Chapter 22: Accounting for Changes and Errors
99. When a company has a counterbalancing error, the company should
a.
not take any action if the financial statements are no longer being presented on a comparative basis.
b.
restate the financial statements to show the correct balances if the financial statements are presented on a
comparative basis.
c.
discuss the error in the notes to the financial statement and restate the financial statements.
d.
a and b.
d
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Bloom’s: Remembering
100. If a prior-period error only affects the balance sheet, the company should
a.
discuss the error in the notes to the financial statements only.
b.
restate the balance sheet from the prior year if it shows comparative financial statements.
c.
make a correcting journal entry and restate the balance sheet for the prior year.
d.
discuss the error in the notes to the financial statements and restate the balance sheet from the prior year.
b
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Bloom’s: Remembering
101. Generally accepted accounting principles have identified four types of accounting changes and three possible
methods to use in accounting for these changes, as follows:
Symbol
Type of Change
P
Change in accounting principle
E
Change in accounting estimate
EC
Error correction
RE
Change in reporting entity
Symbol
Type of Accounting Adjustment
RA
Retrospective adjustment
P
Prospective adjustment
RA–CS
Retrospective adjustment to report consolidated financial information for the
same set of affiliated entities for all years
Required:
Following is a list of errors and changes. In the spaces provided, use the appropriate symbols selected from the above
lists to indicate the type of change and how the change should be treated in the financial statements.
Change
Adjustment
______
_______
a.
Company discovered that last year’s ending inventory
was overstated.
______
_______
b.
Change to the “full cost” method of accounting by an
oil company.
______
_______
c.
Change from the FIFO inventory costing method to the
LIFO method (prior effect not determinable).
______
_______
d.
Change in the method of recognizing income to a
GAAP method.
______
_______
e.
Change in the residual value of a piece of equipment.
______
_______
f.
Change in the companies that are included in combined
financial statements.
______
_______
g.
Change from the double-declining-balance method of
depreciation to the straight-line method.
Change
Adjustment
a.
EC
b.
P
RA
P
P
d.
EC
E
P
g.
E
P
102. Several items related to accounting changes appear below.
Item
Retrospective
Adjustment
Current and
Prospective
a.
Reduction in remaining estimated service life of truck.
_______
X
b.
Expensed a truck when purchased.
_______
_______
c.
Write-down of inventory due to obsolescence.
_______
_______
d.
Receipt of damages won in court suit begun three
years ago.
_______
_______
e.
A company is preparing to become a corporation and
sell stock to the public. At this time, it changed from
accelerated to straight-line depreciation.
_______
_______
f.
Change from FIFO inventory to LIFO; recalculations
are practicable.
_______
_______
g.
Increase in bad debt estimate from 2% to 3% of sales.
_______
_______
h.
Change from LIFO to FIFO.
_______
_______
i.
Change from individual statements to consolidated
statements.
_______
_______
j.
Change from percentage-of-sales to percentage-of-
receivables method of bad debt estimation.
_______
_______
k.
Change from full costing to successful efforts.
_______
_______
Required:
Indicate the appropriate method of accounting for each case by placing an “X” in the appropriate column. Part (a) has
been completed as an example.
Item
Current and
a.
b.
d.
h.
k.
103. The following are independent events:
______
a.
Changed remaining service life from 8 years to 10 years
______
b.
Change from an unacceptable accounting method to an acceptable
______
c.
Received money won in a law suit
______
d.
Inventory write down due to obsolescence
______
e.
Change in rate used to calculate warranty costs
______
f.
Change from FIFO to average costs inventory method
______
g.
Discovered errors in unrecorded expenses from a prior period
______
h.
Purchased another company which now requires the financial
statements to be consolidated.
For each change or error indicate how it would be accounted for using the following:
1
Retrospective adjustment
2
Prospective adjustment
3
None of the choices
a.
2
b.
1
c.
3
d.
2
e.
2
1
g.
1
h.
1
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104. The Opal Company was incorporated and began operations on January 1, 2016. Opal used the weighted-average
method for costing inventories. Effective January 1, 2017, Opal changed to FIFO for costing inventories and can
justify the change. Information related to 2016 and 2017 inventory cost and net income is presented below:
2016
2017
Ending inventory, using:
Weighted-average
$650,000
$620,000
FIFO
680,000
630,000
Net income
700,000
750,000
(using average)
(using FIFO)
Opal’s income tax rate is 30% for both 2016 and 2017.
Required:
Calculate the amount of the cumulative effect of the change on beginning retained earnings on January 1, 2017, that
would appear on Opal’s statement of retained earnings for the year ended December 31, 2017.
2016 FIFO ending inventory
2016 average cost ending inventory
(650,000)
Increase in income before tax
Less: Income tax effect
Cumulative effect as of January 1, 2017, net of tax
increase
105. In 2018, Bevins Company decided to change from LIFO to FIFO due to better representation of the flow of inventory
and costs. Bevins started the business in 2016. Bevin’s tax rate is 35%. The following analysis was provided by
management:
Ending Inventory
LIFO
FIFO
Net Income
12/31/2016
$375,650
$405,900
975,000
12/31/2017
$360,450
$410,750
1,350,000
12/31/2018
$365,975
$445,775
1,389,500
Required:
1) Prepare the journal entry necessary to record the change.
2) What amount of net income would Bevins report in 2016, 2017, and 2018?
106. Shelley Construction began operations in 2016 and appropriately used the completed-contract method in accounting
for its long-term construction contracts. The prepared the following information:
Completed-Contract Method
2016
2017
2018
Construction Revenue
$1,775,000
$ 1,977,500
$2,274,125
Expenses
975,000
1,002,500
1,152,875
Income before income taxes
$ 800,000
$ 975,000
1,121,250
Effective January 1, 2018, Shelley changed to the percentage-of-completion method tax reporting and can justify the
change; the company’s tax rate is 35%. It determines the construction and revenue expense amounts under the
percentage of completion method to be:
Percentage-of-Completion
2016
2017
2018
Construction Revenue
$2,200,000
$2,530,000
$2,909,500
Expenses
1,100,000
1,232,000
1,478,400
Income before income taxes
$1,100,000
$1,298,000
$1,431,100
Required:
1) How would the company account for the change?
2) Prepare the journal entries to reflect the changes.
Construction in Progress ($2,398,000 – $1,775,000)
623,000
Deferred Tax Liability ($623,000 x 35%)
Retained Earnings
107. Tulip Company decided to change from LIFO to FIFO inventory costing, effective January 1, 2018. The following
data were available:
Excess of FIFO
Ending Inventory
Pretax Operating
over LIFO
Year
Income using LIFO
Ending Inventory
2018
$40,000
$8,000
2017
20,000
7,000
2016
30,000
4,000
The income tax rate is 35%. The company began operations on January 1, 2016, and has paid no dividends since
inception.
Required:
Answer the following questions relating to the 2017-2018 comparative financial statements.
a.
What is net income for 2018?
b.
What is restated net income for 2017?
c.
Prepare the 2017 statement of retained earnings as it would appear in the comparative
2017-2018 financial statements.
$19,500
$22,100
14,950
$37,050
108. On January 1, Year 1, the Dole Company purchased an asset that cost $154,000. The asset had an expected useful
life of seven years and no estimated residual value. The company initially decided to use sum-of-the-years’-digits
(SYD) depreciation for both financial accounting and income tax purposes. Depreciation expense for the straight-line
method and the sum-of-the-years’-digits method is as follows:
Straight-line
SYD over
Year
over 7 Years
7 Years
Difference
1
$ 22,000
$ 38,500
$ 16,500
2
22,000
33,000
11,000
3
22,000
27,500
5,500
4
22,000
22,000
0
5
22,000
16,500
(5,500)
6
22,000
11,000
(11,000)
7
22,000
5,500
(16,500)
$154,000
$154,000
$ 0
At the beginning of Year 4, Dole changed from the sum-of-the-years’-digits method to the straight-line method of
depreciation for financial reporting purposes. The company’s income tax rate is 30%. In Year 3 and Year 4, Dole had
$90,000 pretax income before depreciation and income taxes.
Required:
a.
Complete the following section of the income statement:
Year 3
Year 4
Pretax income before depreciation
$90,000
$90,000
Depreciation expense
_______
_______
Income before income taxes
_______
_______
Income tax expense
_______
_______
Net income
_______
_______
b.
Prepare the journal entries to record the depreciation expense, tax expense,
and the effect of the accounting change (if any) in Year 4.
a.
Pretax income before depreciation
$ 90,000
Depreciation expense
Income before income taxes
$ 76,250
Income tax expense
(18,750)
Net income
($154,000 – $38,500 – $33,000 – $27,500)/4 = $13,750
prospectively, no adjustment to opening balances is necessary. However, the
Year 4 financial depreciation of $13,750 will result in a credit to Deferred
Tax Liability for the first time as follows:
109. The Catherine Company, effective January 1, 2018, made the following accounting change:
·
Catherine changed its depreciation method from double-declining-balance to the straight-
line method on equipment purchased on January 1, 2016, at a cost of $400,000. The
equipment had an estimated useful life of five years and a $30,000 residual value.
Catherine is subject to an income tax rate of 30% and can justify the changes.
Required:
Calculate the following amounts:
a.
2018 depreciation expense
b.
the December 31, 2018, accumulated depreciation balance on the equipment
Book value at Jan. 1, 2018
($400,000- $256,000)
Basis for straight-line
depreciation
2018 depreciation
$114,000/3 years
2016
(400,000 × 40%)
2018 depreciation
Depreciation Expense
Tax Expense
Deferred Tax Liability ($22,000 –
$13,750) × .3
110. In Western reviewed their estimated warranty costs which at that time were 5% of sales. This estimated was based
upon the warranty accrual method. In 2016 net sales were $3,250,000 they recorded warranty expense of $162,500.
Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop
in their warranty claims for 2017. The company decided for 2017 to reduce the estimate to 3% of sales. In 2017
Western reported net sales of $3,500,000.
Required:
1) How should the company report the change and why?
2) Prepare any necessary journal entries for 2016 or 2017 to account for the change.
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111. On January 1, 2016, Dawn Company bought a machine for $60,000. It was then estimated that the useful life of the
machine would be eight years with a salvage value of $8,000. On January 1, 2020, it was decided that the machine’s
total life from acquisition date should have been only six years with a salvage value of only $2,000. The company
used straight-line depreciation.
Required:
a.
If an adjusting entry is necessary on January 1, 2020, prepare it.
b.
Compute depreciation expense for 2020.
a.
= $ 6,500
= $32,000
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112. On January 1, 2016, Suzanne Company purchased equipment for $48,000. The estimated life was five years and the
salvage value was estimated at $5,000. On January 1, 2018, it was determined that the equipment’s total useful life
should have been estimated at seven years and the salvage value should have been estimated at only $4,000. The
company used straight-line depreciation.
Required:
a.
What type of change did Suzanne Company make on January 1, 2018, and how should
Suzanne account for the change?
b.
If an adjusting entry is necessary on January 1, 2018, prepare it.
c.
Compute the amount of depreciation expense on the equipment for 2018.
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113. On January 1, 2016 Kefauver Company purchased a piece of equipment for $375,000. The equipment had a useful
life of 10 years and a residual value of $10,000. The company initially starts recording depreciation on a straight-line
method. The following independent situations occur at the beginning of 2018:
a.
The life of the equipment was originally estimated to be 10 years but due to the wear
and tear on the machine they changed it to a remaining life of 7 years.
b.
It was discovered that when initially recorded on the books the residual value had been
ignored.
Required:
Prepare all journal entries related to the equipment for 2018 for each of the independent situations, ignoring income
taxes.