Exercise 20-15
Requirement 1
A deferred tax liability is established using the currently enacted tax rate for
the year(s) a temporary difference is expected to reverse. In this case that rate was
($ in millions)
Income tax expense (to balance)………………………………………… 10
Requirement 2
When a company revises a previous estimate, prior financial statements are
Exercise 20-16
Requirement 1
Requirement 2
When an estimate is revised as new information comes to light, accounting for
the change in estimate is quite straightforward. We do not recast prior years’
Requirement 3
$800,000 Cost
Depreciation to date (2016–2017)
Exercise 20-17
Requirement 1
Calculation of annual depreciation after the estimate change:
Requirement 2
Calculation of annual depreciation after the estimate change:
$40,000
Cost
Previous depreciation:
Depreciation to date (2016–2017)
Book value
Revised depreciable base
2018 depreciation
Exercise 20-18
EP 1. Change from declining balance depreciation to straight-line.
E 2. Change in the estimated useful life of office equipment.
E 3. Technological advance that renders worthless a patent with an
unamortized cost of $45,000.
*Error correction: change from an unacceptable method to GAAP.
Exercise 20-19
Requirement 1
The 2016 error caused 2016 net income to be understated, but since 2016
ending inventory is 2017 beginning inventory, 2017 net income was overstated by
Analysis: U = Understated
O = Overstated
2016 2017
Beginning inventory Beginning inventory U
Revenues Revenues
Retained earnings U Retained earnings corrected
Exercise 20-19 (concluded)
However, the 2017 error has not yet self-corrected. Both retained earnings
and inventory still are overstated as a result of the second error.
Analysis: U = Understated
O = Overstated
2017
Beginning inventory
Requirement 2
Requirement 3
The financial statements that were incorrect as a result of both errors (effect of
one error in 2016 and effect of two errors in 2017) would be retrospectively
restated to report the correct inventory amounts, cost of goods sold, income, and
Exercise 20-20
1. Error discovered before the books are adjusted or closed in 2018.
2. Error not discovered until early 2019.