Solutions Manual and Test Bank Intermediate Accounting Kieso Weygandt Warfield 14th edition

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CHAPTER 22

ACCOUNTING CHANGES AND ERROR ANALYSIS

MULTIPLE CHOICE—Conceptual

  21.     Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of
a.   materiality.
b.   consistency.
c.   conservatism.
d.   objectivity.

  22.     Which of the following is not treated as a change in accounting principle?
a.   A change from LIFO to FIFO for inventory valuation
b.   A change to a different method of depreciation for plant assets
c.   A change from full-cost to successful efforts in the extractive industry
d.   A change from completed-contract to percentage-of-completion

  23.     Which of the following is not a retrospective-type accounting change?
a.   Completed-contract method to the percentage-of-completion method for long-term contracts
b.   LIFO method to the FIFO method for inventory valuation
c.   Sum-of-the-years'-digits method to the straight-line method
d.   "Full cost" method to another method in the extractive industry

  24.     Which of the following is accounted for as a change in accounting principle?
a.   A change in the estimated useful life of plant assets.
b.   A change from the cash basis of accounting to the accrual basis of accounting.
c.   A change from expensing immaterial expenditures to deferring and amortizing them as they become material.
d.   A change in inventory valuation from average cost to FIFO.

  25.     A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a
a.   credit to Accumulated Depreciation.
b.   debit to Retained Earnings in the amount of the difference on prior years.
c.   debit to Deferred Tax Asset.
d.   credit to Deferred Tax Liability.

  26.     Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line?
a.   The cumulative effect on prior years, net of tax, in the current retained earnings statement
b.   Restatement of prior years’ income statements
c.   Recomputation of current and future years’ depreciation
d.   All of these are required.

  27.     A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a
a.   debit to Construction in Process.
b.   debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
c.   debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d.   credit to Deferred Tax Liability.

  28.     Which of the following disclosures is required for a change from LIFO to FIFO?
a.   The cumulative effect on prior years, net of tax, in the current retained earnings statement
b.   The justification for the change
c.   Restated prior year income statements
d.   All of these are required.

  29.     Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
a.   A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
b.   A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
c.   A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
d.   A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

  30.     Which type of accounting change should always be accounted for in current and future periods?
a.   Change in accounting principle
b.   Change in reporting entity
c.   Change in accounting estimate
d.   Correction of an error


  31.     Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?
a.   Current period and prospectively
b.   Current period and retrospectively
c.   Retrospectively only
d.   Current period only

  32.     When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a
a.   change in accounting principle.
b.   change in accounting estimate.
c.   prior period adjustment.
d.   correction of an error.

  33.     The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
a.   continue to depreciate the building over the original 50-year life.
b.   depreciate the remaining book value over the remaining life of the asset.
c.   adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
d.   adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

  34.     Which of the following statements is correct?
a.   Changes in accounting principle are always handled in the current or prospective period.
b.   Prior statements should be restated for changes in accounting estimates.
c.   A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
d.   Correction of an error related to a prior period should be considered as an adjustment to current year net income.

  35.     Which of the following describes a change in reporting entity?
a.   A company acquires a subsidiary that is to be accounted for as a purchase.
b.   A manufacturing company expands its market from regional to nationwide.
c.   A company divests itself of a European branch sales office.
d.   Changing the companies included in combined financial statements.

  36.     Presenting consolidated financial statements this year when statements of individual companies were presented last year is
a.   a correction of an error.
b.   an accounting change that should be reported prospectively.
c.   an accounting change that should be reported by restating the financial statements of all prior periods presented.
d.   not an accounting change.


  37.     An example of a correction of an error in previously issued financial statements is a change
a.   from the FIFO method of inventory valuation to the LIFO method.
b.   in the service life of plant assets, based on changes in the economic environment.
c.   from the cash basis of accounting to the accrual basis of accounting.
d.   in the tax assessment related to a prior period.

  38.     Counterbalancing errors do not include
a.   errors that correct themselves in two years.
b.   errors that correct themselves in three years.
c.   an understatement of purchases.
d.   an overstatement of unearned revenue.

  39.     A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?
                         Assets                 Liabilities            Stockholders' Equity          Net Income
            a.        No effect              Understate                   Overstate                    Overstate.
            b.        No effect              Overstate                   Understate                  Understate.
            c.      Understate            Understate                    No effect                    No effect.
            d.      Understate              No effect                    Understate                  Understate.

  40.     If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause
a.   the ending inventory and retained earnings to be understated.
b.   the ending inventory, cost of goods sold, and retained earnings to be understated.
c.   no effect on net income, working capital, and retained earnings.
d.   cost of goods sold and net income to be understated.



MULTIPLE CHOICE—Computational

  41.     On January 1, 2010, Neal Corporation acquired equipment at a cost of $900,000. Neal adopted the sum-of-the-years’-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2013, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2013 would be
a.   $46,875.
b.   $75,000.
c.   $112,500.
d.   $180,000.

  42.     On January 1, 2010, Knapp Corporation acquired machinery at a cost of $500,000. Knapp adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2013, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2013 would be
a.   $25,600.
b.   $36,572.
c.   $50,000.
d.   $71,428.

  43.     On January 1, 2010, Piper Co., purchased a machine (its only depreciable asset) for $450,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2013, for financial statement reporting, Piper decided to change to the straight-line method for depreciation of the machine. Assume that Piper can justify the change.
Piper's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2013, is $375,000. The income tax rate for 2013, as well as for the years 2010-2012, is 30%. What amount should Piper report as net income for the year ended December 31, 2013?
a.   $90,000
b.   $136,500
c.   $231,000
d.   $262,500

Use the following information for questions 44 and 45.

Ventura Corporation purchased machinery on January 1, 2012 for $840,000. The company used the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2013, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain:
                                                               2012              2013
Straight-line                   $140,000      $140,000
Sum-of-the-years’-digits         240,000      200,000


  44.     Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a.   $180,000.
b.   $160,000.
c.   $96,000.
d.   $0.

  45.     The amount that Ventura should report for depreciation expense on its 2014 income statement is
a.   $160,000.
b.   $140,000.
c.   $100,000.
d.   none of the above.

  46.     During 2013, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
                       Completed-Contract       Percentage-of-Completion
2011                    $   475,000                      $   700,000
2012                           625,000                             950,000
2013                       700,000                         1,050,000
                              $1,800,000                        $2,700,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
a.   $540,000 on the 2013 income statement.
b.   $330,000 on the 2013 income statement.
c.   $540,000 on the 2013 retained earnings statement.
d.   $330,000 on the 2013 retained earnings statement.

Use the following information for questions 47 and 48.

On January 1, 2010, Nobel Corporation acquired machinery at a cost of $800,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2013, a decision was made to change to the double-declining balance method of depreciation for this machine.

  47.     Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is
a.   $89,600.
b.   $0.
c.   $105,280.
d.   $150,400.

  48.     The amount that Nobel should record as depreciation expense for 2013 is
a.   $80,000.
b.   $112,000.
c.   $160,000.
d.   none of the above.


  49.     On December 31, 2013 Dean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2013 beginning inventory to increase by $630,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/13, assuming a 40% tax rate, is
a.   $630,000.
b.   $378,000.
c.   $252,000.
d.   $0.

  50.     Heinz Company began operations on January 1, 2012, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory                                                                  2012                2013
FIFO                                                                               $640,000       $   712,000
LIFO                                                                                 560,000              636,000
Net Income (computed under the FIFO method)           980,000           1,030,000
Based on the above information, a change to the LIFO method in 2013 would result in net income for 2013 of
a.   $1,070,000.
b.   $1,030,000.
c.   $   954,000.
d.   $   950,000.

  51.     Lanier Company began operations on January 1, 2012, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory                                                                  2012                    2013
FIFO                                                                               $320,000               $360,000
LIFO                                                                                 240,000                 300,000
Net Income (computed under the FIFO method)           500,000                 550,000
Based upon the above information, a change to the LIFO method in 2013 would result in net income for 2013 of
a.   $490,000.
b.   $550,000.
c.   $570,000.
d.   $610,000.

  52.     Equipment was purchased at the beginning of 2010 for $340,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $40,000. The equipment was depreciated using the straight-line method of depreciation through 2012. At the beginning of 2013, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $25,000. The amount to be recorded for depreciation for 2013, reflecting these changes in estimates, is
a.   $20,625.
b.   $33,000.
c.   $38,000.
d.   $39,375.
Use the following information for questions 53 and 54.
Swift Company purchased a machine on January 1, 2010, for $500,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2013, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2013 to reflect this additional information.

  53.     Assume that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate was 30% in 2010, 2011, 2012, and 2013. What should be reported in Swift's income statement for the year ended December 31, 2013, as the cumulative effect on prior years of changing the estimated useful life of the machine?
a.   $0
b.   $33,000
c.   $50,000
d.   $175,000

  54.     What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2013?
a.   $  50,000
b.   $  62,500
c.   $100,000
d.   $125,000

Use the following information for questions 55 and 56.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/12 and 12/31/13 contained the following errors:

                                                                   2012                                                    2013            
Ending inventory                   $20,000 overstatement                  $32,000 understatement
Depreciation expense               8,000 understatement               16,000 overstatement

  55.     Assume that the 2012 errors were not corrected and that no errors occurred in 2011. By what amount will 2012 income before income taxes be overstated or understated?
a.   $28,000 overstatement
b.   $12,000 overstatement
c.   $28,000 understatement
d.   $12,000 understatement

  56.     Assume that no correcting entries were made at 12/31/12, or 12/31/13. Ignoring income taxes, by how much will retained earnings at 12/31/13 be overstated or understated?
a.   $32,000 overstatement
b.   $28,000 overstatement
c.   $40,000 understatement
d.   $12,000 understatement

Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors:
                                                                       Dec. 31, 2012                 Dec. 31, 2013
Ending inventory                        $15,000 understated          $22,000 overstated
Depreciation expense                    4,000 understated

An insurance premium of $36,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2013, fully depreciated machinery was sold for $19,000 cash, but the sale was not recorded until 2014. There were no other errors during 2013 or 2014 and no corrections have been made for any of the errors. Ignore income tax considerations.

  57.     What is the total net effect of the errors on Langley's 2013 net income?
a.   Net income understated by $29,000.
b.   Net income overstated by $15,000.
c.   Net income overstated by $26,000.
d.   Net income overstated by $30,000.

  58.     What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2013?
a.   Working capital overstated by $10,000
b.   Working capital overstated by $3,000
c.   Working capital understated by $9,000
d.   Working capital understated by $24,000

  59.     What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2013?
a.   Retained earnings understated by $20,000
b.   Retained earnings understated by $9,000
c.   Retained earnings understated by $5,000
d.   Retained earnings overstated by $7,000

  60.     Accrued salaries payable of $51,000 were not recorded at December 31, 2012. Office supplies on hand of $34,000 at December 31, 2013 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause
a.   2013 net income to be understated $85,000 and December 31, 2013 retained earnings to be understated $34,000.
b.   2012 net income and December 31, 2012 retained earnings to be understated $51,000 each.
c.   2012 net income to be overstated $17,000 and 2013 net income to be understated $34,000.
d.   2013 net income and December 31, 2013 retained earnings to be understated $34,000 each.


Use the following information for questions 61 through 63.
Bishop Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 con- tained the following errors:
                                                                                   Dec. 31, 2012                      Dec. 31, 2013
            Ending inventory                                        $132,000 too high               $166,000 too low
            Depreciation expense                                    84,000 too high                             —
            Insurance expense                                         60,000 too low                    60,000 too high
            Prepaid insurance                                          60,000 too high                             —
In addition, on December 31, 2013 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2014. No corrections have been made for any of the errors. Ignore income tax considerations.

  61.     The total effect of the errors on Bishop's 2013 net income is
a.   understated by $386,800.
b.   understated by $254,800.
c.   overstated by $137,200.
d.   overstated by $269,200.

  62.     The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2013 is understated by
a.   $338,800.
b.   $278,800.
c.   $194,800.
d.   $146,800.

  63.     The total effect of the errors on the amount of Bishop's working capital at December 31, 2013 is understated by
a.   $410,800.
b.   $326,800.
c.   $194,800.
d.   $134,800.

Use the following information for questions 64 and 65.
Link Co. purchased machinery that cost $1,350,000 on January 4, 2011. The entire cost was recorded as an expense. The machinery has a nine-year life and a $90,000 residual value. The error was discovered on December 20, 2013. Ignore income tax considerations.

  64.     Link's income statement for the year ended December 31, 2013, should show the cumulative effect of this error in the amount of
a.   $1,210,000.
b.   $1,070,000.
c.   $930,000.
d.   $0.

  65.     Before the correction was made, and before the books were closed on December 31, 2013, retained earnings was understated by
a.   $1,350,000.
b.   $1,210,000.
c.   $1,070,000.
d.   $930,000.
Use the following information for questions 66 and 67.

Ernst Company purchased equipment that cost $1,500,000 on January 1, 2012. The entire cost was recorded as an expense. The equipment had a nine-year life and a $60,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2014. Ernst is subject to a 40% tax rate.

  66.     Ernst’s net income for the year ended December 31, 2012, was understated by
a.   $804,000.
b.   $900,000.
c.   $1,340,000.
d.   $1,500,000.

  67.     Before the correction was made and before the books were closed on December 31, 2014, retained earnings was understated by
a.   $664,000.
b.   $672,000.
c.   $708,000.
d.   $900,000.


MULTIPLE CHOICE—CPA Adapted

  68.     Which of the following should be reported as a prior period adjustment?
                Change in                             Change from
           Estimated Lives                  Unaccepted Principle
      of Depreciable Assets             to Accepted Principle
a.                  Yes                                          Yes
b.                   No                                           Yes
c.                  Yes                                           No
d.                   No                                           No

  69.     On December 31, 2013, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,000,000 increase in the beginning inventory at January 1, 2013. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a.   $0.
b.   $600,000.
c.   $1,400,000.
d.   $2,000,000.

  70.     On January 1, 2013, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $900,000 increase in the January 1, 2013 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its 2013
a.   retained earnings statement as a $630,000 addition to the beginning balance.
b.   income statement as a $630,000 cumulative effect of accounting change.
c.   retained earnings statement as a $900,000 addition to the beginning balance.
d.   income statement as a $900,000 cumulative effect of accounting change.

  71.     On January 1, 2010, Lake Co. purchased a machine for $1,056,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2013, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $96,000. An accounting change was made in 2013 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2013 of
a.   $584,000.
b.   $616,000.
c.   $640,000.
d.   $704,000.

  72.     On January 1, 2010, Hess Co. purchased a patent for $714,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2025. During 2013, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2013?
a.   $428,400
b.   $489,600
c.   $504,000
d.   $523,650

  73.  During 2012, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year.
·         Royalty income of $162,000 was accrued at 12/31/12 for the period July-December 2012.
·         Royalty income of $180,000 was received on 3/31/13, and $234,000 on 9/30/13.
·         Mercer learned from Roark that sales subject to royalty were estimated at $2,430,000 for the last half of 2013.
In its income statement for 2013, Mercer should report royalty income at
a.   $414,000.
b.   $432,000.
c.   $477,000.
d.   $495,000.


  74.     On January 1, 2012, Janik Corp. acquired a machine at a cost of $800,000. It is to be depreciated on the straight-line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Janik's 2012 financial statements. The oversight was discovered during the preparation of Janik's 2013 financial statements. Depreciation expense on this machine for 2013 should be
a.   $0.
b.   $160,000.
c.   $200,000.
d.   $320,000.

  75.     On December 31, 2013, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2013 balance sheet?
      Accrued Liabilities          Retained Earnings
a.           No effect                        No effect
b.           No effect                      Overstated
c.        Understated                      No effect
d.        Understated                    Overstated

  76.     Black, Inc. is a calendar-year corporation whose financial statements for 2012 and 2013 included errors as follows:
Year                  Ending Inventory                  Depreciation Expense
2012             $162,000  overstated                $135,000  overstated
2013                 59,000  understated                  45,000  understated
Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2012, or at December 31, 2013. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2014?
a.   $149,000 increase
b.   $41,000 increase
c.   $14,000 decrease
d.   $13,000 increase




EXERCISES

Ex. 22-77—Matching accounting changes to situations.

The four types of accounting changes, including error correction, are:

                        Code
                           a.   Change in accounting principle.
                           b.   Change in accounting estimate.
                           c.   Change in reporting entity.
                           d.   Error correction.
Instructions
Following are a series of situations. You are to enter a code letter to the left to indicate the type of change.
_____    1.     Change from presenting nonconsolidated to consolidated financial statements.
_____    2.     Change due to charging a new asset directly to an expense account.
_____    3.     Change from expensing to capitalizing certain costs, due to a change in periods benefited.
_____    4.     Change from FIFO to LIFO inventory procedures.
_____    5.     Change due to failure to recognize an accrued (uncollected) revenue.
_____    6.     Change in amortization period for an intangible asset.
_____    7.     Changing the companies included in combined financial statements.
_____    8.     Change in the loss rate on warranty costs.
_____    9.     Change due to failure to recognize and accrue income.
_____ 10.     Change in residual value of a depreciable plant asset.
_____ 11.     Change from an unacceptable to an acceptable accounting principle.
_____ 12.     Change in both estimate and acceptable accounting principles.
_____ 13.     Change due to failure to recognize a prepaid asset.
_____ 14.     Change from straight-line to sum-of-the-years'-digits method of depreciation.
_____ 15.     Change in life of a depreciable plant asset.
_____ 16.     Change from one acceptable principle to another acceptable principle.
_____ 17.     Change due to understatement of inventory.
_____ 18.     Change in expected recovery of an account receivable.

Ex. 22-78—How changes or corrections are recognized.

For each of the following items, indicate the type of accounting change and how each is recognized in the accounting records in the current year.

(a)    Change from straight-line method of depreciation to sum-of-the-years'-digits

(b)    Change from the cash basis to accrual basis of accounting

(c)    Change from FIFO to LIFO method for inventory valuation purposes (retrospective application impractical)

(d)    Change from presentation of statements of individual companies to presentation of consolidated statements

(e)    Change due to failure to record depreciation in a previous period

(f)     Change in the realizability of certain receivables

(g)    Change from LIFO to FIFO method for inventory valuation purposes




Ex. 22-79—Matching disclosures to situations.

In the blank to the left of each question, fill in the letter from the following list which best describes the presentation of the item on the financial statements of Helton Corporation for 2013.
            a.   Change in estimate
            b.   Prior period adjustment (not due to change in principle)
            c.   Retrospective type accounting change with note disclosure
            d.   None of the above
____     1.     In 2013, the company changed its method of recognizing income from the completed-contract method to the percentage-of-completion method.
____     2.     At the end of 2013, an audit revealed that the corporation's allowance for doubtful accounts was too large and should be reduced to 2%. When the audit was made in 2012, the allowance seemed appropriate.
____     3.     Depreciation on a truck, acquired in 2010, was understated because the service life had been overestimated. The understatement had been made in order to show higher net income in 2011 and 2012.
____     4.     The company switched from a LIFO to a FIFO inventory valuation method during the current year.
____     5.     In the current year, the company decides to change from expensing certain costs to capitalizing these costs, due to a change in the period benefited.
____     6.     During 2013, a long-term bond with a carrying value of $3,600,000 was retired at a cost of $4,100,000.
____     7.     After negotiations with the IRS, income taxes for 2011 were established at $42,900. They were originally estimated to be $28,600.
____     8.     In 2013, the company incurred interest expense of $29,000 on a 20-year bond issue.
____     9.     In computing the depreciation in 2011 for equipment, an error was made which overstated income in that year $75,000. The error was discovered in 2013.
____   10.     In 2013, the company changed its method of depreciating plant assets from the double-declining balance method to the straight-line method.




Ex. 22-80—Change in accounting principle.

In 2013, Fischer Corporation changed its method of inventory pricing from LIFO to FIFO. Net income computed on a LIFO as compared to a FIFO basis for the four years involved is: (Ignore income taxes.)
                                                  LIFO                    FIFO
            2010                           $78,200                 $81,700
            2011                             84,500                   88,100
            2012                             87,000                   91,400
            2013                             92,500                   96,700

Instructions
(a)    Indicate the net income that would be shown on comparative financial statements issued at 12/31/13 for each of the four years, assuming that the company changed to the FIFO method in 2013.
(b)    Assume that the company had switched from the average cost method to the FIFO method with net income on an average cost basis for the four years as follows: 2010, $80,400; 2011, $86,120; 2012, $90,300; and 2013, $93,600. Indicate the net income that would be shown on comparative financial statements issued at 12/31/13 for each of the four years under these conditions.
(c)    Assuming that the company switched from the FIFO to the LIFO method, what would be the net income reported on comparative financial statements issued at 12/31/13 for 2010, 2011, and 2012?




Ex. 22-81—Change in estimate, change in entity, correction of errors.

Discuss the accounting procedures for and illustrate the following:
(a)     Change in estimate
(b)     Change in entity
(c)     Correction of an error




Ex. 22-82—Changes in depreciation methods, estimates.

On January 1, 2008, Powell Company purchased a building and machinery that have the following useful lives, salvage value, and costs.
Building, 25-year estimated useful life, $5,000,000 cost, $500,000 salvage value
Machinery, 10-year estimated useful life, $700,000 cost, no salvage value
The building has been depreciated under the straight-line method through 2012. In 2013, the company decided to switch to the double-declining balance method of depreciation for the building. Powell also decided to change the total useful life of the machinery to 8 years, with a salvage value of $35,000 at the end of that time. The machinery is depreciated using the straight-line method.

Instructions
(a)   Prepare the journal entry necessary to record the depreciation expense on the building in 2013.
(b)   Compute depreciation expense on the machinery for 2013.


Ex. 22-83—Noncounterbalancing error.

Quigley Co. bought a machine on January 1, 2011 for $1,050,000. It had a $90,000 estimated residual value and a ten-year life. An expense account was debited on the purchase date. Quigley uses straight-line depreciation. This was discovered in 2013.

Instructions
Prepare the entry or entries related to the machine for 2013.



Ex. 22-84—Effects of errors.

Show how the following independent errors will affect net income on the Income Statement and the stockholders' equity section of the Balance Sheet using the symbol + (plus) for overstated, – (minus) for understated, and 0 (zero) for no effect.
                                                                                     2012                                        2013            
                                                                    Income            Balance         Income              Balance
                                                                   Statement           Sheet        Statement             Sheet
1.   Ending inventory in 2012 overstated.
2.   Failed to accrue 2012 interest
revenue.
3.   A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to maintenance expense in 2012.


Ex. 22-84  (cont.)

                                                                                     2012                                        2013            
                                                                    Income            Balance         Income              Balance
                                                                   Statement           Sheet        Statement             Sheet
4.   Failed to count office supplies on hand at 12/31/12. Cash expenditures have been charged to a supplies expense account during the year 2012.
5.   Failed to accrue 2012 wages.
6.   Ending inventory in 2012 understated.
7.   Overstated 2012 depreciation
expense; 2013 expense correct.

Ex. 22-85—Effects of errors.

Joseph Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 contained the following errors:
                                                                       Dec. 31, 2012            Dec. 31, 2013
            Ending inventory                              $80,000                        too high  $114,000   too high
            Depreciation expense                        48,000                         too low  —
            Accumulated depreciation                 48,000                         too low  48,000       too low
            Insurance expense                             42,000                        too high  42,000       too low
            Prepaid insurance                              36,000                         too low

In addition, on December 26, 2013 fully depreciated equipment was sold for $53,000, but the sale was not recorded until 2014. No corrections have been made for any of the errors.

Instructions
Ignoring income taxes, show your calculation of the total effect of the errors on 2013 net income.


PROBLEMS

Pr. 22-86—Accounting for changes and error corrections.

Dyke Company's net incomes for the past three years are presented below:
                         2014             2013             2012    
                     $480,000         $450,000         $360,000

During the 2014 year-end audit, the following items come to your attention:

1.   Dyke bought equipment on January 1, 2011 for $294,000 with a $24,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method)

2.   During 2014, Dyke changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases:
                                                   2014               2013                2012
      Straight-line                        36,000             36,000             36,000
      Double-declining                46,080             57,600             72,000


Pr. 22-86 (cont.)

      The net income for 2014 was computed using the double-declining balance method, on the January 1, 2014 book value, over the useful life remaining at that time. The depreciation recorded in 2014 was $72,000.

3.   Dyke, in reviewing its provision for uncollectibles during 2014, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2013 and 2014 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2014. The company would have recorded $6,000 less of bad debt expense on December 31, 2014 under the old rate.

Instructions
(a)    Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year.
(b)    Compute the net income to be reported each year 2012 through 2014.
(c)    Assume that the beginning retained earnings balance (unadjusted) for 2012 was $1,260,000. At what adjusted amount should this beginning retained earnings balance for 2012 be stated, assuming that comparative financial statements were prepared?
(d)    Assume that the beginning retained earnings balance (unadjusted) for 2014 is $1,800,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?



Pr. 22-87—Correction of errors.

Vance Company reported net incomes for a three-year period as follows:
       2011, $191,000;  2012, $199,000;  2013, $180,000.

In reviewing the accounts in 2014 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:
                                                                                                          2011         2012          2013
Overstatement of ending inventory                                                $42,000     $51,000     $29,000
Understatement of accrued advertising expense                              6,600       12,000         7,200

Instructions
(a)    Determine corrected net incomes for 2011, 2012, and 2013.
(b)    Give the entry to bring the books of the company up to date in 2014, assuming that the books have been closed for 2013.


Pr. 22-88—Error corrections and adjustments.

The controller for Haley Corporation is concerned about certain business transactions that the company experienced during 2013. The controller, after discussing these matters with various individuals, has come to you for advice. The transactions at issue are presented below.

1.   The company has decided to switch from the direct write-off method in accounting for bad debt expense to the percentage-of-sales approach. Assume that Haley Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way:
                                                                                 2012               2013
                  From 2012 sales                                  31,800             15,000
                  From 2013 sales                                                          45,000

      The controller estimates that an additional $65,400 will be charged off in 2014: $11,400 applicable to 2012 sales and $54,000 to 2013 sales.

Pr. 22-88  (cont.)

2.   Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such on account. At December 31, 2013, inventory billed and in the hands of consignees amounted to $450,000. The percentage markup on selling price is 20%. Assume that consigned inventory is sold the following year. The company uses the perpetual inventory system.

3.   During the current year, the company sold $600,000 of goods on the installment basis. The cost of sales associated with these goods sold is $420,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $172,000, including a down payment of $60,000, was collected on these installment sales during the current year. Due to questionable collectibility, the installment-sales method was considered appropriate.

Instructions
(a)    Assume that Haley Corporation reported net income of $1,200,000 for 2013. Present a schedule showing the corrected net income after reviewing the above transactions.
(b)    Prepare the journal entries necessary at December 31, 2013, assuming that the books have been closed.


IFRS QUESTIONS
True/False

1.   IFRS requires that changes in estimate be accounted for using the retrospective method.

2.   IFRS requires that any indirect effect of a change in accounting policy, such as increased royalty payments, be recognized in income in the year of the change in policy.

3.   IFRS requires that companies with equity method investments conform the accounting policies of their investees to their accounting policies prior to applying the equity method of accounting.

4.   Both IFRS and U.S. GAAP allow that if determining the effect of a change in accounting principle is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so.

5.   U.S. GAAP does not specifically address how companies should account for the indirect effects of changes in accounting principle.

Multiple Choice

1.   Is the following exception applicable to IFRS or U.S. GAAP?
      “If determining the effect of a change in accounting principle is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so.”
      IFRS        U.S. GAAP
a.     Yes                  Yes
b.     Yes                  No
c.     No                   Yes
d.     No                     No

2.   Is the following exception applicable to IFRS or U.S. GAAP?
      “If determining the effect of a correction of an error is considered impracticable, then a company should report the effect of the error correction in the period in which it believes it practicable to do so.”
      IFRS        U.S. GAAP
a.     Yes                    Yes
b.     Yes                  No
c.      No                 Yes
d.      No                   No




3.   Detailed guidance regarding the accounting and reporting for the indirect effects of changes in accounting principle is available under
a.     both U.S. GAAP and IFRS.
b.     neither U.S. GAAP nor IFRS.
c.     U.S. GAAP only.
d.     IFRS only.

4.   Ben, Inc. follows IFRS for its external financial reporting. Ben, Inc. owns 25% of the outstanding stock of Black, Inc. and accordingly uses the equity method to account for its investment. Which of the following is true regarding Ben, Inc.’s policies related to Black, Inc.?
a.     Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.’s net       loss for the year.
b.     Ben, Inc. will increase the investment account for its pro-rata share of the dividends paid   out   by Black, Inc. for the year.
c.     Ben, Inc. will conform the accounting policies of Black, Inc. to its own accounting policies.
d.     None of the above is true regarding how Ben, Inc. accounts for its investment in Black,      Inc.

5.   Ben, Inc. follows U.S. GAAP for its external financial reporting. Ben, Inc. owns 25% of the outstanding stock of Black, Inc. and accordingly uses the equity method to account for its investment. Which of the following is true regarding Ben, Inc.’s policies related to Black, Inc.?
a.   Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.’s net loss for the year.
b.   Ben, Inc. will increase the investment account for its pro-rata share of the dividends paid out by Black, Inc. for the year.
c.   Ben, Inc. will conform the accounting policies of Black, Inc. to its own accounting policies.
d.   None of the above is true regarding how Ben, Inc. accounts for its investment in Black, Inc.

6.   Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2013 for $780,000. During the year ended December 31, 2013, Hallmark, Inc. reported the following:
        Dividends declared and paid            $   400,000
        Net income                                        2,400,000
      Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2013. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.’s balance sheet at December 31, 2013 assuming Haystack, Inc. follows IFRS for its external financial reporting?
a.   $1,725,000
b.   $1,380,000
c.   $1,485,000
d.   $1,275,000


7.   Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2013 for $780,000. During the year ended December 31, 2013, Hallmark, Inc. reported the following:
                         Dividends declared and paid $   400,000
                         Net income                                       2,400,000
      Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2013. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.’s balance sheet at December 31, 2013 assuming Haystack, Inc. follows U.S. GAAP for its external financial reporting?
a.   $1,725,000
b.   $1,380,000
c.   $1,485,000
d.   $1,275,000

8.   Ridge, Inc. follows IFRS for its external financial reporting, and Cannon Company follows U.S. GAAP for its external financial reporting. During 2013, both companies changed depreciation methods, from double-declining balance to straight-line. Compared to double-declining balance, for Ridge, Inc. the change resulted in a decrease in reported depreciation expense of $60,000, and for Cannon Company the change resulted in a reported decrease in depreciation expense of $70,000. The remaining useful lives of the assets impacted by the change in depreciation method is 10 years for both companies. How would this change impact the net income reported by Ridge, Inc. and Cannon Company for the year ended December 31, 2013?
            Ridge, Inc.                      Cannon Company
a.     Decrease $60,000            Decrease $70,000
b.     Increase $6,000         Increase $7,000
c.     Increase $60,000              Increase $70,000
d.     Increase $60,000              Increase $7,000

9.   Mars, Inc. follows IFRS for its external financial reporting. On January 1, 2013, Mars, Inc. purchased 25% of the outstanding stock of Jerome Company (which uses U.S. GAAP for its external financial reporting) for $740,000, and appropriately uses the equity method to account for its investment. Jerome Company reports the following activity for the year ended December 31, 2013:
Net loss                                        $60,000
Dividends declared and paid         20,000
      Jerome Company uses the completed-contract method for revenue recognition related to its long-term construction contracts, while Mars, Inc. uses the percentage-of-completion method. Mars, Inc. determines that if Jerome Company had used the percentage-of-completion method, its income would have been $100,000 higher during 2013. What is the balance in the Investment in Jerome Company that will be reported on Mars, Inc.’s balance sheet at December 31, 2013?
a.   $775,000
b.   $720,000
c.   $740,000
d.   $735,000


10. Mars, Inc. follows IFRS for its external financial reporting, while Jerome Company uses U.S. GAAP for its external financial reporting. During the year ended December 31, 2013, both companies changed from using the completed-contract method of revenue recognition for long-term construction contracts to the percentage-of-completion method. Both companies experienced an indirect effect, related to increased profit-sharing payments in 2013, of $24,000. As a result of this change, how much expense related to the profit-sharing payment must be recognized by each company on the income statement for the year ended December 31, 2013?
      Mars, Inc.            Jerome Company
a.   $24,000                 $24,000
b.   $24,000                 $-0-
c.   $-0-                        $-0-
d.   $-0-                        $24,000