EXERCISE 22.15 (Continued)
4. Amortization Expense—Copyright …………………… 2,500(c)
Retained Earnings ………………………………………….. 5,000(d)
EXERCISE 22.16 (10–15 minutes)
1. Salaries and Wages Expense ………………………….. 3,400
Salaries and Wages Payable …………………….. 3,400
2. Salaries and Wages Expense ………………………….. 31,100
Salaries and Wages Payable …………………….. 31,100
EXERCISE 22.17 (10–15 minutes)
Retained Earnings …………………………………………………. 33,700*
Inventory ……………………………………………………….. 14,200**
Accumulated Depreciation—Equipment
($38,500(a) – $19,000(b)) …………………………………. 19,500
Computations: Effect on retained earnings
over (under) statement
Overstatement of 2019 ending inventory
($14,200**
Overstatement of 2018 depreciation
Understatement of 2019 depreciation
Total effect of errors on retained earnings
EXERCISE 22.18 (25–30 minutes)
(a) Effect of errors on 2019 net income: £21,700 overstatement
Computations:
Effect on 2019 net income
over (under) statement
Understatement of 2018 ending inventory
Effect on working capital
over (under) statement
Overstatement of 2019 ending inventory
£( 7,100
Total effect on working capital (understated)
(c) Effect of errors on retained earnings: £25,600 understatement
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2019 ending inventory
£( 7,100
EXERCISE 22.19 (20–25 minutes)
(a) 1. Supplies Expense (R2,500 – R1,100) …………….. 1,400
Supplies ………………………………………………. 1,400
5. Rental Income (R24,000 ÷ 2) …………………………. 12,000
Unearned Rent ……………………………………… 12,000
(b) 1. Retained Earnings ………………………………………. 1,400
Supplies ………………………………………………. 1,400
2. Retained Earnings ………………………………………. 2,900
Salaries and Wages Payable …………………. 2,900
6. Retained Earnings ………………………………………. 45,000
Accumulated Depreciation—Equipment … 45,000
7. Retained Earnings ………………………………………. 7,200
Accumulated Depreciation—Equipment … 7,200
[Same as in (a).]
EXERCISE 22.20 (20–25 minutes)
2018
2019
Income before tax
$101,000
$77,400
Corrections:
Sales erroneously included in 2018 income
(38,200)
38,200
Understatement of 2018 ending inventory
8,640
(8,640)
Adjustment to bond interest expense*
Corrected income before tax
*Bond interest expense for 2018 and 2019 was computed as follows:
Book Value of Bonds
Stated Interest
Effective Interest
$240,000
$15,000^
$16,800**
241,800
15,000^
16,926****
EXERCISE 22.21 (10–15 minutes)
2018
2019
Item
Over–
statement
Under-
statement
No
Effect
Over–
statement
Under-
statement
No
Effect
(1)
X
X
(2)
X
X
(3)
X
(4)
X
X
(5)
X
X
TIME AND PURPOSE OF PROBLEMS
Problem 22.1 (Time 30–35 minutes)
Purpose—to provide a problem that requires the student to: (1) account for two changes in estimate,
Problem 22.2 (Time 30–40 minutes)
Purpose—to develop an understanding of the way in which accounting changes and error corrections
Problem 22.3 (Time 30–40 minutes)
Purpose—to provide a problem that requires the student to: (1) prepare correcting entries for two years’
unrecorded sales commissions, (2) three years’ inventory errors, and (3) prepare entries for two different
accounting changes.
Problem 22.4 (Time 40–50 minutes)
Problem 22.5 (Time 30–35 minutes)
Purpose—to develop an understanding of the impact which a change in the method of inventory pricing
Problem 22.6 (Time 25–30 minutes)
Purpose—to develop an understanding of the journal entries and the reporting which are necessitated
Problem 22.7 (Time 25–30 minutes)
Problem 22.8 (Time 30–35 minutes)
Purpose—to help a student understand the effect of errors on income and retained earnings. The
Problem 22.9 (Time 20–25 minutes)
Purpose—to develop an understanding of the effect that errors have on the financial statements. The
Time and Purpose of Problems (Continued)
Problem 22.10 (Time 50–60 minutes)
Purpose—to develop an understanding of the correcting entries and income statement adjustments that
SOLUTIONS TO PROBLEMS
PROBLEM 22.1
(a) 1. Cost of equipment ………………………………………… $85,000(a)
Less: Residual value …………………………………….. 5,000
Depreciable cost ………………………………………….. $80,000
Depreciation to 2019
Depreciation in 2019
Cost of equipment …………………………………. $85,000(a)
Depreciation in 2019
2. Cost of Building …………………………………………… $300,000
Less: Depreciation to 2019
2017…………………………………………………… 60,000
PROBLEM 22.1 (Continued)
3. Depreciation Expense ($120,000(g) – $16,000) ÷ 8 .. 13,000(l)
Accumulated Depreciation—Machine …………. 13,000
Accumulated Depreciation—Machine ……………….. 3,000
Retained Earnings …………………………………….. 3,000(q)
Depreciation recorded in 2017:
Depreciation
taken
Depreciation that
should be taken
Differences
(b) HOLTZMAN COMPANY
Comparative Income Statements
For the Years 2019 and 2018
2019
2018
Income before depreciation expense………………..
$300,000
$310,000
Depreciation expense* …………………………………….
47,750(o)
69,000(p)
*Depreciation Expense
PROBLEM 22.2
(a) 1. Bad debt expense for 2016 should not have been reduced by
€10,000. A change in the experience rate is considered a change
in estimate, which should be handled prospectively.
(b) BOTTICELLI SpA
Comparative Income Statements
For the Years 2016 through 2019
2016
2017
2018
2019
Net income (unadjusted)
€140,000
€160,000
€205,000
€276,000
3. Inventory
Net income (adjusted)
1. Bad debt expense
PROBLEM 22.3
1. Retained Earnings …………………………………. 3,500,000
2. Cost of Goods Sold ………………………………. 25,700,000(a)
Retained Earnings …………………………... 19,000,000(b)
Inventory ………………………………………… 6,700,000(c)
Income Overstated (Understated)
2017
2018
2019
3. Accumulated Depreciation—
Equipment ………………………………………….. 4,800,000
Depreciation Expense ……………………… 4,800,000(d)
Equipment cost …………………………………….. ¥100,000,000
4. Construction in Process ………………………… 45,000,000(e)
Deferred Tax Liability ………………………. 18,000,000(f)
Retained Earnings …………………………... 27,000,000
PROBLEM 22.4
(a) ASTON PLC
Projected Income Statement
For the Year Ended December 31, 2019
Sales …………………………………………….. £29,000,000
Cost of goods sold ………………………… £14,000,000
Depreciation expense …………………….. 1,600,000(a)
Operating expenses ……………………….. 6,400,000 22,000,000
Conditions met:
1. Net income before taxes and bonus > £7,000,000.
2. Payable for income taxes does not exceed £3,000,000.
(a)Depreciation for the current year includes £600,000 for the old equip–
ment and £2,000,000 for the robotic equipment. If the robotic equipment
(b) Students’ answers will vary.
There is nothing unethical about changing the first-year election of
PROBLEM 22.4 (Continued)
immediate needs for cash of £1,000,000 for the president’s bonus and
£3,000,000 for income taxes, there may be a need to sell some of the
investments. Therefore, the transfer of £3,000,000 of held–for-collection
investments to trading investments may also be appropriate.
It is naive to believe that corporate officers do no planning for year-end
Some stakeholders and their interests are:
Stakeholder
Interests
President
Personal gain of £1,000,000 bonus.
CFO
Placed in ethical dilemma between the interests
of the president and the corporation.
for his personal gain.
PROBLEM 22.5
UTRILLO INSTRUMENT LTD
Statement of Income and Retained Earnings
For the Years Ended May 31
(Amounts in millions)
2015
2016
2017
2018
2019
Sales—net
¥13,964
¥15,506
¥16,673
¥18,221
¥18,898
Cost of goods sold
Beginning inventory
1,010
1,124
1,101
1,270
1,500
Purchases
Ending inventory
Total
Gross profit
1,078
1,583
1,842
2,551
2,018
Administrative expenses
Income before taxes
1,010
1,644
1,029
Income taxes (50%)
Net income
Retained earnings—beginning:
As originally reported
1,206
1,388
1,759
2,237
3,005
As restated
Retained earnings—ending
Earnings per share (100 shares)
Adjustment (See note* and
*Note to instructor:
The retained earnings balances are usually reported in the above manner.
If desired, only the restated balances might be reported. The adjustments
are simply the cumulative difference in income between the two inventory
PROBLEM 22.5 (Continued)
In 2019, the Company changed its method of pricing inventory from the
first-in, first-out (FIFO) to the average cost method in order to more fairly
present the financial operations of the company. The financial statements
for prior years have been restated to retrospectively reflect this change,
resulting in the following effects on net income and related per share
amounts:
Increase in
2015
2016
2017
2018
2019
Schedule of Income Reconciliation
and Retained Earnings Adjustments
2015–2019
2014
2015
2016
2017
2018
2019
Beginning Inventory FIFO
¥1,000
¥1,100.00
¥1,000.00
¥1,115.00
¥1,237.00
Average Cost
1,010
1,124.00
1,101.00
1,270.00
1,500.00
Difference
Effect on Income*
¥ (12.00)
Ending Inventory FIFO
¥1,000
¥1,100
¥1,000.00
¥1,115.00
¥1,237.00
¥1,369.00
Average Cost
1,010
1,124
1,101.00
1,270.00
1,500.00
1,720.00
Difference
Tax Effect (50%)
5
12
175.50
Effect on Income**
¥ 5
¥ 12
¥ 175.50
Net Effect on Income
¥ 7
¥ 27.00
¥ 54.00
*Larger (smaller) beginning inventory has negative (positive) effect on net income.
**Larger (smaller) ending inventory has positive (negative) effect on net income.
PROBLEM 22.6
(a) 1. Depreciation Expense ………………………………… 94,500(f)
Accumulated Depreciation—Asset A ……. 94,500
Computations:
Cost of Asset A ……………………………………… €540,000
2. Depreciation Expense ………………………………… 25,800(g)
Accumulated Depreciation—Asset B ……. 25,800
Computations:
Original cost ………………………………………. €180,000(c)
Accumulated depreciation (1/1/19)
3. Asset C …………………………………………………….. 160,000(d)
Accumulated Depreciation—Asset C
PROBLEM 22.6 (Continued)
(b) MADRASA SA
Comparative Retained Earnings Statements
For the Years Ended
2019
2018
Retained earnings, January 1, as previously
reported
€200,000
Add: Error in recording Asset C
112,000(f)
Retained earnings, January 1, as adjusted
€666,000
312,000
Add: Net income
208,700(h)
354,000(i)
Retained earnings, December 31
€874,700
€666,000
Amount expensed incorrectly in 2015 ……………….. €160,000(d)
Depreciation to be taken to January 1, 2018
PROBLEM 22.7
(1)
Depreciation Expense …………………………..………………. 3,200
Accumulated Depreciation—Delivery Vehicles … 3,200
(2)
(3)
Cash ……………………………………………………………………. 5,600
Accounts Receivable ……………………………………… 5,600
(4)
(5)
Litigation Loss ……………………………………………………… 125,000
Estimated Litigation Liability ………………………….. 125,000
(6)
(7)
(8)
Depreciation Expense ($40,000 ÷ ……………………….. 8) 5,000