Exercise 20-3
This is a change in accounting principle.
($ in millions)
Common stock ($1 par x 4 million shares retired)……………………. 4
UMC applies the new way of reporting reacquired shares retrospectively; that is,
to all prior periods as if it always had used that method. In other words, all financial
statement amounts for individual periods affected by the change and that are included
20–22 Intermediate Accounting, 8/e
Exercise 20-4
Requirement 1
($ in millions)
Investment in equity securities ($48 million – 31 million) ……….. 17
Retained earnings (investment revenue from the equity method) 17
Requirement 2
Financial statements would be recast to reflect the equity method for each year
Requirement 3
When a company changes from the equity method, no adjustment is made to the
book value of the investment. Instead, the equity method is simply discontinued,
Exercise 20-5
Requirement 1
Access FASB Accounting Codification
Requirement 2
The specific citation that describes the guidelines for how to account for a change
Requirement 3
35-33 An investment in common stock of an investee that was previously
accounted for on other than the equity method may become qualified for use of the
equity method by an increase in the level of ownership (that is, acquisition of
Exercise 20-6
The FASB Accounting Standards Codification represents the single source of
1. Reporting most changes in accounting principle:
”
2. Disclosure requirements for a change in accounting principle:
3. Illustration of the application of a retrospective change in the method of
accounting for inventory:
Exercise 20-7
Requirement 1
($ in millions)
Inventory (additional amount due
Requirement 2
2016 2015
Income before income taxes $10.0 $8.0
20–26 Intermediate Accounting, 8/e
Exercise 20-7 (continued)
Requirement 3
Besides net income, which was reported in 2015 as $3 million ($5 million less tax)
and now revised to $4.8 million, other amounts that would be revised to reflect
accounting by the FIFO costing method are:
Earnings per share
The reason for the credit to deferred tax liability requires you to reflect back on
what you learned about accounting for income taxes. The reason is that an
accounting method used for tax purposes cannot be changed retrospectively for
Exercise 20-7 (concluded)
Requirement 4
In the retained earnings column of the comparative statements of shareholders’
equity, the beginning balance of 2015 retained earnings is revised to include any
adjusted as follows (not required):
Millington Supplies
Statement of Shareholders’ Equity
For the Years Ended Dec. 31, 2016 and 2015
($ in millions)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shareholders’
Equity
Balance at Jan. 1
9.0*
Net income
4.8
Cash dividends
Balance at Dec. 31, 2015
Exercise 20-8
Requirement 1
To record the change: ($ in millions)
Retained earnings (cost of goods sold higher; 2015 net income lower) 6
Inventory (cost of goods sold higher; inventory lower) ………….. 6
Requirement 2
Flay is unable to apply the LIFO cost method retrospectively. It does, however,
have sufficient information to apply the new method prospectively beginning in 2015.
Requirement 3
($ in millions) 2016 2015 2014
Exercise 20-9
Requirement 1
To record the change: ($ in millions)
Retained earnings ($23 million plus $7 million) …………………….. 30
Inventory (cost of goods sold higher; inventory lower) …………… 30
Requirement 2
If it is impracticable to revise all specific years reported, a change is applied
retrospectively as of the earliest year practicable. Wolfgang has information that
would allow it to revise all assets and liabilities on the basis of LIFO for 2015 in its
Requirement 3
($ in millions) 2016 2015 2014
20–30 Intermediate Accounting, 8/e
Exercise 20-10
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
Requirement 2
Asset’s cost $2,560,000
Accumulated depreciation to date (given) (1,801,000)
Adjusting entry (2016):
Depreciation expense (calculated above) …………………….. 200,000
Exercise 20-11
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
Requirement 2
Asset’s cost $800,000
Accumulated depreciation to date ($160,000 x 2) (320,000)
Adjusting entry:
Depreciation expense (calculated above) …………………….. 240,000
Accumulated depreciation ………………………………… 240,000
Not required:
Exercise 20-12
Requirement 1
April 1, 2016
Cash ……………………………………………………………………………. 36,000
Receivable—royalty revenue …………………………………….. 31,000
Royalty revenue ………………………………………………………. 5,000
Requirement 2
The fact that more royalty revenue was received in April than anticipated in
Exercise 20-13
1. This is a change in estimate.
To revise the liability on the basis of the new estimate:
Exercise 20-14
Requirement 1
Accrued liability and expense
Warranty expense (3% x $3,600,000) ……………………………………….. 108,000
Requirement 2
Actual expenditures (summary entry)
Estimated warranty liability ($50,000 – 23,000) …………………… 27,000
Exercise 20-15
Requirement 1
A deferred tax liability is established using the currently enacted tax rate for the
($ in millions)
Income tax expense (to balance)………………………………………… 10
Requirement 2
When a company revises a previous estimate, prior financial statements are not
Exercise 20-16
Requirement 1
This is a change in accounting estimate.
Requirement 2
When an estimate is revised as new information comes to light, accounting for the
Requirement 3
$800,000 Cost
$160,000 Old annual depreciation ($800,000 ÷ 5 years)
20–36 Intermediate Accounting, 8/e
Exercise 20-17
Requirement 1
Depreciation expense (determined below) .. 3,088
Accumulated depreciation ……………… 3,088
Calculation of annual depreciation after the estimate change:
$40,000 Cost
$7,200 Old annual depreciation ($36,000 ÷ 5 years)
Requirement 2
Depreciation expense (determined below) .. 3,889
Accumulated depreciation………………. 3,889
Calculation of annual depreciation after the estimate change:
$40,000 Cost
Exercise 20-18
EP 1. Change from declining balance depreciation to straight-line.
E 2. Change in the estimated useful life of office equipment.
R 7. Including in the consolidated financial statements a subsidiary acquired
several years earlier that was appropriately not included in previous
years.
Exercise 20-19
Requirement 1
The 2014 error caused 2014 net income to be understated, but since 2014 ending
Analysis: U = Understated
O = Overstated
2014 2015
Beginning inventory → Beginning inventory U
Plus: net purchases Plus: net purchases
Exercise 20-19 (concluded)
However, the 2015 error has not yet self-corrected. Both retained earnings and
inventory still are overstated as a result of the second error.
Analysis: U = Understated
O = Overstated
2015
Beginning inventory
Requirement 2
Retained earnings (overstatement of 2015 income) …………………… 150,000
Requirement 3
The financial statements that were incorrect as a result of both errors (effect of
Exercise 20-20
1. Error discovered before the books are adjusted or closed in 2016.
2. Error not discovered until early 2017.