EXERCISE 22-7 (Continued)
5. Another acceptable presentation for the retained earnings statement for
2012 is:
Retained earnings, January 1, as reported …………….. $125,000
EXERCISE 22-8 (5–10 minutes)
1. b. 6. a.
EXERCISE 22-9 (15–20 minutes)
December 31, 2012
Retained Earnings ($440,000 X 9/55) ………………………. 72,000
Accumulated Depreciation—Equipment …………… 72,000
(To correct for the omission of depreciation
expense in 2010)
22–22
EXERCISE 22-10 (20–25 minutes)
(a) Computation of depreciation for 2012:
Cost of building $1,200,000
Less: Depreciation prior to 2012
Depreciation expense for 2012: $25,761 [($977,407 – $50,000) ÷ 36]
Depreciation Expense ……………………………………. 25,761
Accumulated Depreciation—Buildings ……… 25,761
(b) Computation of 2012 depreciation expense on the equipment:
EXERCISE 22-11 (10–15 minutes)
(a) No entry necessary. Changes in estimates are treated prospectively.
(b) Depreciation Expense ………………………………………. 27,000*
Accumulated Depreciation—Equipment ……… 27,000
EXERCISE 22-12 (20–25 minutes)
(a) Cost of plant assets $2,400,000
Less: Depreciation prior to 2012
2009 ($2,400,000 X .25) $600,000
2012
2011
(b) Income before depreciation expense
$300,000
$370,000
Depreciation expense
182,500
337,500
Net income
$117,500
$ 32,500
EXERCISE 22-13 (10–15 minutes)
(a) The net income to be reported in 2012, using the retrospective approach,
would be computed as follows:
EXERCISE 22-14 (20–25 minutes)
(a) Retained Earnings ……………………………………………. 10,000
Inventory …………………………………………………… 10,000*
2013
2012
2011
2010
Net income
($30,000
$27,000
$25,000
$23,000
(b) Inventory …………………………………………………………. 20,000
Retained Earnings ……………………………………… 20,000*
2013
2012
2011
2010
Net income
($34,000
$29,000
$30,000
$26,000
EXERCISE 22-15 (15–20 minutes)
1. Accumulated Depreciation—Machinery ……………… 30,600
*$510,000 X 1/5 X 2
2. Retained Earnings ……………………………………………. 45,000
Salaries and Wages Expense ……………………… 45,000
EXERCISE 22-15 (Continued)
4. Amortization Expense (Copyright) …………………… 2,500
Retained Earnings …………………………..……………… 5,000
Retained Earnings ……………………………………. 87,000
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 …………………………………………………. 33,700
Inventory ……………………………………………………….. 14,200
Accumulated Depreciation—Equipment
($38,500 – $19,000) ……………………………………… 19,500
Computations:
EXERCISE 22-18 (25–30 minutes)
(a) Effect of errors on 2012 net income: $21,700 overstatement
Computations:
Effect on 2012 net income
over (under) statement
Understatement of 2011 ending inventory
($ 9,600
Expensing of insurance premium in 2011
Failure to record sale of fully depreciated
Total effect of errors on net income
(b) Effect of errors on working capital: $27,900 understatement
Computations:
Overstatement of 2012 ending inventory
Sale of fully depreciated machine
unrecorded (cash)
Total effect on working capital (understated)
Effect on working capital
(c) Effect of errors on retained earnings: $25,600 understatement
Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2012 ending inventory
$( 7,100
Understatement of depreciation expense
in 2011
2,300
Expensing of insurance premium in 2011
Failure to record sale of fully depreciated
machine in 2012
(understated)
22–27
EXERCISE 22-19 (20–25 minutes)
(a) 1. Supplies Expense ($2,500 – $1,100) ……………… 1,400
Supplies ………………………………………………. 1,400
4. Insurance Expense ($90,000 – $65,000) ………… 25,000
Prepaid Insurance ………………………………… 25,000
5. Rent Revenue ($24,000 ÷ 2) ………………………….. 12,000
Unearned Rent Revenue ……………………….. 12,000
Accumulated Depreciation ……………………. 7,200
(b) 1. Retained Earnings ………………………………………. 1,400
Supplies ………………………………………………. 1,400
4. Retained Earnings ………………………………………. 25,000
Prepaid Insurance ………………………………… 25,000
5. Retained Earnings ………………………………………. 12,000
Unearned Rent Revenue ……………………….. 12,000
EXERCISE 22-20 (20–25 minutes)
2012
2013
Income before tax
$101,000
$77,400
Corrections:
Sales erroneously included in 2012 income
(38,200)
38,200
Understatement of 2012 ending inventory
8,640
(8,640)
*Bond interest expense for 2012 and 2013 was computed as follows:
Book Value of Bonds
Stated Interest
Effective Interest
2012
$240,000
$15,000
$16,800**
2013
241,800
15,000
16,926*
**$240,000 X 7%
22–29
EXERCISE 22-21 (10–15 minutes)
2012
2013
Item
Over–
statement
Under-
statement
No
Effect
Over–
statement
Under-
statement
No
Effect
(1)
X
X
*EXERCISE 22-22 (25–30 minutes)
Because Sandburg Co. now has a 30% interest in Yevette Corp. as of 7/1/13,
it is necessary to first adjust the investment in Yevette to the equity method
in prior periods. The following schedule provides this information:
Note to instructor: Under GAAP, goodwill is not amortized.
A computation of the ending balance in the investment account of Yevette
Corp. can now be made as follows:
(2)
X
X
(3)
X
(4)
X
X
(5)
X
X
22–30
*EXERCISE 22-23 (15–20 minutes)
(a) Prior to January 2, 2013, Gamble Corp. carried the investment in
Sabrina Company under the equity method of accounting as evidenced
from the entries in the investment account. Use of the equity method
was appropriate because Gamble’s interest in Sabrina exceeded 20%.
(b) The carrying amount of the investment in Sabrina as of December 31,
2013, would be computed as follows:
Carrying amount, 12/31/12 (from the given
account information) ……………………………………………. $3,730,000
a$3,730,000 X 126/210
bComputation of Excess Dividends Received over Share of Earnings:
Dividends
Received
Share of Sabrina Co.
Income
Excess Dividends Received
Over Share of Earnings
22–31
*EXERCISE 22-23 (Continued)
Note to instructor: The entry in 2013 to record the receipt of the
dividend would be:
Cash ……………………………………………………………… 50,400
Equity Investments (Available-for-sale) ……. 8,400
Dividend Revenue …………………………………… 42,000
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
are handled in accounting records. The problem presents descriptions of various situations for which
the student is required to indicate the correct accounting treatment and to prepare comparative income
statements for a four-year period.
Problem 22-3 (Time 30–40 minutes)
Purpose—to provide a problem that requires the student to: (1) prepare correcting entries for two years’
unrecorded sales commissions, (2) three years’ inventory errors, and (3) prepare entries for two different
accounting changes.
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
(from LIFO to average cost) has on the financial statements during a five-year period. The student
is required to prepare a comparative statement of income and retained earnings for the five years
assuming the change in inventory pricing with an indication of the effects on net income and earnings
per share for the years involved.
Problem 22-6 (Time 25–30 minutes)
Purpose—to develop an understanding of the journal entries and the reporting which are necessitated
by an accounting change or correction of an error. The student is required to prepare the entries to
reflect such changes or errors and the comparative income statements and retained earnings state–
ments for a two-year period.
Problem 22-7 (Time 25–30 minutes)
Purpose—to provide a problem that requires the student to analyze eleven transactions and to prepare
adjusting or correcting entries for these transactions.
Problem 22-8 (Time 30–35 minutes)
Purpose—to help a student understand the effect of errors on income and retained earnings. The
student must analyze the effects of errors on the current year’s net income and on the next year’s
ending retained earnings balance.
Problem 22-9 (Time 20–25 minutes)
Purpose—to develop an understanding of the effect that errors have on the financial statements. The
student is required to prepare a schedule portraying the corrected net income for the years involved
with this error analysis.
22–33
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
are required for changes in accounting policies and accounting errors. This comprehensive problem
involves many different concepts such as consignment sales, bonus computations, warranty costs, and
bank funding reserves. The student is required to prepare the necessary journal entries to correct the
accounting records and a schedule showing the revised income before taxes for each of the three
years involved.
*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
the cost method to the equity method in accounting for an investment. The student is required to
prepare the necessary journal entries for a three-year period with respect to this stock investment and
the change in reporting methods.
SOLUTIONS TO PROBLEMS
PROBLEM 22-1
(a) 1. Cost of equipment ………………………………………………….. $85,000
Less: Salvage value ……………………………………………….. 5,000
Depreciable cost ……………………………………………………. $80,000
Depreciation in 2012
Cost of equipment ………………….. $85,000
Less: Depreciation to 2012 …….. 24,000
Book value (January 1, 2012) ….. 61,000
Less: Salvage value ………………. 3,000
Depreciable cost …………………….. $58,000
2. Cost of Building …………………………….. $300,000
Less: Depreciation to 2012
2010…………………………………….. 60,000
2011…………………………………….. 48,000
Book value (January 1, 2012) … $192,000
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 that should be recorded in 2011:
(120,000 – $16,000) ÷ 8 = 13,000
(b) HOLTZMAN COMPANY
Comparative Income Statements
For the Years 2012 and 2011
2012
2011
Income before depreciation expense………………..
$300,000
$310,000
Net income ……………………………………………………..
$252,250
$241,000
*Depreciation Expense
$ 14,500
$ 8,000
PROBLEM 22-2
(a) 1. Bad debt expense for 2010 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) The lawsuit settlement is correctly treated.
(b) BOTTICELLI INC.
Comparative Income Statements
For the Years 2010 through 2013
2010
2011
2012
2013
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
2010
2011
2012
$276,000
$274,000
PROBLEM 22-3
1. Retained Earnings …………………………..………………… 3,500
Sales Commissions Payable ……………………….. 2,500
Sales Commissions Expense ………………………. 1,000
Income Overstated (Understated)
2010
2011
2012
Beginning inventory
$ 16,000
$19,000
Ending inventory
$(16,000)
(19,000)
6,700
$(16,000)
$ (3,000)
$25,700
4. Construction in Process ……………………………………. 45,000
Deferred Tax Liability ………………………………….. 18,000*
Retained Earnings ………………………………………. 27,000
PROBLEM 22-4
(a) ASTON CORPORATION
Projected Income Statement
For the Year Ended December 31, 2012
Sales …………………………………………….. $29,000,000
Cost of goods sold ………………………… $14,000,000
Depreciation expense …………………….. 1,600,000a
Income before income taxes …………… $ 7,000,000
Income taxes
Current …………………………..………. $ 3,000,000
Deferred …………………………………. 500,000c 3,500,000
Net income ……………………………………. $ 3,500,000
aDepreciation for the current year includes $600,000 for the old equip-
ment and $2,000,000 for the robotic equipment. If the robotic equipment
is changed to straight–line, its depreciation is only $1,000,000 and the
total is $1,600,000.
22–39
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
for-sale securities to trading securities may also be appropriate.
It is naive to believe that corporate officers do no planning for year-end
(or interim) financial statements. The slippery slope arises with manipula–
tion of financial statements. The security reclassification for the selected
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 22-5
UTRILLO INSTRUMENT COMPANY
Statement of Income and Retained Earnings
For the Years Ended May 31
2008
2009
2010
2011
2012
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
700
763
832
907
989
Income before taxes
1,010
1,644
1,029
Income taxes (50%)
Net income
189
410
505
822
514
Retained earnings—beginning:
As originally reported
1,206
1,388
1,759
2,237
3,005
As restated
$ 1,400
$ 1,810
$ 2,315
$ 3,137
$ 3,651
Earnings per share (100 shares)
Adjustment (See note* and
*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