978-1259722660 Chapter 20 Solution Manual Part 12

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Judgment Case 20-10

Situation I

2.The change in estimate should be reflected in the current period and in future

3.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

4.A note should disclose the effect of the change in accounting estimate on

Situation II

1.The change from reporting the investment in Allen to using a consolidated

2.A change in reporting entity is effected and disclosed by recasting all

prior-period financial statements in accordance with the method of presenting

3.The balance sheet will be affected by this change in that the investment account

of the parent and the equity section of the subsidiary will be eliminated,

Case 20-10 (concluded)

4.The financial statements of the period of the change in the reporting entity

should describe by note disclosure the nature of the change and the reason for it.

Situation III

1.The change in the method of computing depreciation represents a change in

estimate resulting from a change in accounting principle. This is because a

change in the depreciation method is adopted to reflect a change in (a)

estimated future benefits from the asset, (b) the pattern of receiving those

benefits, or (c) the company’s knowledge about those benefits. The effect of the

2.The change should be reflected in the current period and in future periods.

3. This change will affect the balance sheet in that the accumulated depreciation in

4.Additionally, a disclosure note should justify that the change is preferable and

Judgment Case 20-11

Despite the self-correcting feature of certain inventory errors, the errors cause

the financial statements of the year of the error as well as the financial statements

in the subsequent year to be incorrect. For example, an overstatement of ending

inventory at the end of 2017 will correct itself in 2018 and retained earnings at the

end of 2018 will be correct. However, cost of goods sold and net income will be

incorrect in both years. In addition, inventory and retained earnings on the 2017

balance sheet will be incorrect.

If a material inventory error is discovered in an accounting period subsequent

to the period in which the error is made, previous years’ financial statements that

were incorrect as a result of the error are retrospectively restated to reflect the

correction. And, of course, any account balances that are incorrect as a result of

the error are corrected by journal entry. If retained earnings is one of the incorrect

accounts, the correction is reported as a prior period adjustment to the beginning

balance of retained earnings, net of tax, in the statement of shareholders’ equity. In

addition, a disclosure note is needed to describe the nature of the error and the

impact of its correction on income from continuing operations, net income, and

earnings per share.

Ethics Case 20-12

Requirement 1

Bonuses will be negatively affected because if the error is corrected, a lower

Requirement 2

The error will be reported as a prior period adjustment to the beginning

retained earnings balance, net of tax, for the year beginning July 1, 2018.

Requirement 3

Ethical Dilemma:

Should John recognize his obligation to disclose the inventory error to

Target Case

Requirement 1

Target reports its inventory under the retail inventory accounting method (RIM)

Note 2: Restatement of Accounts 2014

The majority of our inventory is accounted for under the retail inventory

accounting method (RIM) using the last-in, first-out (LIFO) method. Inventory

is stated at the lower of LIFO cost or market. The cost of our inventory includes

We report most voluntary changes in accounting principles retrospectively. This

means Target would (1) revise all previous period’s financial statements presented

as if the new method always had been used. Target would (2) revise cost of goods

sold as well as any other income statement amounts affected by that revision,

Target Case (concluded)

Requirement 2

It’s not practicable to report some changes in principle retrospectively because

insufficient information is available. Revising balances in prior years means

knowing what those balances should be. One example is switching from the FIFO

Air France/KLM Case

Requirement 1

In each of the changes described in Note 2: Restatement of Accounts 2014, Air

France followed the retrospective approach, which is required for most changes in

accounting principle. This the same approach AF would follow if using U.S.

Requirement 2

For the change described in 2.1, no account balances required any adjustment. The

2.1. Modification in the presentation of the income statement

To facilitate performance analysis, the Group decided, as from January 1,

2015, to isolate the items relating to capitalized production in a single line of

In € millions December 31, 2014

External expenses (445)

So, these items were reported differently in the income statement, but their

balances in AF’s books were unchanged.