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PROBLEM 22.7 (Continued)
(9)
(10)
Amortization Expense ($50,000 ÷ 10) ................................ 5,000
Retained Earnings .............................................................. 5,000
Trademarks ................................................................. 10,000
LO: 3,4, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
PROBLEM 22.8
Net Income for 2018
Retained Earnings 12/31/19
Item
Understated
Overstated
Understated
Overstated
1.
£14,100
0
0
0
Explanations:
1. The net income would be understated in 2018 because interest income
is understated. The net income would be overstated in 2019 because
2. The depreciation expense in 2018 should be £500 for this machine.
Since the machine was bought on July 1, 2018, only one-half of a year’s
3. IFRS requires that all research costs should be expensed when
incurred. Net income in 2018 is overstated £22,000 (£33,000 research
PROBLEM 22.8 (Continued)
4. The security deposit of £20,000 should be a long-term asset, called
refundable deposits. The £8,000 of the last month’s rent is also an
5. £12,000 or one-third of £36,000 should be reported as income each
year. In 2018, £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-
PROBLEM 22.9
2018
2019
Net income, as reported
€29,000
€37,000
(1) Rent received in 2018, earned in 2019
(1,000)
1,000
(2) Salaries and Wages not accrued, 12/31/17
1,100
PROBLEM 22.10 (Continued)
(b) ROBERTS COMPANY
Journal Entries
March 31, 2019
Sales .......................................................................... 5,590(a)
Inventory on Consignment ....................................... 4,472(b)
Cost of Goods Sold ........................................... 4,472(b)
recorded, 3/31/18)
Warranty Expense ..................................................... 5,067(d)
Retained Earnings ($3,908(e) + $3,443(f)) .................... 7,351
Estimated Liability Under Warranties .............. 12,418
($5,067 + $7,351)
(To set up allowance for warranty
expense)
PROBLEM 22.10 (Continued)
Commissions Expense.................................................... 220(o)
Retained Earnings ($1,400(m) – $500(m)) ............................ 900
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 IFRS related to
correction of an error, plus the necessary reporting requirements for each proposal.
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 IFRS 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
in the accounting records to facilitate analysis and understanding of financial statements. This case
treatment that each should be given.
CA 22.5 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain how to account for various accounting
change situations. Explanations for two changes in estimate are communicated in a written letter.
CA 22.6 (Time 20–30 minutes)
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 22.1
2. Depreciation.
3. Mathematical Error. This is a correction of an error and prior period adjustment 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 Average-Cost Change. This is a change in accounting policy. Restatement of
6. Percentage-of-Completion. This is a change in accounting policy. Retained earnings
should be adjusted.
(b) The adjustment to the December 31, 2018 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 policy.
Yes
2.
A change in an accounting estimate.
No
3.
An accounting change involving both a change in accounting
No
CA 22.3
Situation 1.
(a) A change from an accounting policy 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
Situation 2.
(a) The change in method of inventory pricing represents a change in accounting policy, as defined
by IFRS.
CA 22.3 (Continued)
Situation 3.
(a) A change in the depreciable lives of fixed assets is a change in accounting estimate.
CA 22.4
1. This situation is a change in estimate. Whenever it is impossible to determine whether a change
in policy or a change in estimate has occurred, the change should be considered a change in
estimate. A change in estimate employs the current and prospective approach by:
2. 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.
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
was obviously computed incorrectly because of lack of expertise or in bad faith, the adjustment
should be considered an error. Changes due to error should employ the retroactive approach by:
4. No adjustment is necessary—a change in accounting policy is not considered to have happened if
a new policy is adopted in recognition of events that have occurred for the first time.
CA 22.4 (Continued)
6. This situation is considered a change in accounting policy. A change in accounting policy should
employ the retrospective approach by:
CA 22.5
Mr. Joe Davison, CEO Sports-Pro Athletics
Dear Mr. Davison:
You recently contacted me about two accounting changes made at Sports-Pro Athletics, Inc. in 2019.
This letter details how you should account for each change.
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 was
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) According to note 1 (accounting policies - new standards adopted by
the Group), there have been no significant changes to accounting
(b) According to note 1 (accounting policies – critical accounting
estimates and judgements), the estimates M&S discussed in 2016 were
COMPARATIVE ANALYSIS CASE
Puma vs. adidas
(a) and (c) for Puma (according to note 1 – general):
The following new and amended standards and interpretations have been
used for the first time in the current financial year:
(b) and (c) for adidas (according to note 1 – general):
The following new standards and interpretations and amendments to
existing standards and interpretations are applicable for the first time for
financial years beginning on January 1, 2015:
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ABC CO.
Statement of Financial Position
at December 31
2019 2018 2019 2018
PPE $ 400 $ 400 Share capital $ 500 $ 500
ABC CO.
Income Statement
for the Year Ended December 31,
2019 2018
Sales ................................................................................. $550 $500
Cost of goods sold .......................................................... 330 290
Depreciation expense ..................................................... 40 40
Compensation expense .................................................. 17 15
Net income ....................................................................... $163 $155
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
ANALYSIS
Average cost (as reported):
Inventory turnover = $300 ÷ $500 = 0.60
FIFO:
PRINCIPLES
The issue is consistency across time. When a company changes accounting
policies, financial statements from one period are not really comparable to
RESEARCH CASE
(b) According to paragraph 14, “An entity shall change in accounting only if
the change:
(1) is required by an IFRS; or
GAAP CONCEPTS and APPLICATION
GAAP22.1 U.S. GAAP absolutely requires restatement of prior financial
statements for all accounting errors while IFRS allows for
GAAP22.2 U.S. GAAP has detailed guidance on the accounting and
reporting of indirect effects. U.S. GAAP requires that indirect
GAAP22.3 There is a difference between U.S. GAAP and IFRS related to
how the investor evaluates the accounting policies of the
investee. For example, if the investee uses an inventory
