PROBLEM 22.6 (Continued)
(b) MADRASA INC.
Comparative Retained Earnings Statements
For the Years Ended
2020
2019
Retained earnings, January 1, as previously
reported
$200,000
*Amount expensed incorrectly in 2016 ……………….. $160,000
Depreciation to be taken to January 1, 2019
($16,000 X 3) …………………………………………………. (48,000)
Prior period adjustment for income …………………… $112,000
PROBLEM 22.7
(1)
Depreciation Expense …………………………………………… 3,200
Accumulated Depreciation—Equipment ………….. 3,200
(2)
(4)
Accumulated Depreciation—Equipment …………………. 25,000
Equipment …………………………………………………….. 21,300
Gain on Disposal of Plant Assets ……………………. 3,700
(5)
Lawsuit Loss ………………………………………………………… 125,000
Lawsuit Liability …………………………………………….. 125,000
PROBLEM 22.7 (Continued)
(9)
(10)
Amortization Expense ($50,000 ÷ 10) ………………………….. 5,000
PROBLEM 22.8
Net Income for 2019
Retained Earnings 12/31/20
Item
Understated
Overstated
Understated
Overstated
Explanations:
1. The net income would be understated in 2019 because interest income
is understated. The net income would be overstated in 2020 because
2. The depreciation expense in 2019 should be $500 for this machine.
Since the machine was bought on July 1, 2019, only one-half of a year’s
3. GAAP requires that all research and development costs should be ex–
pensed when incurred. Net income in 2019 is overstated $22,000 ($33,000
PROBLEM 22.8 (Continued)
4. The security deposit should be a long-term asset, called refundable
deposits. The $8,000 of the last month’s rent is also an asset, called
5. $12,000 or one-third of $36,000 should be reported as income each
year. In 2019, $36,000 was reported as income when only $12,000
6. The ending inventory would be understated since the merchandise was
omitted. Because ending inventory and net income have a direct relation-
ship, net income in 2019 would be understated. The ending inventory
PROBLEM 22.9
2019
2020
Net income, as reported
$29,000
$37,000
Rent received in 2019, earned in 2020
(1,000)
1,000
Salaries and Wages not accrued, 12/31/18
1,100
Salaries and Wages not accrued, 12/31/19
Salaries and Wages not accrued, 12/31/20
Inventory of supplies, 12/31/18
(1,300)
Inventory of supplies, 12/31/19
Inventory of supplies, 12/31/20
Corrected net income
Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 22-47
Additional expense
$ 1,584
$ 1,237
$ 608
(1,584)
(1,237)
(608)
6. Adjustment for contract financing
3,000
3,900
5,100
7. Adjustment for commissions
(1,400)
500*
(220)**
66,408
118,520
95,567
8. Adjustment for bonus, 1%
of income before taxes and bonus
(664)
(1,185)
(956)
Income before income taxes
$65,744
$117,335
$ 94,611
*$1,400 – $900
**$900 –$1,120
1. Income before income taxes, as reported
$71,600
$111,400
$103,580
2. Elimination of profit on consignments:
Billed
$ 6,500
$ 5,590
at 125% of cost
÷ 125%
Cost
4,472
Profit error
$ 1,300
$ 1,300
$ 1,118
(1,300)
1,300
3. To correct C.O.D. sale
6,100
4. Adjustment of warranty expense:
Sales per books
$940,000
Correction for consignments
Correction for C.O.D. sale
Corrected sales
$933,500
Normal warranty expense, one-half of 1%
$ 4,668
$ 5,113
$ 8,917
Less costs charged to expense
3,850
Additional expense
$ 3,908
$ 3,443
$ 5,067
(3,908)
(3,443)
1% of sales
$ 2,334
$ 2,557
$ 4,458
Less previous write-offs
3,850
PROBLEM 22.10 (Continued)
(b) 2. Sales Revenue …………………………………………….. 5,590
Inventory on Consignment ……………………………. 4,472
3. Sales Revenue …………………………………………….. 6,100
Retained Earnings ……………………………………… 6,100
(To adjust for C.O.D. sales not
recorded
4. Warranty Expense ………………………………………… 5,067
Retained Earnings ($3,908 + $3,443) ……………… 7,351
6. Due to Customer …………………………..……………… 12,000
Finance Expense ……………………………………….. 5,100
Retained Earnings ($3,000 + $3,900) ……………. 6,900
(To record finance charge reserve
held by bank)
*PROBLEM 22.11
(a) MILLAY INC.
Schedule of Income or Loss from Investment
For Year Ending December 31, 2020
(b) MILLAY INC.
Schedule of Income or Loss from Investment
For Years Ending December 31, 2021 and 2020
2021
2020
Income from investment in Genso
(Schedule 1)
$170,000
$55,000
Income for 2020 ($550,000 X 10%)
Income for 2021 ($300,000* X 10%)
30,000
*PROBLEM 22.12
January 3, 2019
Equity Investments ……………………………………………….. 500,000
Cash ……………………………………………………………… 500,000
December 31, 2019
Fair Value Adjustment ($560,000 − $500,000) ………….. 60,000
Unrealized Holding Gain or Loss—Income ………. 60,000
(To recognize as part of stockholders’ equity
the increase in fair value of equity
securities)
December 31, 2020
*PROBLEM 22.12 (Continued)
January 2, 2021
Equity Investments (Renner Corp.) ………………………. 1,545,000
Computation of Prior Period Adjustment
January 2, 2021
Equity Investments (Renner Corp.) ……………………. 500,000
Equity Investments …………………………..……….. 500,000
*PROBLEM 22.12 (Continued)
December 31, 2021
Equity Investments (Renner Corp.). ……………………….. 220,000
Investment Revenue ……………………………………… 220,000
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 22.1 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the applications of GAAP related to
CA 22.2 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the application and reporting requirements of
CA 22.3 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of GAAP and its respective applications. This case
CA 22.4 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of how changes in accounting can be reflected
CA 22.5 (Time 20–30 minutes)
CA 22.6 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain the ethical issues related to changes in
estimates.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 22.1
(a) 1. Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement
of prior periods is not appropriate.
2. Depreciation.
3. Mathematical Error. This is a correction of an error and prior period treatment would be in
order.
4. Preproduction Costs—Furniture Division. This should probably be construed as an
inseparability situation in that the change in accounting estimate (period benefited by
5. FIFO to LIFO Change. This is a change in accounting principle. Restatement of December 31,
2019 retained earnings is not appropriate, given that the effect on net income in prior periods
6. Percentage of Completion. This is a change in accounting principle. Retained earnings
should be adjusted.
(b) The adjustment to the December 31, 2019 retained earnings balance would be computed as
follows:
CA 22.2
Item
Change
Type of Change
Should Prior
Years’ Statements
Be Retrospectively
Applied or Restated?
1.
A change in accounting principle.
Yes
2.
A change in an accounting estimate.
No
3.
Handle as a change in estimate.
An accounting change involving both a change in accounting
No
4.
Not an accounting change but rather a change in classification.
Yes
5.
An error correction not involving a change in accounting principle.
Yes
which is a special type of change in accounting principle.
accounting.
principle to another generally accepted accounting principle.
be in prior periods.
CA 22.3
Situation 1.
(a) A change from an accounting principle not generally accepted to one generally accepted is a
correction of an error.
(b) When comparative statements are presented, net income, components of net income, retained
earnings, and any other affected balances for all periods presented should be restated to correct
CA 22.3 (Continued)
Situation 2.
(a) The change in method of inventory pricing represents a change in accounting principle, as
defined by GAAP.
(b) Changes in accounting principle are accounted for through retrospective application. Under this
Situation 3.
(a) A change in the depreciable lives of fixed assets is a change in accounting estimate.
(b) In accordance with GAAP, the change in estimate should be reported in the current period and in
CA 22.4
1. This situation is a change in estimate. Whenever it is impossible to determine whether a change
in principle or a change in estimate has occurred, the change should be considered a change in
estimate. This is often referred to as a change in accounting estimate effected by a change in
accounting principle. A change in estimate employs the current and prospective approach by:
3. This situation is considered a correction of an error. The general rule is that careful estimates
which later prove to be incorrect should be considered changes in estimates. Where the estimate
CA 22.4 (Continued)
(b) Correcting all prior period statements presented in comparative financial statements. The
5. This situation is considered a change in estimate because new events have occurred which call
for a change in estimate. The accounting should be the same as discussed in 1.
6. This situation is considered a change in accounting principle. A change in accounting principle
should employ the retrospective approach by:
CA 22.5
Mr. Joe Davison, CEO Sports-Pro Athletics, Inc.
Dear Mr. Davison:
You recently contacted me about several accounting changes made at Sports-Pro Athletics, Inc. in
2020. This letter details how you should account for each change.
Your change from one method of depreciation to another constitutes a change in accounting estimate
effected by a change in accounting principle. A change in estimate employs the prospective approach
by reporting current and future financial statements on the new basis. Prior periods financial statements
are presented as previously reported.
CA 22.6
(a) The ethical issues are the honesty and integrity of Frost’s financial reporting practices versus the
Corporation’s and the accounting manager’s profit motives. Shortening the life of fixed assets
from 10 to 6 years may be evidence that depreciation expense during the first five years were
understated. Such a practice distorts Frost’s operating results and misleads users of Frost’s
financial statements. If this practice is intentional, it is unethical.
FINANCIAL REPORTING PROBLEM
(a) New Accounting Pronouncements and Policies
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606).” This guidance outlines a single, comprehensive
model for accounting for revenue from contracts with customers. We plan
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes.” This guidance
simplifies the presentation of deferred taxes on the balance sheet by
requiring that all deferred tax assets and liabilities be classified as non–
current. The new standard is effective for us beginning July 1, 2017, with
early adoption permitted. We elected to early adopt the new guidance on a
FINANCIAL REPORTING PROBLEM (Continued)
In March 2016, the FASB issued ASU 2016-09, “Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting,”
which changes the accounting for certain aspects of share-based
payments to employees. The new guidance requires excess tax benefits
(which represent the excess of actual tax benefits received at vest or
settlement over the benefits recognized at issuance of share-based
payments) and tax deficiencies (which represent the amount by which
actual tax benefits received at vest or settlement is lower than the benefits
during fiscal year 2017. We also elected to adopt the cash flow presentation
of the excess tax benefits prospectively commencing in the first quarter of
fiscal 2017. We have elected to continue to estimate forfeitures expected to
occur to determine the amount of compensation cost to be recognized in
each period. The adoption of this amended guidance did not have a
material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and