SOLUTIONS TO PROBLEMS
P23-1 (AICPA adapted solution)
(1) (2)
Transaction Classification Accounting Treatment
1 Change in accounting principle Retrospective adjustment
2 Change in accounting estimate Prospective
P23-2
1. Inventory ($42,000 + $18,000) 60,000
Retained Earnings ($60,000 x 0.70) 42,000
Income Taxes Payable ($60,000 x 0.30) 18,000
2. Comparative Income Statements
2011 2010
As adjusted
Revenues $230,000 $225,000
P23-2 (continued)
3. Comparative Statements of Retained Earnings
2011 2010
Balance at beginning of year, as
4. Note to the Financial Statements (partial):
On January 1, 2011, the company changed its method of valuing its inventory
and cost of goods sold to the FIFO method from the LIFO method used in all
Income Statement
For Year Ended 12/31/2010
As Originally
Reported
under LIFO
As Adjusted
to FIFO
Effect of
Change
Sales $225,000 $225,000 0
23-23
P23-2 (continued)
4. (continued)
Income Statement
For Year Ended 12/31/2011
As Computed
under LIFO
As Reported
under FIFO
Effect of
Change
Sales $230,000 $230,000 0
5. If employees received a bonus of 10% of income before deducting the bonus
and income taxes, the change in accounting principle would affect the
P23-3
1. Retained Earnings ($16,000 – $4,800) 11,200
23-24
P23-3 (continued)
2. KOOPMANN COMPANY
Comparative Income Statements
For Years Ended December 31
2011 2010
As adjusted
Revenues $130,000 $100,000
KOOPMANN COMPANY
Comparative Retained Earnings Statements
For Years Ended December 31
2011 2010
Beginning unadjusted retained earnings $19,500 $15,000
Less: Adjustment for the cumulative effect on
prior years’ of retrospectively applying the
23-25
P23-3 (continued)
2. (continued)
KOOPMANN COMPANY
Comparative Balance Sheets
December 31
2011 2010
As adjusted
Assets
Cash $ 10,000 $ 9,000
P23-4
2. SCHMIDT COMPANY
Comparative Income Statements
For Years Ended December 31
2011 2010
As adjusted
Revenues $130,000 $128,000
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P23-4 (continued)
2. (continued)
SCHMIDT COMPANY
Comparative Retained Earnings Statements
For Years Ended December 31
2011 2010
Beginning unadjusted retained earnings $38,500 $27,000
Plus: Adjustment for the cumulative effect on
SCHMIDT COMPANY
Comparative Balance Sheets
December 31
2011 2010
As adjusted
Assets
Liabilities and Stockholders’ Equity
Accounts payable $ 3,000c $ 4,000
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P23-5
1. 2011
Jan. 1 Construction in Progress 70,000a
2. GOODE CONSTRUCTION COMPANY
Comparative Income Statements (Partial)
2011 2010 2009
As adjusted As adjusted
Income before income taxes $400,000 $200,000 $220,000
retrospectively applying the
percentage-of-completion
method of accounting for long-
term contracts (net of income
taxes of $21,000 in 2011 and
P23-5 (continued)
3. Items Restated:
On the 2009 and 2010 income statements, construction revenues and
P23-6
1. Change in estimate—accounted for prospectively:
2. Change in accounting estimate effected by change in accounting
principle—accounted for prospectively:
Previous depreciation amount
2009: ($40,000 – $4,000) x 8/36* = $ 8,000
P23-6 (continued)
3. Error—accounted for as a prior period restatement (adjustment):
Previous 2010 depreciation – erroneously calculated:
($80,000 – $8,000) x [2 x (100% ÷ 5)] = $28,800
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P23-7 (AICPA adapted solution)
THE KRAFT MANUFACTURING COMPANY
Effect on Income Before Income Taxes –
Change from FIFO to LIFO Inventory Method
For Year Ended December 31, 2011
Inventory at December 31, 2011 if on
Mult
Beginning inventory:
5,000 units x $5.00
(November 9, 2010 unit cost) $ 25,000
10,000 units x $6.00
(December 14, 2010 unit cost) 60,000
$ 85,000
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P23-8
1. JACKSON COMPANY
Comparative Income Statements
For Years Ended December 31
2008 2009 2010
Sales $100,000 $130,000 $180,000
Comparative Balance Sheets
December 31
2008 2009 2010
Cash $ 5,500 $ 12,500 $ 9,960
Accounts receivable (net)b 29,000 47,700 58,900
aOther expenses:
2010 $13,200 ($19,200 – $10,000) +
($ 8,000 – $ 4,000)
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P23-8 (continued)
1. (continued)
Total increase (decrease) in other expenses:
2008 $1,000 + $6,000 – $10,000 = $(3,000)
bAccounts receivable (net):
Deduction for allowance for uncollectibles:
cInterest payable:
2010 $12,000 + (12% x $50,000) = $18,000
dEquipment:
Amount Correct
Computed1 Amount
Balance, January 1, 2008 $100,000 $100,000
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P23-8 (continued)
1. (continued)
1The depreciation expense each year is computed from the change in the
balance of Accumulated Depreciation. The amounts are consistent with
the applicable MACRS percentages in 2008.
2$40,000 x 20% (applicable MACRS depreciation in 2010)
eIncome tax refund receivable:
Decrease in Cumulative
Taxable Income* x Tax Rate = Refund Refund
Increase in
Tax Accounting Temporary Tax Deferred Tax
Depreciation* – Depreciation = Difference x Rate = Liability Cumulative
*From footnote d
2. The omission of the allowance for uncollectibles, the non-accrual of interest,
and the use of MACRS depreciation would all be considered errors and
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P23-9
1. a. Incorrect entries:
Building 90,000
Notes Payable 90,000
cInterest computed using effective
interest method: 12% x $57,197
Entries to correct error:
Discount on Notes Payable 32,803