Problem 20-16
a. Investments ($220,000 – 180,000) ………………………………….. 40,000
Gain on sale of investments ……………………………………. 40,000
b. Unrealized loss–OCI ………………………………………………… 16,000
Fair value adjustment (calculated below) …………………… 16,000
Fair value adjustment calculation:
c. Loss–lawsuit ……………………………………………………………. 130,000
Liability—lawsuit …………………………………………………. 130,000
d. Cost of goods sold ……………………………………………………. 132,000
Inventory ……………………………………………………………… 132,000
e. Property, plant, and equipment (amount expensed in error) …. 80,000
Income tax payable ($80,000 x 40%)………………………….. 32,000
20–82 Intermediate Accounting, 8/e
Problem 20-16 (concluded)
Income taxes:
Taxable income (same as pretax accounting income
before temporary differences), as reported $1,280,000
Add: Realized gain on sale of investments (a) 40,000
Future deductible amounts (not included in taxable income):
Lawsuit expected to be settled in 2019 (c) $130,000
Unrealized loss on investments (b) 16,000
Total future deductible amounts $146,000
Problem 20-17
Requirement 1
If GYI had recorded the purchase correctly, depreciation would have been $100,000
per year in the financial statements for 2013, 2014, and 2015. Deductions on the tax
In addition, because using straight-line depreciation in the income statement and
MACRS on the tax return creates a temporary difference, GYI needs to record a
deferred tax liability for the remaining seven years. After three years, the cumulative
temporary difference (and thus the future deductible amount) is $262,700 as indicated
in the table below. The deferred tax liability is the tax rate times that cumulative
temporary difference, $105,080:
Year
MACRS
Deductions
Straight-
Line
Depreciation
Difference
Cumulative
Temporary
Difference
Deferred
Tax
Liability
Correcting entry:
Machinery (cost) 1,000,000
Accumulated depreciation (S–L depr: $100,000 x 3 years) 300,000
20–84 Intermediate Accounting, 8/e
Problem 20-17 (concluded)
Requirement 2
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct depreciation, assets, and retained earnings
Requirement 3
Adjusting entry:
Depreciation expense 100,000
Accumulated depreciation 100,000
CASES
Integrating Case 20-1
1. Webster’s dollar-value LIFO inventory at December 31, 2017 and 2018, is
calculated as follows:
Year Inventory Divided Inventory Layers
at by At Base At Base Times Inventory
FIFO Index Year Cost Year Cost Index at DVL
2016 $300,000 1.00 $300,000 $300,000 1.00 $300,000
2. When a company changes to the LIFO inventory method from another inventory
method, accounting records usually are insufficient to determine the cumulative
income effect of the change required to apply the new method retrospectively. So,
20–86 Intermediate Accounting, 8/e
Communication Case 20-2
Requirement 1
Change in Inventory Method
During 2016, the Company changed the method of valuing its inventories from the
first-in, first-out (FIFO) method, to the last-in, first-out (LIFO) method, determined
by the retail method. To estimate the effects of changing retail prices on
Note: Because cost of goods sold would have been $22 million lower if the change
Requirement 2
It usually is impracticable to calculate the cumulative effect of a change to LIFO.
To do so would require assumptions as to when specific LIFO inventory layers were
Ethics Case 20-3
Discussion should include these elements.
How would the actions suggested contribute toward “softening” the bad
news?
The choice of inventory method will affect earnings. FIFO will increase
reported net income in a period of rising prices. However, FIFO also will cause
an increase in taxes paid.
20–88 Intermediate Accounting, 8/e
Case 20-3 (concluded)
Ethical Dilemma:
Is the auditor’s obligation to challenge the questionable change in methods
Who is affected?
You, the auditor
Managers
CPA firm (lost fees? reputation? legal action?)
Analysis Case 20-4
For changes not involving LIFO or changes from the LIFO method to another, the
event is accounted for as a normal change in accounting principle. In general, we
report voluntary changes in accounting principles retrospectively. This means
The advantage of retrospective application is to enhance comparability of the
statements from year to year. The recast statements appear as if the newly adopted
accounting method had been applied in all previous years.
Consistency and comparability suggest that accounting choices once made should
be consistently followed from year to year. So, any change requires that the new
report the change retrospectively. Because of this difficulty, a company changing to
LIFO usually does not report the change retrospectively. Instead, the base year
inventory for all future LIFO calculations is the beginning inventory in the year the
LIFO method is adopted. Then, the LIFO method is applied prospectively from that
point on. The disclosure note must include an explanation as to why retrospective
application was impracticable.
20–90 Intermediate Accounting, 8/e
Communication Case 20-5
Suggested Grading Concepts and Grading Scheme:
Content (80%)
20 Identifies the situation as a change in estimate.
The liability was originally (appropriately) estimated as
20 Indicates that additional disclosure is necessary.
Bonus (4) Provides detail regarding the disclosure note.
A disclosure note should describe the effect of a
Writing (20%)
5 Terminology and tone appropriate to the audience of a Vice
President.
6 Organization permits ease of understanding.
Analysis Case 20-6
Larry apparently is referring to the fact that because the company now believes
the useful lives of the assets are longer than before that depreciation calculated
assuming the shorter 16 year life was overstated. Now by not recalculating a lower
accounted for prospectively. When a company revises a previous estimate, prior
financial statements are not revised. Instead, the company merely incorporates the
new estimate in any related accounting determinations from then on. The result,
however, is as Larry describes: the depreciation before the change is higher and the
depreciation after the change is lower than it would have been if the new estimate had
been used throughout.
Research Case 20-7
Requirement 3
The results students report will vary somewhat depending on the firms chosen.
A recent disclosure for Macy’s, Inc. follows:
The following provides the assumed health care cost trend rates related to the
Company’s postretirement obligations at February 1, 2014 and February 2, 2013:
2013 2012
Health care cost trend rates assumed for next year 7.27% -9.20% 7.52% -9.50%
The assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement obligations. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Point
Decrease Decrease
(millions)
Case 20-7 (concluded)
Requirement 4
The specific citation that describes disclosure requirements for health care cost trends
is FASB ASC 715–20–50–1m: Compensation-Retirement Benefits–Defined Benefit
Plans–General–Disclosure .
1m. The effect of a one-percentage-point increase and the effect of a one-percentage-
point decrease in the assumed health care cost trend rates on the aggregate of the
20–94 Intermediate Accounting, 8/e
Analysis Case 20-8
Requirement 1
DRS’s change in depreciation method for computers represents a change in
estimate resulting from a change in accounting principle. This is because a
change in the depreciation method is adopted to reflect a change in (a) estimated
The change in residual value for the office building is a change in accounting
estimate. The company reports the change prospectively; previous financial
statements are not recast. Instead, the company simply employs the new residual
value estimate from then on. The undepreciated cost remaining at the time of the
change would be reduced by the new estimate of residual value and the resulting
amount would be depreciated over the remaining useful life of the building.
Requirement 2
Applying the same accounting principles from one reporting period to another
enhances the comparability of accounting information across accounting periods.
The FASB’s conceptual framework describes comparability as one of the
Analysis Case 20-9
2016. Ray also should disclose the nature and details of the corrections in disclosure
notes.
The change from accelerated depreciation for all future acquisitions is a change in
accounting principle. Ray should disclose the nature and justification for the change
20–96 Intermediate Accounting, 8/e
Judgment Case 20-10
Situation I
1. A change in the depreciable lives of fixed assets is a change in accounting
estimate.
2. The change in estimate should be reflected in the current period and in future
3. This change in accounting estimate will affect the balance sheet in that the
4. A note should disclose the effect of the change in accounting estimate on income
Situation II
2. A change in reporting entity is effected and disclosed by recasting all prior-period
financial statements in accordance with the method of presenting the current
3. The balance sheet will be affected by this change in that the investment account of
Case 20-10 (concluded)
4. The financial statements of the period of the change in the reporting entity should
describe by note disclosure the nature of the change and the reason for it. In
Situation III
1. The change in the method of computing depreciation represents a change in
estimate resulting from a change in accounting principle. This is because a change
in the depreciation method is adopted to reflect a change in (a) estimated future
benefits from the asset, (b) the pattern of receiving those benefits, or (c) the
2. The change should be reflected in the current period and in future periods. Unlike
3. This change will affect the balance sheet in that the accumulated depreciation in the
4. Additionally, a disclosure note should justify that the change is preferable and
describe the effect of a change on any financial statement line items and per share
amounts affected for all periods reported.
20–98 Intermediate Accounting, 8/e
Judgment Case 20-11
Despite the self-correcting feature of certain inventory errors, the errors cause the
financial statements of the year of the error as well as the financial statements in the
subsequent year to be incorrect. For example, an overstatement of ending inventory at
the end of 2015 will correct itself in 2016 and retained earnings at the end of 2016 will
Ethics Case 20-12
Requirement 1
Bonuses will be negatively affected because if the error is corrected, a lower
Requirement 2
The error will be reported as a prior period adjustment to the beginning retained
Requirement 3
Ethical Dilemma:
Should John recognize his obligation to disclose the inventory error to Danville