CHAPTER 22
SOLUTIONS TO B EXERCISES
E22-1B (10–15 minutes)
(a) The net income to be reported in 2014, using the retrospective approach,
would be computed as follows:
E22-2B (10–15 minutes)
(a) Retained earnings …………………………………….. 40,000*
Inventory …………………………………………… 40,000
E22-3B (10–15 minutes)
(a) LIFO:
2012 2013 2014
Sales $15,000 $15,000 $15,000
Cost of sales 10,000 10,500 11,000
Gross profit 5,000 4,500 4,000
Operating expenses 2,500 2,500 2,500
Net income $ 2,500 $ 2,000 $ 1,500
Average-cost:
2012 2013 2014
Sales $15,000 $15,000 $15,000
(b) Average-cost:
2013 2014
Sales $15,000 $15,000
(c) KYTO ELECTRONICS
Retained Earnings Statement
For the Year Ended December 31
2013 2014
Retained earnings, as reported $2,500
Adjustment for the cumulative effect on prior
E22-3B (Continued)
(d) On January 1, 2014, the Company elected to change its method of valuing
its inventory to the average-cost method; in all prior years inventory was
2014 2013
LIFO Average Difference LIFO Average Difference
Balance Sheet:
Inventory $3,500 $6,000 $2,500 $3,000 $5,000 $2,000
Retained
earnings 6,000 8,500 2,500 4,500 6,500 2,000
E22-4B (10–15 minutes)
(a) $60,000
E22-5B (30–35 minutes)
(a) MARVEL INC.
Income Statement
For the Year Ended
2014
2013
Sales ………………………………………………………..
$10,000
$10,000
Cost of goods sold ……………………………………
5,600
5,500
Operating expenses
1,500
1,500
Income before profit sharing ……………….
Profit sharing expense ………………………………
Net income …………………………………………
(b) The profit sharing expense reflects an indirect effect of the change in
accounting principle. Indirect effects from periods before the change are
recorded in the year of the change. In this case, profit sharing expense
recorded in 2014 is composed of:
(c) Retained Earnings Statement
2014
Retained earnings, January 1, as reported ………………… $25,000
E22-6B (30–35 minutes)
(a) Depreciation to date on equipment:
Double-declining balance depreciation
2012 (40% X $650,000) $260,000
2013 (40% X $390,000) 156,000
$416,000
(b) Depreciation to date on building:
($5,500,000 – $500,000)/40 years = $125,000 per year
$125,000 X 2 = $250,000 depreciation to date
E22-7B (25–35 minutes)
Depreciation for 2014 using double-declining balance method of depreciation
= $160,000 X 50% = $80,000
TITAN COMPANY
Comparative Income Statements
For the Years 2014 and 2013
2014
$890,000
2013
$640,000
Sales …………………………………………………..
Expenses ……………………………………………
TITAN COMPANY
Statement of Retained Earnings
For the Years 2014 and 2013
2014
$773,000
2013
$680,000
Note:
Another acceptable presentation for the retained earnings statement for 2014
is:
Retained earnings (January 1), unadjusted ………………. $740,000
E22-8B (5–10 minutes)
1. a 6. b
E22-9B (15–20 minutes)
December 31, 2014
Retained Earnings ($250,000 X 1/5) ………………………… 50,000
Accumulated Depreciation—Equipment ………….. 50,000
(To correct for the omission of depreciation
expense in 2013)
E22-10B (20–25 minutes)
Computation of 2015 depreciation expense on the building:
Cost of building …………………………………………………………… $2,500,000
E22-10B (Continued)
Computation of 2015 depreciation expense on the equipment:
Cost of equipment ……………………………………………………….. $300,000
E22-11B (10–15 minutes)
(a) No entry necessary.
(b) Depreciation Expense ………………………………………. 135,000*
Accumulated Depreciation—Equipment ……… 135,000
*Original cost $1,000,000
E22-12B (20–25 minutes)
(a) Depreciation Expense …………………………………….. 200,000*
Accumulated Depreciation ……………………….. 200,000
*Original cost $600,000
(b)
2015
2014
Income before depreciation expense……….
$760,000
$560,000
Income taxes …………………………………………
$336,000
E22-13B (10–15 minutes)
(a) The net income to be reported in 2015, using the retrospective approach,
would be computed as follows:
E22-14B (20–35 minutes)
(a) Inventory ………………………………………………………… 38,000
Retained Earnings …………………………………….. 38,000*
(b) Inventory ………………………………………………………… 40,000
Retained Earnings …………………………………….. 40,000*
E22-15B (15–20 minutes)
1. Goodwill …………………………………………………………. 20,000
Retained Earnings …………………………………….. 10,000
Amortization Expense ……………………………….. 10,000
E22-15B (Continued)
4. Depreciation Expense ………………………………………. 4,800
E22-16B (10–15 minutes)
1. Insurance Expense…………………………………………… 2,500
Prepaid Insurance……………………………………… 2,500
E22-17B (10–15 minutes)
Inventory ……………………………………………………………….. 73,600
Retained Earnings ……………………………………………. 44,100
Computations:
Effect on retained earnings
over (under) statement
Understatement of 2014 ending inventory …….
($(73,600)
Understatement of 2013 depreciation …………..
E22-18B (25–30 minutes)
(a) Effect of errors on 2015 net income: $106,500 overstatement
Computations:
Effect on 2015
net income over
(under) statement
Overstatement of 2013 ending inventory …………….
($ 0
(b) No effect on 2015 working capital as inventory error corrected itself.
(c) Effect of errors on retained earnings: $21,500 overstatement
Computations:
Effect on retained
earnings over
(under) statement
Overstatement of 2013 ending inventory …………
$ 0
E22-19B (20–25 minutes)
(a) 1. Supplies on Hand ……………………………………….. 6,500
Supplies Expense ………………………………… 6,500
2. Salary and Wages Expense …………………………. 4,000
Accrued Salaries and Wages ………………… 4,000
6. Accumulated Depreciation ($75,000 – $7,000) .. 68,000
Depreciation Expense ………………………….. 68,000
7. Accumulated Depreciation ………………………….. 45,000
Retained Earnings ……………………………….. 45,000
(b) 1. Supplies on Hand ……………………………………….. 6,500
Retained Earnings ……………………………….. 6,500
E22-19B (Continued)
5. Retained Earnings ($36,000 ÷ 2) …………………… 18,000
Prepaid Rent ……………………………………….. 18,000
(c)(1) Books have not been closed
6. Accumulated Depreciation ………………………….. 68,000
(c)(2) Books have been closed
6. Accumulated Depreciation ………………………….. 68,000
E22-20B (20–25 minutes)
2014
2015
Income before tax ……………………………………………..
$650,000
$521,800
Corrections:
Adjustment to interest income* …………………….
615
646
Sales erroneously included in 2015 income …..
Overstatement of 2014 ending inventory ……….
*Interest income for 2014 and 2015 was computed as follows:
Book Value of Bonds
Stated Interest
Effective Interest
2014
$92,300
$4,000
$4,615**
2015
92,915
4,000
4,646*
**$92,300 X 5%
Difference between effective interest at 5% and stated interest (4%):
E22-21B (10–15 minutes)
2014
2015
(1)
(3)
(5)
Over–
Under-
No
Over–
Under-
No
*E22-22B (25–30 minutes)
Because GEO has a 30% interest in Graphic Corp. as of 7/1/15, it is necessary
to first adjust the investment in Graphic to the equity method in prior periods.
The following schedule provides this information:
12/31/14
6/30/15
Dividends received ………………………………………………
Adjustment …………………………………………………………
Note: Goodwill is not amortized.
A computation of the ending balance in the investment account of Graphic
Corp. can now be made as follows:
Investment in Graphic Corp. 1/1/14 ……………………………… $2,700,000
*E22-23B (15–20 minutes)
(a) Prior to January 1, 2015, EchoLab Inc. carried the investment in Quiet
Inc. under the equity method of accounting, as evidenced from the
entries in the investment account. Use of the equity method was
appropriate because EchoLab’s interest in Quiet exceeded 20%.
*E22-23B (Continued)
(b) The carrying amount of the investment in Quiet as of December 31, 2015,
would be computed as follows:
Carrying amount, 12/31/14 (from the given
account information) …………………………………………… $8,860,000
bComputation of excess dividends received over share of earnings:
Dividends
Received
Share of Quiet. Co.
Income
Excess Dividends Received
Over Share of Earnings
2015
$310,000
$240,000c
$(70,000)
(c) The entry to recognize the excess of fair value over the carrying amount
of the securities is as follows:
December 31, 2015
Securities Fair Value Adjustment