Exercise 20-21
Requirement 1
The error caused both 2014 net income and 2015 net income to be overstated, so
retained earnings is overstated by a total of $85,000. Also, the note payable would be
Requirement 2
Retained earnings (overstatement of 2014–2015 income) ………….. 85,000
Requirement 3
The financial statements that were incorrect as a result of the errors would be
retrospectively restated to report the correct interest amounts, income, and retained
20–42 Intermediate Accounting, 8/e
Exercise 20-22
The 2016 interest expense is overstated by the extra interest recorded in
February. Similarly, retained earnings is overstated by the same amount because 2015
interest expense was understated when the accrued interest was not recorded.
To correct the error:
*ENTRIES THAT SHOULD HAVE BEEN RECORDED:
2015 adjusting entry:
Interest expense (5/6 x $73,200) …………………………. 61,000
Exercise 20-23
Error a
2015
Income Statement: Expenses understated, net income overstated.
Balance Sheet: Liabilities understated, retained earnings overstated.
2016
Retained earnings …………………………………………………………. 90,000
Rent revenue …………………………………………………………….. 90,000
Error c
2015
20–44 Intermediate Accounting, 8/e
Exercise 20-24
U = understated
O = overstated
NE = no effect
Cost of Net Retained
Goods Sold Income Earnings
1. Overstatement of ending inventory U O O
2. Overstatement of purchases O U U
Exercise 20-25
F 1. Change from expensing extraordinary repairs to capitalizing the
expenditures.
C 2. Change in the residual value of machinery.
CPA / CMA REVIEW QUESTIONS
CPA Exam Questions
1. b. The depreciation prior to the change is as follows:
SYD Depreciation:
2014 depreciation $11,400 ($34,200 x 5/15)
Since a change in depreciation method is considered a change in
accounting estimate resulting from a change in accounting principle, Kap
reports the change prospectively, just like a change in estimate. Kap
depreciates the remaining undepreciated cost on a straight-line basis over the
remaining useful life:
Asset’s cost $36,000
2. b. Most changes in accounting principle are accounted for retrospectively. That is,
3. a. The change in the estimate for warranty costs is based on new information
obtained from experience and qualifies as a change in accounting estimate. A
CPA Exam Questions (continued)
4. b. This is a change in reporting entity to be accounted for retrospectively. That is,
5. b. The insurance premiums of $60,000 were charged in error to insurance expense
on the 2015 income statements. The premiums should have been allocated
6. c. The $60,000 understated ending inventory would cause the 2015 cost of goods
sold to be overstated, understating net income and retained earnings. That same
IFRS CPA Exam Questions
7. b According to IAS 8: Accounting Policies, Changes in Accounting Estimates and
Errors, a change in accounting policy normally should be recognized
20–48 Intermediate Accounting, 8/e
CPA Exam Questions (continued)
8. d Errors discovered in reporting periods subsequent to the error that has occurred
should be recognized in the financial statements as if the error had not occurred
by restating those financial statements both in all periods affected and
cumulatively in opening retained earnings for the earliest period presented if the
9. d IAS 8 states that a change in accounting policy because of the entity’s initial
application of an IFRS should be applied in accordance with the transitional
guidance in that IFRS. If the IFRS does not include specific transitional
guidance or if the change is being made voluntarily, the change should be
CPA Exam Questions (concluded)
10. c Errors discovered in reporting periods subsequent to the error that has occurred
should be recognized in the financial statements as if the error had not occurred
by restating those financial statements both in all periods affected and
cumulatively in opening retained earnings for the earliest period presented if
11. a According to IAS 8: Accounting Policies, Changes in Accounting Estimates
12. c Upon first-time adoption of IFRS, an entity may elect to use fair value as
13. a A company’s first IFRS financial statements must include at least three balance
sheets and two of each of the other financial statements. If the company’s first
14. a
15. b LIFO is not a permissible method for accounting for inventory under IFRS.
20–50 Intermediate Accounting, 8/e
CMA Exam Questions
1. d. A change in the liability is merely a change in an estimate; it is not a change in
2. a. Prior-period adjustments (error corrections) are to be accounted for through
retained earnings, not the income statement. Thus, the beginning balance of
3. c. The correction of an error in the financial statements of a prior period is
Problem 20-1
Requirement 1
To record the change:
Inventory ($155,000 – 120,000) ………………………………………….. 35,000
.
Requirement 2
COMPARATIVE INCOME STATEMENTS
2016 2015
Income from continuing operations $525,000 $399,000*
*$400,000 less 1,000‡ = $399,000 if FIFO had been used
‡ Calculation of decrease in 2015 pretax income:
$160,000 – 124,000 = $36,000 increase in 2015 beginning inventory
PROBLEMS
Problem 20-2
Requirement 1
Inventory (additional amount due to the new method) …….. 39,000
Income tax payable ($39,000* x 40%) ……………………………. 15,600
Retained earnings (difference) ………………………………………. 23,400
*……………………………………………………………………………………………………….
Note: Notice that the income tax effect is reflected in the income tax payable
account. The reason is that, unlike for other accounting method changes,
Requirement 2
2016 2015
Income before income taxes $51,000 $45,000
Problem 20-2 (concluded)
Requirement 3
Pyramid Company
Statement of Shareholders’ Equity
For the Years Ended Dec. 31, 2016 and 2015
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shareholders’
Equity
Balance at Jan. 1 *
50,000
180,000
54,000
284,000
income increases retained earnings.
Problem 20-3
1. This is a change in accounting principle to be recorded retrospectively.
($ in 000s)
Weihrich will recast its financial statements to appear as if the average method
always had been used. It also will reduce retained earnings to the balance it would
2. This is a change in accounting principle that usually is reported prospectively.
No entry is needed to record the change.
3. This is a change in accounting principle to be partially recorded retrospectively.
($ in 000s)
Retained earnings ($750 – 540) ……………………………………….. 210
Problem 20-4
Requirement 1
To record the change:
Retained earnings (net effect) ………………………………………….. 12,000
Deferred tax asset ($20,000 x 40%) ……………………………………. 8,000
Requirement 2
Rockwell will recast its financial statements to appear as if the average method
always had been used. This will include reporting cost of goods sold in the income
statement and inventory in the balance sheet for 2016 using the newly adopted
average method.
Average cost method cost of goods sold:
Beginning inventory (5,000 units) $130,000
Cost of ending inventory:
20–56 Intermediate Accounting, 8/e
Problem 20-5
Requirement 1
January 1, 2016
($ in millions)
Inventory (additional inventory if FIFO had been used) …………………. 20
Retained earnings (additional net income if FIFO had been used) .. 12*
Deferred tax payable (40% x $20 million) …………………………... 8
* Prior to 2016, using FIFO:
Inventory would have been higher by $20, so
For financial reporting purposes, but not for tax, the company is retrospectively
increasing accounting income, but not taxable income. This creates a temporary
Requirement 2
Net income, which was reported in 2015 as $28 million, would be revised to $30
Problem 20-5 (concluded)
Requirement 3
Fantasy Fashions
Statement of Shareholders’ Equity
For the Years Ended Dec. 31, 2016 and 2015
($ in millions)
Common
Stock
Retained
Earnings
Total
Shareholders’
Equity
Balance at Jan. 1, 2015
2501
Balance at Dec. 31, 2015
A disclosure note would describe the change and justify the new method as
preferable. It also would describe the effects of the change on all items affected,
including the fact that the January 1, 2015, balance in the statement of shareholders’
Problem 20-6
Requirement 1
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 the
depreciation method is similar to changing the economic useful life of a depreciable
Asset’s cost $21,000
Accumulated depreciation (SYD) to date (given) (6,909)
Undepreciated cost, Jan. 1, 2016 $14,091
Adjusting entry (2016 depreciation):
Depreciation expense (calculated above) ………………………………………. 1,636
Problem 20-6 (concluded)
Requirement 2
If Faulkner switched to sum-of–the-years’ digits with eight years remaining, it
reports the change prospectively; previous financial statements are not revised.
Instead, the company employs the SYD method from then on. The undepreciated cost
remaining at the time of the change would be depreciated by the SYD method over the
remaining useful life.
Asset’s cost $21,000
Adjusting entry (2016 depreciation):
Depreciation expense (calculated above) ……………………………………… 3,556
20–60 Intermediate Accounting, 8/e
Problem 20-7
Requirement 1
Cost of mineral mine:
Depletion:
$2,200,000 – 100,000
Depletion per ton = = $5.25 per ton
400,000 tons
Depreciation:
Structures:
$150,000
Depreciation per ton = = $.375 per ton
400,000 tons