22–41
PROBLEM 22-5 (Continued)
In 2012, the Company changed its method of pricing inventory from the
last-in, first out (LIFO) to the average cost 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
2008
2009
2010
2011
2012
Schedule of Income Reconciliation
and Retained Earnings Adjustments
2008–2012
2007
2008
2009
2010
2011
2012
Beginning Inventory LIFO
$1,000
$1,100.00
$1,000.00
$1,115.00
$1,237.00
Average Cost
1,010
1,124.00
1,101.00
1,270.00
1,500.00
Difference
(10)
(24.00)
(101.00)
(155.00)
(263.00)
Tax Effect (50%)
Effect on Income*
$ (131.50)
Ending Inventory LIFO
Average Cost
1,124
1,101.00
1,270.00
1,720.00
Difference
(351.00)
Tax Effect (50%)
Effect on Income**
44.00†
Cumulative Effect on
Beginning Retained
Earnings
$ 12
$ 50.50†
$ 77.50†
$ 131.50
$ 175.50
*Larger (smaller) beginning inventory has negative (positive) effect on net income.
PROBLEM 22-6
(a) 1. Depreciation Expense ………………………………… 94,500
Accumulated Depreciation—Buildings …. 94,500
2. Depreciation Expense ………………………………… 25,800
Accumulated Depreciation—
Equipment ………………………………………. 25,800
Computations:
3. Equipment (Asset C) ………………………………….. 160,000
Accumulated Depreciation—Equipment
(4 X $16,000) ……………………………………. 64,000
Retained Earnings ………………………………. 96,000
22–43
PROBLEM 22-6 (Continued)
(b) MADRASA INC.
Comparative Retained Earnings Statements
For the Years Ended
2012
2011
Retained earnings, January 1, as previously
*Amount expensed incorrectly in 2008 ……………….. $160,000
Depreciation to be taken to January 1, 2011
($16,000 X 3) …………………………………………………. (48,000)
Prior period adjustment for income …………………… $112,000
22–44
PROBLEM 22-7
(1)
(2)
Cost of Goods Sold …………………………..………………….. 19,000
Retained Earnings …………………………..…………….. 19,000
(3)
(4)
Accumulated Depreciation—Equipment …………………. 25,000
Equipment …………………………………………………….. 21,300
Gain on Sale of Plant Assets ………………………….. 3,700
(5)
(6)
Unrealized Holding Gain or Loss—Income …………….. 2,000
Fair Value Adjustment (Trading) ……………………… 2,000
(7)
(8)
Depreciation Expense …………………………………………… 5,000
Equipment ……………………………………………………………. 40,000
Maintenance and Repairs Expense …………………. 40,000
Accumulated Depreciation—Equipment ………….. 5,000
22–45
PROBLEM 22-7 (Continued)
(9)
(10)
Amortization Expense ($50,000 ÷ 10) ………………………….. 5,000
Retained Earnings …………………………………………………….. 5,000
Trademarks ……………………………………………………….. 10,000
22–46
PROBLEM 22-8
Net Income for 2011
Retained Earnings 12/31/12
Item
Understated
Overstated
Understated
Overstated
1.
$14,100
0
0
0
2.
$ 3,500
0
$ 2,500
0
3.
0
$22,000
0
$11,000
4.
$28,000
0
$28,000
0
5.
0
$24,000
0
$12,000
6.
$18,200
0
0
0
Although explanations were not required in answering the question, they
are included below for your interest.
Explanations:
1. The net income would be understated in 2011 because interest income
is understated. The net income would be overstated in 2012 because
2. The depreciation expense in 2011 should be $500 for this machine.
Since the machine was bought on July 1, 2011, only one-half of a year’s
3. GAAP requires that all research and development costs should be ex–
pensed when incurred. Net income in 2011 is overstated $22,000 ($33,000
22–47
PROBLEM 22-8 (Continued)
4. The security deposit should be a long-term asset, called refundable
deposits. The $8,000 of the last month’s rent is also an asset, called
5. $12,000 or one-third of $36,000 should be reported as income each
year. In 2011, $36,000 was reported as income when only $12,000
6. The ending inventory would be understated since the merchandise was
omitted. Because ending inventory and net income have a direct relation-
PROBLEM 22-9
2011
2012
Net income, as reported
$29,000
$37,000
Rent received in 2011, earned in 2012
(1,000)
1,000
Wages not accrued, 12/31/10
1,100
Wages not accrued, 12/31/11
Wages not accrued, 12/31/12
Inventory of supplies, 12/31/10
(1,300)
Inventory of supplies, 12/31/11
Inventory of supplies, 12/31/12
Corrected net income
PROBLEM 22-10
Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) 22–49
(a) ROBERTS COMPANY
Schedule of Revised Net Income
For the Years Ended March 31, 2011, 2012, and 2013
COMPUTATIONS
SUMMARY
Increases (Decreases) in Income
2011
2012
2013
2011
2012
2013
1. Income before income taxes, as reported
$71,600
$111,400
$103,580
2. Elimination of profit on consignments:
Billed
$ 6,500
$ 5,590
at 125% of cost
÷ 125%
Cost
5,200
4,472
Profit error
$ 1,300
$ 1,300
$ 1,118
1,300
(1,118)
3. To correct C.O.D. sale
6,100
(6,100)
4. Adjustment of warranty expense:
Sales per books
$940,000
$1,010,000
$1,795,000
Correction for consignments
(6,500)
Correction for C.O.D. sale
6,100
Corrected sales
$933,500
$1,022,600
$1,783,310
Normal warranty expense, one-half of 1%
$ 4,668
$ 5,113
$ 8,917
Less costs charged to expense
760
1,670
3,850
Additional expense
$ 3,908
$ 3,443
$ 5,067
(3,443)
(5,067)
5. Bad debt adjustments:
Normal bad debt expense, one-quarter of
1% of sales
$ 2,334
$ 2,557
$ 4,458
Less previous write-offs
750
1,320
3,850
Additional expense
$ 1,584
$ 1,237
$ 608
(1,584)
(1,237)
(608)
6. Adjustment for contract financing
3,000
3,900
5,100
(1,400)
118,520
Income before income taxes
$65,744
$117,335
$ 94,611
PROBLEM 22-10 (Continued)
(b) Sales Revenue …………………………………………………. 5,590
Inventory on Consignment ………………………………… 4,472
Cost of Goods Sold ……………………………………. 4,472
Accounts Receivable …………………………………. 5,590
(To adjust for consignments treated
as sales, 3/31/11)
Retained Earnings ($1,584 + $1,237) ………………….. 2,821
Bad Debt Expense …………………………..……………….. 608
Allowance for Doubtful Accounts ……………….. 3,429
(To set up allowance for uncollectible
accounts)
Salaries and Wages Expense …………………………….. 220
Retained Earnings ($1,400 – $500) …………………….. 900
Salaries and Wages Payable ………………………. 1,120
(To adjust for accrued commissions)
*PROBLEM 22-11
(a) MILLAY INC.
Schedule of Income or Loss from Investment
For Year Ending December 31, 2012
Dividend revenue …………………………………………………………….. $15,000
(10,000 shares X $1.50 dividend/share)
(b) MILLAY INC.
Schedule of Income or Loss from Investment
For Years Ending December 31, 2013 and 2012
2013
2012
Income from investment in Genso
(Schedule 1)
$170,000
$55,000
Income for 2012 ($550,000 X 10%)
First half ($300,000* X 10%)
*PROBLEM 22-12
January 3, 2011
December 31, 2011
Cash ……………………………………………………………………. 15,000
Dividend Revenue ………………………………………….. 15,000
(To record the receipt of cash dividends from
Renner Corp.)
December 31, 2011
December 31, 2012
Cash ……………………………………………………………………. 20,000
Dividend Revenue ………………………………………….. 20,000
(To record the receipt of cash dividends from
Renner Corp.)
*PROBLEM 22-12 (Continued)
January 2, 2013
Equity Investment (Equity Method) ……………………. 1,564,000
Cash …………………………………………………………. 1,545,000
Retained Earnings …………………………………….. 19,000
(To record purchase of additional interest
in Renner and to reflect retroactively
a change from the fair value to the equity
January 2, 2013
Equity Investment (Equity Method) ……………………. 500,000
Equity Investments (Available-for-sale) ………. 500,000
(To reclassify investment carried under
fair value method to investment carried
under equity method)
*PROBLEM 22-12 (Continued)
December 31, 2013
Equity Investment (Equity Method). ……………………….. 169,500
Revenue from Investment ………………………………. 169,500
Computation of amortization:
2011 purchase
($130,000 ÷ 10 years) $13,000
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 22-1 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the applications of GAAP related to
accounting changes. This case describes several proposed accounting changes with which the student
is required to identify whether the change involves an accounting principle, accounting estimate, or
correction of an error, plus the necessary reporting requirements for each proposal.
CA 22-2 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the application and reporting requirements of
SFAS No. 154. This case describes many different accounting changes with which the student is required
to identify the type of change involved and to indicate which changes necessitate the restatement of
prior years’ financial statements when presented in comparative form with the current year’s statement.
CA 22-3 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of GAAP and its respective applications. This case
describes three independent situations with which the student is required to identify the type of
accounting change involved, the reporting which is necessitated under current generally accepted
accounting principles, and the effects of each change on the financial statements.
CA 22-4 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of how changes in accounting can be reflected
in the accounting records to facilitate analysis and understanding of financial statements. This case
involves several situations with which the student is required to indicate the appropriate accounting
treatment that each should be given.
CA 22-5 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain how to account for various accounting
change situations. Explanations for a change in estimate, change in principle, and change in entity are
communicated in a written letter.
CA 22-6 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to explain the ethical issues related to changes in
estimates.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 22-1
(a) 1. Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement
of prior periods is not appropriate.
2. Depreciation.
3. Mathematical Error. This is a correction of an error and prior period treatment would be in
order.
4. Preproduction Costs—Furniture Division. This should probably be construed as an
inseparability situation in that the change in accounting estimate (period benefited by
deferred costs) has been affected by a change in accounting principle (amortization on a
per-unit basis). Consequently, it is treated as a change in accounting estimate. Restatement
of opening retained earnings is not appropriate.
(b) The adjustment to the December 31, 2011 retained earnings balance would be computed as
follows:
CA 22-2
Item
Change
Type of Change
Should Prior
Years’ Statements
Be Retrospectively
Applied or Restated?
1.
A change in accounting principle.
Yes
2.
A change in an accounting estimate.
Handle as a change in estimate.
4.
Not an accounting change but rather a change in classification.
Yes
5.
An error correction not involving a change in accounting principle.
Yes
which is a special type of change in accounting principle.
accounting.
principle to another generally accepted accounting principle.
be in prior periods.
CA 22-3
Situation 1.
(a) A change from an accounting principle not generally accepted to one generally accepted is a
correction of an error.
CA 22-3 (Continued)
Situation 2.
(a) The change in method of inventory pricing represents a change in accounting principle, as
defined by GAAP.
Situation 3.
(a) A change in the depreciable lives of fixed assets is a change in accounting estimate.
CA 22-4
1. This situation is a change in estimate. Whenever it is impossible to determine whether a change
in principle or a change in estimate has occurred, the change should be considered a change in
estimate. This is often referred to as a change in accounting estimate effected by a change in
accounting principle. A change in estimate employs the current and prospective approach by:
2. This situation is considered a change in estimate because new events have occurred which call
for a change in estimate. The accounting should be the same as discussed in 1.
CA 22-4 (Continued)
(b) Correcting all prior period statements presented in comparative financial statements. The
amount of the error related to periods prior to the earliest year’s statement presented for
comparative purposes should be included as an adjustment to the beginning balance of
retained earnings of that earliest year’s statement.
5. This situation is considered a change in estimate because new events have occurred which call
for a change in estimate. The accounting should be the same as discussed in 1.
6. This situation is considered a change in accounting principle. A change in accounting principle
should employ the retrospective approach by:
CA 22-5
Mr. Joe Davison, CEO Sports-Pro Athletics
Dear Mr. Davison:
You recently contacted me about several accounting changes made at Sports-Pro Athletics, Inc. in
2012. This letter details how you should account for each change.
Your change in salvage values for your office equipment is considered a change in estimate. This type
of change does not really affect previous financial statements and is thus accounted for currently and
prospectively. The change is included in the most current period being reported. There is no need to
restate prior periods’ financial statements.
CA 22-6
(a) The ethical issues are the honesty and integrity of Frost’s financial reporting practices versus the
Corporation’s and the accounting manager’s profit motives. Shortening the life of fixed assets
from 10 to 6 years may be evidence that depreciation expense during the first five years were
understated. Such a practice distorts Frost’s operating results and misleads users of Frost’s
financial statements. If this practice is intentional, it is unethical.