EXERCISE 22-8 (5–10 minutes)
1. a. 6. a.
EXERCISE 22-9 (15–20 minutes)
December 31, 2015
Retained Earnings ($550,000 X 9/55) ………………………. 90,000
Accumulated Depreciation—Equipment …………… 90,000
(To correct for the omission of depreciation
expense in 2013)
EXERCISE 22-10 (20–25 minutes)
(a) Computation of depreciation for 2015:
Cost of building $800,000
Less: Depreciation prior to 2015
(b) Computation of 2015 depreciation expense on the equipment:
Cost of equipment $100,000
EXERCISE 22-11 (10–15 minutes)
(a) No entry necessary. Changes in estimates are treated prospectively.
(b) Depreciation Expense ………………………………………. 19,375*
Accumulated Depreciation—Equipment ……… 19,375
EXERCISE 22-12 (20–25 minutes)
(a) Cost of plant assets $1,600,000
Less: Depreciation prior to 2015
2012 ($1,600,000 X .25) $400,000
2015
2014
(b) Income before depreciation expense
$300,000
$270,000
Depreciation expense
115,000
225,000
Net income
$185,000
$ 45,000
EXERCISE 22-13 (10–15 minutes)
(a) The net income to be reported in 2015, using the retrospective approach,
would be computed as follows:
EXERCISE 22-14 (20–35 minutes)
(a) Retained Earnings ……………………………………………. 8,000
Inventory …………………………..………………………. 8,000*
Net income
($30,000
$27,000
$24,000
(b) Inventory …………………………………………………………. 19,000
Retained Earnings ……………………………………… 19,000*
2015
2014
2012
Net income
($34,000
$28,000
$26,000
EXERCISE 22-15 (15–20 minutes)
1. Accumulated Depreciation—Equipment …………….. 25,500
Depreciation Expense ………………………………… 8,500
2. Retained Earnings ……………………………………………. 45,000
Salaries and Wages Expense ……………………… 45,000
EXERCISE 22-15 (Continued)
4. Amortization Expense …………………………………….. 2,250
Retained Earnings ………………………………………….. 4,500
Copyrights ………………………………………………. 6,750
EXERCISE 22-16 (10–15 minutes)
1. Salaries and Wages Expense ………………………….. 3,400
Salaries and Wages Payable …………………….. 3,400
2. Salaries and Wages Expense ………………………….. 31,100
Salaries and Wages Payable …………………….. 31,100
EXERCISE 22-17 (10–15 minutes)
Retained Earnings …………………………………………………. 37,700
Inventory ……………………………………………………….. 16,200
Accumulated Depreciation—Equipment …………… 21,500
($38,500 – $17,000)
Computations:
Effect on retained earnings
over (under) statement
EXERCISE 22-18 (25–30 minutes)
(a) Effect of errors on 2015 net income: $24,700 overstatement
Computations:
Effect on 2015 net income
over (under) statement
Understatement of 2014 ending inventory
($ 9,600
Expensing of insurance premium in 2014
Failure to record sale of fully depreciated
(b) Effect of errors on working capital: $28,900 understatement
Computations:
Effect on working capital
over (under) statement
Overstatement of 2015 ending inventory
$( 8,100
Total effect on working capital (understated)
(c) Effect of errors on retained earnings: $26,600 understatement
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2015 ending inventory
$( 8,100
Expensing of insurance premium in 2014
EXERCISE 22-19 (20–25 minutes)
(a) 1. Supplies Expense ($2,700 – $1,100) ……………… 1,600
Supplies ………………………………………………. 1,600
2. Salary and Wages Expense ………………………….. 2,900
($4,400 – $1,500)
Salaries and Wages Payable …………………. 2,900
5. Rent Revenue ($28,000 ÷ 2) ………………………….. 14,000
Unearned Rent Revenue ……………………….. 14,000
(b) 1. Retained Earnings ………………………………………. 1,600
Supplies ………………………………………………. 1,600
2. Retained Earnings ………………………………………. 2,900
Salaries and Wages Payable …………………. 2,900
7. Same as in (a).
EXERCISE 22-19 (Continued)
(c) 6. Retained Earnings ………………………………………. 27,000
7. Retained Earnings ………………………………………. 4,320
EXERCISE 22-20 (20–25 minutes)
2014
2015
Income before tax
$101,000
$77,400
Corrections:
Sales erroneously included in 2014 income
(38,200)
38,200
Adjustment to bond interest expense*
Corrected income before tax
*Bond interest expense for 2014 and 2015 was computed as follows:
Book Value of Bonds
Stated Interest
Effective Interest
2014
$235,000
$15,000
$16,450**
2015
EXERCISE 22-20 (Continued)
***Erroneous depreciation taken in 2015:
EXERCISE 22-21 (10–15 minutes)
2014
2015
Item
Over–
statement
Under-
statement
No
Effect
Over–
statement
Under-
statement
No
Effect
(1)
X
X
(2)
X
X
(3)
X
(4)
X
X
(5)
X
X
*EXERCISE 22-22 (25–30 minutes)
Because Beyonce Co. now has a 30% interest in Elton John Corp. as of
7/1/15, it is necessary to first adjust the investment in Elton John to the
equity method in prior periods. The following schedule provides this
information:
12/31/14
6/30/15
Note to instructor: Under GAAP, goodwill is not amortized.
A computation of the ending balance in the investment account of Elton
John Corp. can now be made as follows:
Investment in Elton John Corp. 1/1/14 $1,400,000
*EXERCISE 22-23 (15–20 minutes)
(a) Prior to January 2, 2014, Dan Aykroyd Corp. carried the investment in
Martin Company under the equity method of accounting as evidenced
from the entries in the investment account. Use of the equity method
(b) The carrying amount of the investment in Martin as of December 31,
2014, would be computed as follows:
Carrying amount, 12/31/13 (from the given
account information) $3,690,000
bComputation of Excess Dividends Received over Share of Earnings:
Dividends
Received
Share of Martin Co.
Income
Excess Dividends Received
Over Share of Earnings
*EXERCISE 22-23 (Continued)
Note to instructor: The entry in 2014 to record the receipt of the
dividend would be:
Cash ……………………………………………………………… 50,400
TIME AND PURPOSE OF PROBLEMS
Problem 22-1 (Time 30–35 minutes)
Purpose—to provide a problem that requires the student to: (1) account for a change in estimate,
(2) record a correction of an error, and (3) account for a change in accounting principle. The student is
also required to compute corrected/adjusted net income amounts.
Problem 22-2 (Time 30–40 minutes)
Purpose—to develop an understanding of the way in which accounting changes and error corrections
Problem 22-3 (Time 30–40 minutes)
Problem 22-4 (Time 40–50 minutes)
Purpose—to allow the student to see the impact of accounting changes on income and to examine an
ethical situation related to the motivation for change.
Problem 22-5 (Time 30–35 minutes)
Purpose—to develop an understanding of the impact which a change in the method of inventory pricing
Problem 22-6 (Time 25–30 minutes)
Purpose—to develop an understanding of the journal entries and the reporting which are necessitated
Problem 22-7 (Time 25–30 minutes)
Purpose—to provide a problem that requires the student to analyze ten transactions and to prepare
adjusting or correcting entries for these transactions.
Problem 22-8 (Time 30–35 minutes)
Problem 22-9 (Time 20–25 minutes)
Time and Purpose of Problems (Continued)
Problem 22-10 (Time 50–60 minutes)
Purpose—to develop an understanding of the correcting entries and income statement adjustments that
*Problem 22-11 (Time 20–25 minutes)
Purpose—to provide the student with a problem involving an investment that grows from 10% to 40%
(from lack of significant influence to significant influence). The student is required to account for the
effect of this change on income.
*Problem 22-12 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the proper entries to reflect a change from
SOLUTIONS TO PROBLEMS
PROBLEM 22-1
(a) 1. Cost of equipment ………………………………………………….. $85,000
Less: Salvage value …………………………..…………………… 5,000
Depreciable cost ……………………………………………………. $80,000
2. Cost of Building …………………………….. $300,000
Less: Depreciation to 2014
2012…………………………………….. 60,000
PROBLEM 22-1 (Continued)
3. Depreciation Expense ($120,000 – $16,000) ÷ 8 ….. 13,000
Accumulated Depreciation—Machinery ……… 13,000
Accumulated Depreciation—Machinery …………….. 3,000
Retained Earnings …………………………………….. 3,000
Depreciation recorded in 2012:
(120,000 – $16,000) ÷ 8 = 13,000
Depreciation
taken
Depreciation that
should be taken
Differences
(b) HOLTZMAN COMPANY
Comparative Income Statements
For the Years 2014 and 2013
2014
2013
Income before depreciation expense………………..
$300,000
$310,000
Depreciation expense* …………………………………….
47,750
69,000
*Depreciation Expense
2014
2013
PROBLEM 22-2
(a) 1. Bad debt expense for 2012 should not have been reduced by
$10,000. A change in the experience rate is considered a change
in estimate, which should be handled prospectively.
(b) BOTTICELLI INC.
Comparative Income Statements
For the Years 2012 through 2015
2012
2013
2014
2015
Income before
extraordinary item
$145,000
$135,000*
$201,000
$274,000
Extraordinary gain
30,000
Net income (see below)
$145,000
$165,000
$201,000
$274,000
2012
2013
2014
2015
Net income (unadjusted)
$140,000
$160,000
$205,000
$276,000
Net income (adjusted)
$145,000
$201,000
$274,000
PROBLEM 22-3
1. Retained Earnings …………………………………………….. 3,500
Sales Commissions Payable ……………………….. 2,500
2. Cost of Goods Sold ($19,000 + $6,700) ……………….. 25,700
3. Accumulated Depreciation—Equipment ……………… 4,800
Depreciation Expense …………………………………. 4,800*
*Equipment cost …………………………………. $100,000
4. Construction in Process ……………………………………. 45,000
Deferred Tax Liability ………………………………….. 18,000*
PROBLEM 22-4
(a) ASTON CORPORATION
Projected Income Statement
For the Year Ended December 31, 2014
Sales …………………………………………….. $29,000,000
Cost of goods sold ………………………… $14,000,000
Depreciation expense …………………….. 1,600,000a
Operating expenses ……………………….. 6,400,000 22,000,000
Conditions met:
1. Net income before taxes and bonus > $7,000,000.
2. Payable for income taxes does not exceed $3,000,000.
aDepreciation for the current year includes $600,000 for the old equip-
PROBLEM 22-4 (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
immediate needs for cash of $1,000,000 for the president’s bonus and
Some stakeholders and their interests are:
Stakeholder
Interests
President
Personal gain of $1,000,000 bonus.
CFO
Board of Directors
May be subject to the manipulations of the CEO
Placed in ethical dilemma between the interests
PROBLEM 22-5
UTRILLO INSTRUMENT COMPANY
Statement of Income and Retained Earnings
For the Years Ended May 31
2010
2011
2012
2013
2014
Sales—net
$13,964
$15,506
$16,673
$18,221
$18,898
Cost of goods sold
Beginning inventory
1,010
1,124
1,101
1,270
1,500
Purchases
Ending inventory
Total
Gross profit
1,078
1,583
1,842
2,551
2,018
Administrative expenses
Income before taxes
1,010
1,644
1,029
Income taxes (50%)
Net income
Retained earnings—beginning:
As originally reported
1,206
1,388
1,759
2,237
3,005
Adjustment (See note* and
schedule)
5
12
51
78
132
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