)
2014 2015
Income Balance Income Balance
Statement Sheet Statement Sheet
4. Failed to count office supplies on hand
at 12/31/14. Cash expenditures have
been charged to Supplies Expense
during the year 2014.
5. Failed to accrue 2014 wages.
6. Ending inventory in 2014 understated.
7. Overstated 2014 depreciation
expense; 2015 expense correct.
Solution 22-84
Test Bank for Intermediate Accounting, Fifteenth Edition
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Ex. 22-85—Effects of errors.
Joseph Co. began operations on January 1, 2014. Financial statements for 2014 and 2015
contained the following errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory $80,000 too high $104,000 too high
Depreciation expense 48,000 too low —
Accumulated depreciation 48,000 too low 48,000 too low
Insurance expense 42,000 too high 42,000 too low
Prepaid insurance 36,000 too low
In addition, on December 26, 2015 fully depreciated equipment was sold for $48,000, but the sale
was not recorded until 2016. No corrections have been made for any of the errors.
Instructions
Ignoring income taxes, show your calculation of the total effect of the errors on 2015 net income.
PROBLEMS
Pr. 22-86—Accounting for changes and error corrections.
Dyke Company's net incomes for the past three years are presented below:
2016 2015 2014
$480,000 $450,000 $360,000
During the 2016 year-end audit, the following items come to your attention:
1. Dyke bought equipment on January 1, 2013 for $392,000 with a $32,000 estimated salvage
value and a six-year life. The company debited an expense account and credited cash on the
purchase date for the entire cost of the asset. (Straight-line method)
2. During 2016, Dyke changed from the straight-line method of depreciating its cement plant to
the double-declining balance method. The following computations present depreciation on
both bases:
2016 2015 2014
Straight-line 36,000 36,000 36,000
Double-declining 46,080 57,600 72,000
Accounting Changes and Error Analysis
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Pr. 22-86 (cont.)
The net income for 2016 was computed using the double-declining balance method, on the
January 1, 2016 book value, over the useful life remaining at that time. The depreciation
recorded in 2016 was $72,000.
3. Dyke, in reviewing its provision for uncollectibles during 2014, has determined that 1% is the
appropriate amount of bad debt expense to be charged to operations. The company had used
1/2 of 1% as its rate in 2015 and 2016 when the expense had been $18,000 and $12,000,
respectively. The company recorded bad debt expense under the new rate for 2016. The
company would have recorded $6,000 less of bad debt expense on December 31, 2016
under the old rate.
Instructions
(a) Prepare in general journal form the entry necessary to correct the books for the transaction
in part 1 of this problem, assuming that the books have not been closed for the current year.
(b) Compute the net income to be reported each year 2014 through 2016.
(c) Assume that the beginning retained earnings balance (unadjusted) for 2014 was
$1,260,000. At what adjusted amount should this beginning retained earnings balance for
2014 be stated, assuming that comparative financial statements were prepared?
(d) Assume that the beginning retained earnings balance (unadjusted) for 2016 is $1,800,000
and that non-comparative financial statements are prepared. At what adjusted amount
should this beginning retained earnings balance be stated?
Test Bank for Intermediate Accounting, Fifteenth Edition
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Pr. 22-87—Correction of errors.
Vance Company reported net incomes for a three-year period as follows:
2013, $191,000; 2014, $199,000; 2015, $180,000.
In reviewing the accounts in 2016 after the books for the prior year have been closed, you find
that the following errors have been made in summarizing activities:
2013 2014 2015
Overstatement of ending inventory $37,000 $51,000 $26,000
Understatement of accrued advertising expense 6,600 12,000 7,200
Instructions
(a) Determine corrected net incomes for 2013, 2014, and 2015.
(b) Give the entry to bring the books of the company up to date in 2016, assuming that the
books have been closed for 2015.
Pr. 22-88—Error corrections and adjustments.
The controller for Haley Corporation is concerned about certain business transactions that the
company experienced during 2015. The controller, after discussing these matters with various
individuals, has come to you for advice. The transactions at issue are presented below.
1. The company has decided to switch from the direct write-off method in accounting for bad
debt expense to the percentage-of-sales approach. Assume that Haley Corporation has
recognized bad debt expense as the receivables have actually become uncollectible in the
following way:
2014 2015
From 2012 sales 31,800 20,000
From 2013 sales 45,000
The controller estimates that an additional $65,400 will be charged off in 2016: $11,400
applicable to 2014 sales and $54,000 to 2015 sales.
Accounting Changes and Error Analysis
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Pr. 22-88 (cont.)
2. Inventory has been shipped on consignment. These transactions have been recorded as
ordinary sales and billed as such on account. At December 31, 2015, inventory billed and in
the hands of consignees amounted to $425,000. The percentage markup on selling price is
20%. Assume that consigned inventory is sold the following year. The company uses the
perpetual inventory system.
3. During the current year, the company sold $600,000 of goods on the installment basis. The
cost of sales associated with these goods sold is $450,000. The company inadvertently
handled these sales and related costs as part of the regular sales transactions. Cash of
$172,000, including a down payment of $60,000, was collected on these installment sales
during the current year. Due to questionable collectibility, the installment−sales method was
considered appropriate.
Instructions
(a) Assume that Haley Corporation reported net income of $1,200,000 for 2015. Present a
schedule showing the corrected net income after reviewing the above transactions.
(b) Prepare the journal entries necessary at December 31, 2015, assuming that the books have
been closed.
Test Bank for Intermediate Accounting, Fifteenth Edition
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IFRS QUESTIONS
True/False
1. IFRS requires that changes in estimate be accounted for using the retrospective method.
2. IFRS requires that any indirect effect of a change in accounting policy, such as increased
royalty payments, be recognized in income in the year of the change in policy.
3. Under IFRS, the direct effects of changes in the accounting policies are applied
retrospectively.
4. Both IFRS and U.S. GAAP allow that 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.
5. Under IFRS, errors in financial statements are considered as an accounting change.
Multiple Choice
6. Is the following exception applicable to IFRS or U.S. GAAP?
“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.”
IFRS U.S. GAAP
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. Is the following exception applicable to IFRS or U.S. GAAP?
“If determining the effect of a correction of an error is considered impracticable, then a
company should report the effect of the error correction in the period in which it believes it
practicable to do so.”
IFRS U.S. GAAP
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Accounting Changes and Error Analysis
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8. Detailed guidance regarding the accounting and reporting for the indirect effects of changes in
accounting principle is available under
a. both U.S. GAAP and IFRS.
b. neither U.S. GAAP nor IFRS.
c. U.S. GAAP only.
d. IFRS only.
9. Ben, Inc. follows IFRS for its external financial reporting. Ben, Inc. owns 25% of the
outstanding stock of Black, Inc. and accordingly uses the equity method to account for its
investment. Which of the following is true regarding Ben, Inc.’s policies related to Black, Inc.?
a. Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.’s net
loss for the year.
b. Ben, Inc. will increase the investment account for its pro-rata share of the dividends paid
out by Black, Inc. for the year.
c. Ben, Inc. will conform the accounting policies of Black, Inc. to its own accounting policies.
d. None of these is true regarding how Ben, Inc. accounts for its investment in Black,
Inc.
10. Ben, Inc. follows U.S. GAAP for its external financial reporting. Ben, Inc. owns 25% of the
outstanding stock of Black, Inc. and accordingly uses the equity method to account for its
investment. Which of the following is true regarding Ben, Inc.’s policies related to Black, Inc.?
a. Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.’s net
loss for the year.
b. Ben, Inc. will increase the investment account for its pro-rata share of the dividends paid
out by Black, Inc. for the year.
c. Ben, Inc. will conform the accounting policies of Black, Inc. to its own accounting policies.
d. None of these is true regarding how Ben, Inc. accounts for its investment in Black, Inc.
11. Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the
equity method to account for its investment. The stock was purchased on January 1, 2015 for
$880,000. During the year ended December 31, 2015, Hallmark, Inc. reported the following:
Dividends declared and paid $ 400,000
Net income 2,400,000
Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the
LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if
Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher
during 2015. What is the balance in the Investment in Hallmark, Inc. that will be reported on
Haystack, Inc.’s balance sheet at December 31, 2015 assuming Haystack, Inc. follows IFRS
for its external financial reporting?
a. $1,825,000
b. $1,480,000
c. $1,585,000
d. $1,375,000
Test Bank for Intermediate Accounting, Fifteenth Edition
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12. Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the
equity method to account for its investment. The stock was purchased on January 1, 2015 for
$880,000. During the year ended December 31, 2015, Hallmark, Inc. reported the following:
Dividends declared and paid $ 400,000
Net income 2,400,000
Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the
LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if
Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher
during 2015. What is the balance in the Investment in Hallmark, Inc. that will be reported on
Haystack, Inc.’s balance sheet at December 31, 2015 assuming Haystack, Inc. follows U.S.
GAAP for its external financial reporting?
a. $1,825,000
b. $1,480,000
c. $1,585,000
d. $1,375,000
13. Ridge, Inc. follows IFRS for its external financial reporting, and Cannon Company follows U.S.
GAAP for its external financial reporting. During 2015, both companies changed depreciation
methods, from double-declining balance to straight-line. Compared to double-declining
balance, for Ridge, Inc. the change resulted in a decrease in reported depreciation expense
of $90,000, and for Cannon Company the change resulted in a reported decrease in
depreciation expense of $105,000. The remaining useful lives of the assets impacted by the
change in depreciation method is 10 years for both companies. How would this change
impact the net income reported by Ridge, Inc. and Cannon Company for the year ended
December 31, 2015?
Ridge, Inc. Cannon Company
a. Decrease $90,000 Decrease $105,000
b. Increase $9,000 Increase $10,500
c. Increase $90,000 Increase $105,000
d. Increase $90,000 Increase $10,500
14. Mars, Inc. follows IFRS for its external financial reporting. On January 1, 2015, Mars, Inc.
purchased 25% of the outstanding stock of Jerome Company (which uses U.S. GAAP for its
external financial reporting) for $790,000, and appropriately uses the equity method to
account for its investment. Jerome Company reports the following activity for the year ended
December 31, 2015:
Net loss $60,000
Dividends declared and paid 20,000
Jerome Company uses the completed-contract method for revenue recognition related to its
long-term construction contracts, while Mars, Inc. uses the percentage-of-completion method.
Mars, Inc. determines that if Jerome Company had used the percentage-of-completion
method, its income would have been $100,000 higher during 2015. What is the balance in the
Investment in Jerome Company that will be reported on Mars, Inc.’s balance sheet at
December 31, 2015?
a. $825,000
b. $770,000
c. $790,000
d. $785,000
Accounting Changes and Error Analysis
22 - 37
15. Mars, Inc. follows IFRS for its external financial reporting, while Jerome Company uses U.S.
GAAP for its external financial reporting. During the year ended December 31, 2015, both
companies changed from using the completed-contract method of revenue recognition for
long-term construction contracts to the percentage-of-completion method. Both companies
experienced an indirect effect, related to increased profit-sharing payments in 2015, of
$30,000. As a result of this change, how much expense related to the profit-sharing payment
must be recognized by each company on the income statement for the year ended December
31, 2015?
Mars, Inc. Jerome Company
a. $30,000 $30,000
b. $30,000 $-0-
c. $-0- $-0-
d. $-0- $30,000
Short Answer
16. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to reporting accounting changes.
17. How might differences in presentation of comparative data under U.S. GAAP and IFRS affect
adoption of IFRS by U.S. companies?
