CHAPTER 22
Accounting for Changes and Error Analysis
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Differences between change in
principle, change in estimate,
errors.
2, 4, 6, 7, 8,
9, 12, 13,
15,
8
3
1, 2, 3, 4
2. Accounting changes:
a. Comprehensive.
1, 10, 11
3, 6, 7
1, 2, 4, 5
for long-term construction
2, 10
1, 2, 10
1, 8, 13
3
1
2
4, 8, 14
5
1, 2, 3
3
2, 3, 5,
8, 14
2
4
f. Miscellaneous.
1, 3, 4, 5
9
b. Changes in estimate,
changes in depreciation
6, 8, 18
4, 5, 9
6, 7, 8, 9,
10, 11, 12,
1, 2, 4,
6, 7
1, 2, 3,
4, 5, 6
3. Correction of an error.
a. Comprehensive.
8, 9, 14,
15,17
8, 9, 10
8, 15, 16,
18, 19,
3, 6, 7,
8, 9, 10
2, 3, 4
20, 21
2, 18, 20
6, 7
9, 15,
17, 18
1, 6, 8
9, 16, 19
7, 15,17,
2, 10
1, 2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts for
Analysis
1. Discuss the types of accounting
changes and the accounting for
changes in accounting policies.
1, 2, 3,
9, 10
1, 2, 3, 4, 5,
8, 13, 14
2, 3, 5
1, 2, 3, 4
reporting for changes of estimates.
6, 7, 8, 9,
10, 11, 12
1, 2, 3, 4,
6
1, 2, 3, 4,
5, 6
9, 10
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E22.1
Change in policy—long-term contracts.
Moderate
10–15
E22.2
Change in policy—inventory methods.
Moderate
10–15
E22.3
Accounting change.
Complex
25–30
E22.4
Accounting change.
Complex
25–30
E22.5
Accounting change.
Complex
30–35
E22.6
Accounting changes—depreciation.
Complex
30–35
E22.7
Change in estimate and error; financial statements.
Moderate
25–30
E22.8
Accounting for accounting changes and errors.
Simple
E22.9
Error and change in estimate—depreciation.
Simple
15–20
E22.10
Depreciation changes.
Moderate
20–25
E22.11
Change in estimate—depreciation.
Simple
10–15
E22.12
Change in estimate—depreciation.
Simple
20–25
E22.13
Change in policy—long-term contracts.
Simple
10–15
E22.14
Various changes in policy—inventory methods.
Moderate
20–25
E22.15
Error correction entries.
Simple
15–20
E22.16
Error analysis and correcting entry.
Simple
10–15
E22.17
Error analysis and correcting entry.
Simple
10–15
E22.18
Error analysis.
Moderate
25–30
E22.19
Error analysis and correcting entries.
Simple
20–25
E22.20
Error analysis.
Moderate
20–25
E22.21
Error analysis.
Moderate
10–15
P22.1
Change in estimate and error correction.
Moderate
30–35
P22.2
Comprehensive accounting change and error analysis problem.
Complex
30–40
P22.3
Error corrections and accounting changes.
Complex
30–40
P22.4
Accounting changes.
Moderate
40–50
P22.5
Change in policy—inventory—periodic.
Moderate
30–35
P22.6
Accounting changes and error analysis.
Moderate
25–30
P22.7
Error corrections.
Moderate
25–30
P22.8
Comprehensive error analysis.
Complex
30–35
P22.9
Error analysis.
Moderate
20–25
P22.10
Error analysis and correcting entries.
Complex
50–60
CA22.1
Analysis of various accounting changes and errors.
Moderate
25–35
CA22.2
Analysis of various accounting changes and errors.
Moderate
20–30
CA22.3
Analysis of three accounting changes and errors.
Moderate
30–35
CA22.4
Analysis of various accounting changes and errors.
Moderate
20–30
CA22.5
Changes in estimate.
Moderate
20–30
CA22.6
Change in estimate, ethics.
Moderate
20–30
1. The major reasons why companies change accounting policies are:
(1) Desire to show better profit picture.
2. (a) Change in accounting policy; retrospective application to prior period financial statements.
(b) Correction of an error and therefore prior period adjustment; adjust the beginning balance of
retained earnings.
3. The three approaches suggested for reporting changes in accounting policies are:
(a) Currently—the cumulative effect of the change is reported in the current year’s income as
a special item.
4. The IASB believes that the retrospective approach provides financial statement users the most
useful information. Under this approach, the prior statements are changed on a basis consistent
5. The indirect effect of a change in accounting policy reflects any changes in current or future cash
flows resulting from a change in accounting policy that is applied retrospectively. An example is
6. A change in an estimate is simply a change in the way an individual perceives the realizability of
an asset or liability. Examples of changes in estimate are: (1) change in the realizability of trade
Questions Chapter 22 (Continued)
7. This is an example of a situation in which it is difficult to differentiate between a change in account–
ing policy and a change in estimate. In such a situation, the change should be considered a
8. (a) Charge to expense—possibly separately disclosed.
(b) Change in estimate—account for currently and prospectively.
(c) Charge to expense—possibly separately disclosed.
9. This change is to be handled as a correction of an error. As such, the portion of the change
attributable to prior periods (CHF23,000) should be reported as an adjustment to the beginning
10. Preferability is a difficult concept to apply. The problem is that there are no basic objectives to
indicate which is the most preferable method, assuming a selection between two generally accepted
11. When a company changes to the new policy, the base-year amounts for all subsequent
calculations under the new method is the beginning balance in the year the policy is adopted.
This assumes that prior years’ income is not changed because it would be too impractical to do so.
LO: 1,3, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
12. Larger companies that are more politically visible may seek to report low income numbers to
13. Some of the key reasons for changing accounting policies are: (1) political costs, (2) capital
structure, (3) bonus payments, and (4) smoothing of earnings.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
14. Counterbalancing errors are errors that will be offset or corrected over two periods. Non–
counterbalancing errors are errors that take longer than two periods to correct themselves. An
Questions Chapter 22 (Continued)
15. A correction of an error in previously issued financial statements should be handled as a prior–
period adjustment. Thus, such an error should be reported in the year that it is discovered as an
adjustment to the beginning balance of retained earnings. And, if comparative statements are
16. This change represents a change from an accounting policy that is not generally accepted to an
accounting policy that is acceptable. As such, this change should be handled as a correction of
17. Retained earnings is correctly stated at December 31, 2020. Failure to accrue salaries in earlier
years is a counterbalancing error that has no effect on 2020 ending retained earnings.
LO: 3,4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
18. December 31, 2019
Equipment ……………………………………………………………………………………. 6,000
Accumulated Depreciation—Equipment ……………………………………… 600
19. This error has no effect on net income because both purchases and inventory were understated.
The entry to correct for this error, assuming a periodic inventory system, is:
20. This error decreases net income by $2,400 in 2019. Depreciation should have been charged to
net income. The entry to correct for this error is as follows:
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 22.1
Construction in Process ($120,000 – $80,000) ………. 40,000
BRIEF EXERCISE 22.2
Difference in profit-sharing expense—prior years
BRIEF EXERCISE 22.3
Inventory ……………………………………………………………. 1,200,000
Deferred Tax Liability (€1,200,000 X 40%) ………. 480,000
BRIEF EXERCISE 22.4
Cost of depreciable assets ………………………………….. $250,000
Depreciation to date ……………………………………………. (90,000)
BRIEF EXERCISE 22.5
Depreciation Expense …………………………..………………….. 24,000^
Accumulated Depreciation …………………………………. 24,000
BRIEF EXERCISE 22.6
Equipment ……………………………………………………………….. 50,000
Accumulated Depreciation—Equipment ……………… 20,000*
BRIEF EXERCISE 22.7
CHENG LTD.
Retained Earnings Statement
For the Year Ended December 31, 2019
Retained earnings, January 1, as previously reported ……. ¥20,000,000
Less: Correction of depreciation error, net of tax ……… 2,400,000*
BRIEF EXERCISE 22.8
2018
2019
a.
Overstated
Overstated
b.
Overstated
Understated
Understated
Overstated
Overstated
Understated
No effect
Overstated
BRIEF EXERCISE 22.9
1. The change to a three-year remaining life for the purpose of computing
2. This is an expense classification change arising from a change in the
3. The change to expensing preproduction costs (writing the costs off in
BRIEF EXERCISE 22.10
1. Both FIFO and average cost are generally accepted accounting
policies; thus, this item is a change in accounting policy.
SOLUTIONS TO EXERCISES
EXERCISE 22.1 (10–15 minutes)
(a) The net income to be reported in 2019, using the retrospective approach,
would be computed as follows:
EXERCISE 22.2 (10–15 minutes)
(a) Inventory ……………………………………………………… 11,000*
EXERCISE 22.3 (25–30 minutes)
(a) RAMIREZ CO.
Income Statement
For the Year Ended December 31
Average Cost
2017
2018
2019
Sales …………………………………………………
$4,000
$4,000
$4,000
Cost of goods sold …………………………....
Operating expenses …………………………..
Net income ………………………………….
$2,200
$2,000
$1,870
Income Statement
For the Year Ended December 31
FIFO
2017
2018
2019
Sales …………………………………………………
$4,000
$4,000
$4,000
Cost of goods sold …………………………..
820
940
1,100
Operating expenses …………………………..
1,000
1,000
1,000
Net income ………………………………….
$2,180
$2,060^^
$1,900^
(b) RAMIREZ CO.
Income Statement
For the Year Ended December 31
2019
2018
As adjusted (Note A*)
Sales …………………………………………………
$4,000
$4,000
Cost of goods sold …………………………..
Operating expenses …………………………..
EXERCISE 22.3 (Continued)
(c) Note A:
Change in Method of Accounting for Inventory Valuation
On January 1, 2019, Ramirez elected to change its method of valuing
its inventory to the FIFO method, whereas in all prior years inventory
2019
2018
Statement of Financial
Position
Average
FIFO
Difference
Average
FIFO
Difference
Inventory
$ 320
$ 390
$70
$ 200
$ 240
$40
Retained Earnings
Income Statement
Cost of Goods Sold
Net Income
Statement of Cash Flows
(No
Effect)
(** and ***) – Refer to part (d) below for detailed computations
[^ and ^^ refer to amounts from parts (a) and (b) of this exercise]
(d) Retained earnings statements after retrospective application.
2019
2018
Retained earnings, January 1, as reported
$2,200
Less: Adjustment for cumulative effect
EXERCISE 22.4 (25–30 minutes)
2016
(a) Retained earnings, January 1, as reported …………….. £160,000
2019
(b) Retained earnings, January 1, as reported …………….. £590,000
Cumulative effect of change in accounting
2020
(c) Retained earnings, January 1, as reported …………….. £780,000
Cumulative effect of change in accounting
2017 2018 2019
(d) Net Income ……………………….. £130,000 £293,000 £310,000
EXERCISE 22.5 (30–35 minutes)
(a) CARLTON COMPANY
Income Statement
For the Year Ended
2019
2018
Sales ………………………………………………………..
€3,000
€3,000
Cost of goods sold ……………………………………
1,100
940
Operating expenses ………………………………….
Income before profit sharing ……………….
€ 900
€1,060
Profit sharing expense ………………………………
Net income …………………………………………
(b) The profit sharing expense reflects an indirect effect of the change in
accounting policy. Under IFRS, indirect effects from periods before the
(c) Retained Earnings Statement
2019
Retained earnings, January 1, as reported ………………. €8,000
Cumulative effect of change to FIFO (€1,000 – €940) ….. 60
EXERCISE 22.6 (30–35 minutes)
(a) Depreciation to date on equipment
Sum-of-the-years’-digits depreciation
2016 (5/15 X €450,000) €150,000
2017 (4/15 X €450,000) 120,000
(b) Depreciation to date on building
€780,000/30 years = €26,000 per year
€26,000 X 3 = €78,000^ depreciation to date
Cost of building ……………………………………………… €780,000
EXERCISE 22.7 (25–30 minutes)
Change from sum-of-the-years-digits to straight-line
Depreciation for 2019 using straight-line depreciation
PANNEBECKER INC.
Retained Earnings Statement
For the Year Ended
2019
2018
Retained earnings, January 1, unadjusted ………..
$125,000
Less: Correction of error for inventory
overstatement ……………………………………….
(20,000)
Retained earnings, January 1, adjusted ……………
Add: Net income ……………………………………………
Retained earnings, December 31 ……………………..
Note to instructor:
1. 2018 Cost of sales increased $20,000; 2019 cost of sales decreased
2. 2018 expenses remained unchanged.
EXERCISE 22.7 (Continued)
5. Another acceptable presentation for the retained earnings statement
for 2019 is:
Retained earnings, January 1, as reported ……… $125,000
EXERCISE 22.8 (5–10 minutes)
1. b. 6. b.
2. b. 7. a.
EXERCISE 22.9 (15–20 minutes)
December 31, 2019
Retained Earnings (W44,000,000* X 9/55) ………………… 7,200,000
Cost of Machine W44,000,000*
Less: Depreciation prior to 2019
2016 (W44,000,000* X 10/55) W8,000,000
EXERCISE 22.10 (20–25 minutes)
(a) Computation of depreciation for 2019:
Cost of building £1,200,000
Less: Depreciation prior to 2019
2015 (£1,200,000 – £ 0) X .05* £60,000
(b) Computation of 2019 depreciation expense on the equipment:
Cost of equipment ………………………………………….. £130,000
Accumulated depreciation
EXERCISE 22.11 (10–15 minutes)
(a) No entry necessary. Changes in estimates are treated prospectively.
(b) Depreciation Expense ………………………………………. 27,000*
Accumulated Depreciation—Equipment ……… 27,000
EXERCISE 22.12 (20–25 minutes)
(a) Cost of plant assets €2,400,000
Less: Depreciation prior to 2019
2016 (€2,400,000 X .25*) €600,000
2019
2018
(b) Income before depreciation expense
€300,000
€370,000
Depreciation expense
EXERCISE 22.13 (10–15 minutes)
(a) The net income to be reported in 2019, using the retrospective approach,
would be computed as follows:
Income before income tax ………………………… $900,000
EXERCISE 22.14 (20–25 minutes)
(a) Retained Earnings ……………………………………………. 10,000
Inventory …………………………..………………………. 10,000*
*2016 € 3,000 (€26,000 – €23,000)
(b) Inventory …………………………………………………………. 10,000
Retained Earnings ……………………………………… 10,000*
2016 € 3,000 (€26,000 – €23,000)
EXERCISE 22.15 (15–20 minutes)
1. Accumulated Depreciation—Machinery …….. 30,600
Depreciation Expense ……………………….. 10,200(a)
2. Retained Earnings …………………………………… 45,000
Salaries and Wages Expense (sales) ….. 45,000