EXERCISE 22.12 (20–25 minutes)
(a) Computation of depreciation for 2021:
Cost of building $800,000
Less: Depreciation prior to 2021
2017 ($800,000 – $0) X .05* $40,000
2018 ($800,000 – $40,000) X .05 38,000
(b) Computation of 2021 depreciation expense on the equipment:
Cost of equipment $100,000
Less: Accumulated depreciation
EXERCISE 22.13 (10–15 minutes)
(a) No entry necessary. Changes in estimates are treated prospectively.
(b) Depreciation Expense ……………………………………….. 19,375*
Accumulated Depreciation—Equipment ………. 19,375
EXERCISE 22.14 (20–25 minutes)
(a) Cost of equipment $1,600,000
Less: Depreciation prior to 2021
2021
2020
(b) Income before depreciation expense
$300,000
$270,000
EXERCISE 22.15 (15–20 minutes)
1. Accumulated Depreciation—Equipment …………….. 25,500
Depreciation Expense ………………………………… 8,500
Retained Earnings ……………………………………… 17,000
2019–2020
2021
Depreciation taken
$170,000*
$85,000
Less: Depreciation (correct)
$ 8,500
EXERCISE 22.15 (Continued)
4. Amortization Expense …………………………………….. 2,250
Retained Earnings ………………………………………….. 4,500
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 …………………………………………………. 37,700
Inventory ……………………………………………………….. 16,200
Accumulated Depreciation—Equipment …………… 21,500
($38,500 – $17,000)
Computations:
Effect on retained earnings
over (under) statement
($16,200
( (17,000)
( 38,500
($37,700
EXERCISE 22.18 (25–30 minutes)
(a) Effect of errors on 2021 net income: $24,700 overstatement
Computations:
Effect on 2021 net income
over (under) statement
Understatement of 2020 ending inventory
($ 9,600
(b) Effect of errors on working capital: $28,900 understatement
Computations:
Effect on working capital
over (under) statement
Overstatement of 2021 ending inventory
$( 8,100
(c) Effect of errors on retained earnings: $26,600 understatement
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2021 ending inventory
$( 8,100
Failure to record sale of fully depreciated
Total effect on retained earnings
EXERCISE 22.19 (20–25 minutes)
(a) 1. Supplies Expense ($2,700 – $1,100) ……………… 1,600
Supplies ………………………………………………. 1,600
2. Salary and Wages Expense ………………………….. 2,900
($4,400 – $1,500)
Salaries and Wages Payable …………………. 2,900
6. Depreciation Expense …………………………………. 45,000
($50,000 – $5,000)
Accumulated Depreciation—Equipment … 45,000
7. Retained Earnings ………………………………………. 7,200
Accumulated Depreciation—Equipment … 7,200
(b) 1. Retained Earnings ………………………………………. 1,600
Supplies ………………………………………………. 1,600
EXERCISE 22.19 (Continued)
(c) 6. Retained Earnings ………………………………………. 27,000
Income Taxes Receivable ……………………………. 18,000*
EXERCISE 22.20 (20–25 minutes)
2020
2021
Income before tax
$101,000
$77,400
Corrections:
Sales erroneously included in 2020 income
(38,200)
38,200
Understatement of 2020 ending inventory
8,640
(8,640)
Adjustment to bond interest expense*
Corrected income before tax
*Bond interest expense for 2020 and 2021 was computed as follows:
Book Value of Bonds
Stated Interest
Effective Interest
2020
$235,000
$15,000
$16,450**
2021
236,450
15,000
16,552*
EXERCISE 22.20 (Continued)
***Erroneous depreciation taken in 2021:
EXERCISE 22-21 (10–15 minutes)
2020
2021
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
*EXERCISE 22.22
A computation of the ending balance in the investment account of Elton
John Corp. is made as follows:
Investment in Elton John Corp. 1/1/20 $1,400,000
*EXERCISE 22.23 (15–20 minutes)
(a) Prior to January 2, 2020, Aykroyd Corp. carried the Investment in
Martin Company under the equity method of accounting as evidenced
from the entries in the investment account. Use of the equity method
was appropriate because Aykroyd’s interest in Martin exceeded 20%.
*EXERCISE 22.23 (Continued)
(b) The carrying amount of the investment in Martin as of December 31,
2020, would be computed as follows:
Carrying amount, 12/31/19 (from the given
account information) $3,690,000
bComputation of Excess Dividends Received over Share of Earnings:
Dividends
Received
Share of Martin Co.
Income
Excess Dividends Received
Over Share of Earnings
2020
$50,400
$36,000c
$(14,400)
c$300,000 X 12% = $36,000
Note to instructor: The entry in 2020 to record the receipt of the
dividend would be:
(c) The entry to recognize the excess of fair value over the carrying
amount of the securities is as follows:
December 31, 2020
TIME AND PURPOSE OF PROBLEMS
Problem 22.1 (Time 30–35 minutes)
Purpose—to develop an understanding of the impact that a change in the method of inventory pricing
Problem 22.2 (Time 30–35 minutes)
Purpose—to provide a problem that requires the student to: (1) account for a change in estimate,
Problem 22.3 (Time 30–40 minutes)
Purpose—to develop an understanding of the way in which accounting changes and error corrections
Problem 22.4 (Time 30–40 minutes)
Problem 22.5 (Time 40–50 minutes)
Purpose—to allow the student to see the impact of accounting changes on income and to examine an
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
are required for changes in accounting policies and accounting errors. This comprehensive problem
*Problem 22.11 (Time 20–25 minutes)
Purpose—to provide the student with a problem involving an investment that grows from 10% to 40%
*Problem 22.12 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the proper entries to reflect a change from
SOLUTIONS TO PROBLEMS
PROBLEM 22.1
UTRILLO INSTRUMENT COMPANY
Statement of Income and Retained Earnings
For the Years Ended May 31
2016
2017
2018
2019
2020
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
13,000
13,900
15,000
15,900
17,100
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
Adjustment (See note* and
schedule)
5
12
51
78
132
As restated
1,211
1,400
1,810
2,315
3,137
Retained earnings—ending
Earnings per share (100 shares)
*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
PROBLEM 22.1 (Continued)
In 2020, the Company changed its method of pricing inventory from the
last-in, first out (LIFO) 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
2016
2017
2018
2019
2020
Schedule of Income Reconciliation
and Retained Earnings Adjustments
2016–2020
2015
2016
2017
2018
2019
2020
Beginning Inventory LIFO
$1,000
$1,100.00
$1,000.00
$1,115.00
$1,237.00
Average Cost
1,010
1,124.00
1,101.00
1,500.00
Difference
Effect on Income*
$ (12.00)
$ (131.50)
Ending Inventory LIFO
$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%)
12
175.50
Effect on Income**
$ 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 22.2
(a) 1. Cost of equipment ………………………………………………….. $85,000
Less: Salvage value ……………………………………………….. 5,000
Depreciable cost ……………………………………………………. $80,000
Depreciation to 2020
Depreciation in 2020
Cost of equipment ………………….. $85,000
Less: Depreciation to 2020 …….. 24,000
2. Cost of Building …………………………….. $300,000
Less: Depreciation to 2020
2018…………………………………….. 60,000
PROBLEM 22.2 (Continued)
3. Depreciation Expense ($120,000 – $16,000) ÷ 8 ….. 13,000
Accumulated Depreciation—Machinery ……… 13,000
Accumulated Depreciation—Machinery …………….. 3,000
Retained Earnings …………………………………….. 3,000
Depreciation
taken
Depreciation that
should be taken
Differences
2018
$ 7,500
$ 6,500
$1,000
$3,000
(b) HOLTZMAN COMPANY
Comparative Income Statements
For the Years 2020 and 2019
2020
2019
Income before depreciation expense………………..
$300,000
$310,000
Net income ……………………………………………………..
$252,250
$241,000
*Depreciation Expense
$ 14,500
$ 8,000
(a) 1. Bad debt expense for 2018 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.
2. A change from LIFO to FIFO is considered a change in accounting
(b) BOTTICELLI INC.
Comparative Income Statements
For the Years 2018 through 2021
2018
2019
2020
2021
Net income (see below)
$145,000
$165,000
$201,000
$274,000
2018
2019
2020
2021
PROBLEM 22.3
PROBLEM 22.4
1. Retained Earnings …………………………………………….. 3,500
2. Cost of Goods Sold ($19,000 + $6,700) ……………….. 25,700
Retained Earnings ………………………………………. 19,000
Inventory ……………………………………………………. 6,700
Income Overstated (Understated)
3. Accumulated Depreciation—Equipment ……………… 4,800
Depreciation Expense …………………………………. 4,800*
4. Construction in Process ……………………………………. 45,000
Deferred Tax Liability ………………………………….. 9,000*
PROBLEM 22.5
(a) ASTON CORPORATION
Projected Income Statement
For the Year Ended December 31, 2020
Sales …………………………………………….. $28,995,000
Interest revenue …………………………….. 5,000
Cost of goods sold ………………………… $14,000,000
Conditions met:
1. Net income before taxes and bonus > $7,000,000.
aDepreciation for the current year includes $600,000 for the old equip-
ment and $2,000,000 for the robotic equipment. If the robotic equipment
PROBLEM 22.5 (Continued)
(b) Students’ answers will vary.
There is nothing unethical about changing the first-year election of
depreciation back to the straight-line method provided that it meets with
the approval of appropriate corporate decision makers. Considering the
immediate needs for cash of $1,000,000 for the president’s bonus and
$1,200,000 for income taxes, there may be a need to sell some of the
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.
Board of Directors
May be subject to the manipulations of the CEO
plan for all of the employees.
PROBLEM 22.6
(a) 1. Depreciation Expense ………………………………… 94,500
Accumulated Depreciation—Equipment .. 94,500
2. Depreciation Expense ………………………………… 25,800
Accumulated Depreciation—
Equipment ………………………………………. 25,800
Computations:
3. Equipment (Asset C) ………………………………….. 160,000
Accumulated Depreciation—Equipment