Problem 20-7 (concluded)
Equipment:
$80,000 – 4,000
Depreciation per ton = = $.19 per ton
400,000 tons
Requirement 2
Mineral mine:
Cost $ 2,200,000
Structures:
Cost $ 150,000
Less accumulated depreciation:
Equipment:
Cost $ 80,000
20–62 Intermediate Accounting, 8/e
Problem 20-8
a. This is a change in estimate.
No entry is needed to record the change
2016 adjusting entry:
If the effect is material, a disclosure note should describe the effect of a change in
b. This is a change in estimate.
No entry is needed to record the change
Calculation of annual depreciation after the estimate change:
$1,000,000 Cost
$25,000 Old depreciation ($1,000,000 ÷ 40 years)
A disclosure note should describe the effect of a change in estimate on income
from continuing operations, net income, and related per share amounts for the current
period.
Problem 20-8 (continued)
c. This is a change in accounting principle that usually is reported prospectively.
No entry is needed to record the change.
When a company changes to the LIFO inventory method from another inventory
method, accounting records usually are insufficient to determine the cumulative
d. This is a change in accounting estimate resulting from a change in accounting
principle.
No entry is needed to record the change
Problem 20-8 (concluded)
A change in depreciation method is considered a change in accounting estimate
resulting from a change in accounting principle. Accordingly, the Hoffman Group
reports the change prospectively; previous financial statements are not revised.
Instead, the company simply employs the straight-line method from now on. The
undepreciated cost remaining at the time of the change is depreciated straight line over
the remaining useful life.
($ in 000s)
Asset’s cost $330
Accumulated depreciation to date (calculated below) (162)
Calculation of SYD depreciation:
e. This is a change in estimate.
To revise the liability on the basis of the new estimate:
Loss—litigation ………………………………………………………… 150,000
f. This is a change in accounting principle accounted for prospectively.
Because the change will be effective only for assets placed in service after the
Problem 20-9
P R 1. By acquiring additional stock, Wagner increased its investment in
Wise, Inc., from a 12% interest to 25% and changed its method of
accounting for the investment to the equity method.
E P 6. Due to an unexpected relocation, Wagner determined that its office
building previously depreciated using a 45-year life should be
depreciated using an 18-year life.
E P 7. Wagner offers a three-year warranty on the farming equipment it
sells. Manufacturing efficiencies caused Wagner to reduce its
expectation of warranty costs from 2% of sales to 1% of sales.
20–66 Intermediate Accounting, 8/e
Problem 20-10
Requirement 1
Analysis: U = Understated
O = Overstated
2014 2015
Beginning inventory → Beginning inventory U-6,000
Plus: Net purchases Plus: Net purchases U-3,000
Requirement 2
Retained earnings ……………………………… 12,000
Requirement 3
The financial statements that were incorrect as a result of both errors (effect of
one error in 2014 and effect of three errors in 2015) would be retrospectively restated
Problem 20-11
Requirement 1
Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)
[1] $1,900,000 x 25% (2 times the straight-line rate of 12.5%)
[2] $2,000,000 x 25%
[3] ($1,900,000 – 475,000) x 25%
[4] ($2,000,000 – 500,000 ) x 25%
To correct incorrect accounts
Retained earnings …………………………………………. 56,250
Problem 20–11 (concluded)
Requirement 2
This is a change in accounting estimate resulting from a change in accounting
principle.
No entry is needed to record the change
A change in depreciation method is considered a change in accounting estimate
resulting from a change in accounting principle. Accordingly, the Collins Corporation
Asset’s cost (after correction) $1,900,000
Accumulated depreciation to date ($475,000 + 356,250) (831,250)
Problem 20-12
a. This is a correction of an error.
To correct the error:
Prepaid insurance ($35,000 ÷ 5 yrs x 3 yrs: 2016–2018) ………. 21,000
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the prepaid insurance acquired and reflect the correct
operations, net income, and earnings per share.
b. This is a change in estimate.
No entry is needed to record the change
2016 adjusting entry:
Calculation of annual depreciation after the estimate change:
$600,000 Cost
$12,500 Old depreciation ([$600,000 – 100,000] ÷ 40 years)
20–70 Intermediate Accounting, 8/e
Problem 20-12 (continued)
A disclosure note should describe the effect of a change in estimate on income
from continuing operations, net income, and related per share amounts for the current
period.
c. This is a correction of an error.
To correct the error:
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct inventory amounts, cost of goods sold,
d. This is a change in accounting principle and is reported retrospectively.
To record the change:
Problem 20-12 (continued)
Most changes in accounting principle are accounted for retrospectively. Prior
years’ financial statements are recast to reflect the use of the new accounting method.
The company should increase retained earnings to the balance it would have been if
the FIFO method had been used previously; that is, by the cumulative income
e. This is a correction of an error.
To correct the error:
The 2015 financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct compensation expense, net income, and
Problem 20-12 (concluded)
f. This is a change in estimate resulting from a change in accounting principle and is
accounted for prospectively.
No entry is needed to record the change
2016 adjusting entry:
Depreciation expense (calculated below) ……………………………. 57,600
Accumulated depreciation ……………………………………. 57,600
A change in depreciation method is considered a change in accounting estimate
Undepreciated cost, Jan. 1, 2016 (given) $460,800
Estimated residual value (0)
g. This is a change in estimate.
No entry is needed to record the change
Problem 20-13
a. This is a correction of an error.
To correct the error:
Prepaid insurance ($35,000 ÷ 5 yrs x 3 yrs: 2016–2018) ………. 21,000
Income tax payable ($21,000 x 40%) ………………………….. 8,400
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the prepaid insurance acquired and reflect the correct
b. This is a change in estimate.
No entry is needed to record the change
2016 adjusting entry:
Calculation of annual depreciation after the change:
$600,000 Cost
$12,500 Old depreciation ([$600,000 – 100,000] ÷ 40 years)
20–74 Intermediate Accounting, 8/e
Problem 20-13 (continued)
A disclosure note should describe the effect of a change in estimate on income
from continuing operations, net income, and related per share amounts for the current
period.
c. This is a correction of an error.
To correct the error:
The financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct inventory amounts, cost of goods sold,
d. This is a change in accounting principle and is reported retrospectively.
To record the change:
Most changes in accounting principle are accounted for retrospectively. Prior
years’ financial statements are recast to reflect the use of the new accounting method.
The company should increase retained earnings to the balance it would have been if
amounts affected for all periods reported.
Problem 20-13 (continued)
Companies are required to repay the taxes saved by using LIFO in prior years
within six years. As a result, this liability has both current (payable within one year)
and noncurrent (payable after one year) aspects, but is not a deferred tax liability.
e. This is a correction of an error.
To correct the error:
Retained earnings (net effect) …………………………..…………………. 9,300
The 2015 financial statements that were incorrect as a result of the error would be
retrospectively restated to report the correct compensation expense, net income, and
Problem 20-13 (concluded)
f. This is a change in estimate resulting from a change in accounting principle and is
accounted for prospectively.
No entry is needed to record the change
A change in depreciation method is considered a change in accounting estimate
g. This is a change in estimate.
No entry is needed to record the change.
Problem 20-14
Requirement 1
a. ($ in millions)
Inventory (understatement of 2016 beginning inventory) ……………. 10
Retained earnings (understatement of 2015 income) ……………… 10
Note: The 2014 error requires no adjustment because it has self-corrected by 2016.
Patent …………………………………………………………………….. 3
d.
No entry to record the change
2016 adjusting entry:
Calculation of annual depreciation after the change:
$30 Cost
(18) Previous depreciation (calculated below*)
Problem 20-14 (concluded)
Requirement 2
Shareholders’ Net
Assets Liabilities Equity Income Expenses
2014 $740 $330 $410 $210 $150
2014 inventory (12) (12) (12) 12
2015 $820 $400 $420 $230 $175
2014 inventory 12 (12)
Problem 20-15
1a. To correct the error:
Equipment (cost) ………………………………………………………….. 45,000
b. To reverse erroneous entry:
Cash …………………………..…………………………………………….. 17,000
Office supplies ……………………………………………………….. 17,000
To record correct entry:
d. To correct the error:
Retained earnings ([$12 x 2,000 shares] – $2,000) ………………… 22,000
20–80 Intermediate Accounting, 8/e
Problem 20-15 (concluded)
e. To correct the error:
Retained earnings (overstatement of 2015 income) ………………….. 104,000
Interest expense (overstatement of 2016 interest) ………………. 104,000