CHAPTER 22
SOLUTIONS TO B PROBLEMS
PROBLEM 22-1B
(a) 1. Cost of equipment …………………………………………………. $142,000
Less: Salvage value ……………………………………………….. 6,000
Depreciable cost ……………………………………………………. $136,000
Depreciation to 2014
2010 ($136,000/8) ……………………. $17,000
$68,000
Depreciation in 2014
Cost of equipment ………………….. $142,000
Depreciable cost ……………………. $72,000
Depreciation in 2014
$72,000/6 = $12,000
2. Cost of Building …………………………….. $620,000
Less: Depreciation to 2014
2012 ……………………………………. 62,000
2013 ……………………………………. 55,800
PROBLEM 22-1B (Continued)
3. Depreciation Expense ($72,000 – $9,000) ÷ 6 ……… 10,500
Accumulated Depreciation—Machinery ……… 10,500
Depreciation
taken
Depreciation that
should be taken
Differences
2012
$6,000
$5,250
$ 750
2013
(b) BISHOP WAY COMPANY
Comparative Income Statements
For the Years 2014 and 2013
2013
Income before depreciation expense ………………..
$386,000
Net income ……………………………………………………..
$202,700
*Depreciation Expense
PROBLEM 22-2B
(a) 1. Bad debt expense for 2014 should not have been reduced by
$26,000. A change in the experience rate is considered a change
in estimate, which should be handled prospectively.
(b) ROYAL PALM INC.
Comparative Income Statements
For the Years 2012 through 2014
2012
2013
2014
(45,000)
Income before
2012
2013
2014
Net income (unadjusted)
$230,000
$205,000
$240,000
1. Bad debt expense
adjustment
(26,000)
PROBLEM 22-3B
1. Retained Earnings ……………………………………………. 6,100
Sales Commissions Payable ………………………. 4,500
Sales Commissions Expense ……………………… 1,600
3. Accumulated Depreciation—Equipment …………….. 18,000
Depreciation Expense ………………………………… 18,000*
4. Construction in Process……………………………………. 46,000
PROBLEM 22-4B
(a) POWER CORPORATION
Projected Income Statement
For the Year Ended December 31, 2014
Sales …………………………………………….. $45,000,000
Cost of goods sold ………………………… $26,000,000
Depreciation expense …………………….. 2,200,000a
Conditions met:
1. Net income before taxes and bonus > $5,000,000.
2. Payable for income taxes does not exceed $1,800,000.
aDepreciation for the current year includes $1,600,000 for the old
equipment and $1,200,000 for the robotic equipment. If the robotic
PROBLEM 22-4B (Continued)
(b) Students’ answers will vary.
There is nothing unethical about changing the first-year election of
depreciation back to the straight-line method provided that it meets with
the approval of appropriate corporate decision makers. Considering the
the attention of the board of directors.
Some stakeholders and their interests are:
Stakeholder
Interests
President
Personal gain of $1,000,000 bonus.
CFO
Placed in ethical dilemma between the interests
of the president and the corporation.
Board of Directors
May be subject to the manipulations of the CEO
PROBLEM 22-5B
CAO FIXTURES COMPANY
Statement of Income and Retained Earnings
For the Years Ended May 31
2010
2011
2012
2013
2014
Sales—net
$8,642
$10,689
$14,381
$15,400
$16,098
Cost of goods sold
Beginning inventory
1,550
1,120
1,050
1,690
2,150
Purchases
6,000
8,100
12,600
13,100
13,900
Ending inventory
(1,120)
(1,050)
(1,690)
(2,150)
(2,160)
Total
6,430
8,170
11,960
12,640
13,890
Gross profit
2,212
2,519
2,421
Administrative expenses
Income before taxes
1,412
1,495
1,830
1,260
Income taxes (40%)
Net income
1,026
1,098
As originally reported
2,433
3,441
4,314
As restated
Earnings per share (100 shares)
*Note to instructor:
The retained earnings balances are usually reported in the above manner.
If desired, only the restated balances might be reported. The adjustments
are simply the cumulative difference in income between the two inventory
PROBLEM 22-5B (Continued)
In 2014, the Company changed its method of pricing inventory from the
last-in, first out (LIFO) to the first-in first-out (FIFO) method in order to more
fairly present the financial operations of the company. The financial
statements for prior years have been restated to retrospectively reflect this
change, resulting in the following effects on net income and related per
share amounts:
Increase in
2010
2011
2012
2013
2014
Schedule of Income Reconciliation
and Retained Earnings Adjustments
2010–2014
2007
2010
2011
2012
2013
2014
Beginning Inventory LIFO
$1,500
$1,100
$1,000
$1,600
$2,000
FIFO
1,550
1,120
1,690
2,150
Difference
Tax Effect (40%)
36
Effect on Income*
$ (90)
Ending Inventory LIFO
$1,500
$1,100
$1,000
$1,600
$2,000
$1,800
FIFO
1,550
1,120
1,050
1,690
2,150
2,160
Difference
(50)
(20)
(50)
(90)
(150)
(360)
Tax Effect (40%)
20
20
60
Effect on Income**
$ 12
$ 30
$ 90
Net Effect on Income
$ 18
PROBLEM 22-6B
(a) 1. Equipment (Asset X) ………………………………….. 114,000
Accumulated Depreciation—Equipment
2. Depreciation Expense ……………………………….. 49,091
Accumulated Depreciation—Buildings …. 49,091
Computations:
Cost of Building …………………………………….. $540,000
3. Depreciation Expense ……………………………….. 12,500
Accumulated Depreciation—
Equipment ………………………………………. 12,500
Computations:
Original cost ………………………………………. $160,000
Accumulated depreciation (1/1/14)
PROBLEM 22-6B (Continued)
(b) TANNERY INC.
Comparative Retained Earnings Statements
For the Years Ended
2014
2013
Retained earnings, January 1, as previously
reported
$325,000
Add: Error in recording equipment (Asset X)
99,750*
Retained earnings, December 31
*Amount expensed incorrectly in 2012 ……………….. $114,000
Depreciation to be taken to January 1, 2013
($14,250 X 1) …………………………………………………. (14,250)
Prior period adjustment for income …………………… $99,750
**Income before depreciation expense (2014) $316,000
Depreciation for 2014
PROBLEM 22-7B
(1)
Depreciation Expense …………………………..……………….. 2,500
Accumulated Depreciation—Equipment …………… 2,500
(2)
(4)
Accumulated Depreciation—Equipment …………………. 12,000
Equipment ……………………………………………………… 9,000
Gain on Sale of Plant Assets …………………………... 3,000
(5)
(7)
Salaries and Wages Payable ($4,600 – $1,200) ………… 3,400
Salaries and Wages Expense ………………………….. 3,400
(8)
Depreciation Expense …………………………..……………….. 15,000