Kieso intermediate accounting 14th edition chapter 22 solutions

Thus, in the statements, the cumulative effect of the change should be reported as an adjustment to the beginning balance of retained earnings. If statements are presented for comparative purposes, these statements should be restated to correct for the accounting error. Retained earnings is correctly stated at December 31, Failure to accrue salaries in earlier years is a counterbalancing error that has no effect on ending retained earnings. December 31, Machinery The entry to correct for this error is as follows: Discount on Bonds Payable This error has no effect on net income because both purchases and inventory were understated.

The entry to correct for this error, assuming a periodic inventory system, is: Purchases Depreciation should have been charged to net income. The entry to correct for this error is as follows: Depreciation Expense Cost of depreciable assets Depreciation Expense Overstated Overstated b. Overstated Understated c. Understated Overstated d. Overstated Understated e. The changeto a three-year remaining life for the purpose ofcomputing depreciation on production equipmentis a change in estimate due to a change in conditions.

This is an expense classification change arising from a change in the use of the building for a different purpose. Thus, it is not a change in principle, a change in estimate, or an error. The change to expensing preproduction costs writing the costs off in one year as opposed to several years is a change in estimate due to a change in conditions. This oversightis a mistake that should be corrected.

Such a correction is considered a change due to error. Both the completed-contract method and the percentage-of-completion methodaregenerallyacceptedaccountingprinciples;thus,sucha change is a change in accounting principle.

The new method of accounting for inventorywas adopted becauseit better reflects the currentcostof the inventoryon the balancesheetand comparativefinancialstatements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items for fiscal years and were affected by the change in accounting principle. Under GAAP, indirect effects from periods before the change are recorded in the year of the change.

Additional disclosures would be a necessitated as indicated in the chapter. Changes in estimates are treated prospectively. Accumulated Depreciation—Equipment Retained Earnings No entry necessary. Amortization Expense Write off of Inventories Salaries and Wages Expense Sales Revenue Salary and Wages Expense Insurance Expense Same as in a.

A computation of the ending balance in the investment account of Elton John Corp. Aykroyd must change to the fair value method. Cessation of the equity method increasing the investment for the proportionate share of earnings and decreasing it for dividends received occurs immediately.

That carrying amount is transferred from the investment in Steve Martin account to the Available-for-Sale Securities account.

Problem 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 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 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 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 statements for a two-year period.

Problem Time 25—30 minutes Purpose—to provide a problem that requires the student to analyze ten transactions and to prepare adjusting or correcting entries for these transactions. Problem Time 30—35 minutes Purpose—to help a student understand the effect of errors on incomeand retained earnings. Problem 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.

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.

The student is required to account for the effect of this change on income. 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.

Cost of equipment Cost of Building A change in the experience rate is considered a change in estimate, which should be handled prospectively. Bad debt expense adjustment 10, 2. Inventoryadjustment FIFO 15, 5, 10, 16, 3. Construction in Process There is nothing unethical about changing the first-year election of depreciation back to the straight-linemethodprovidedthatit meets with the approval of appropriate corporate decision makers.

It is naive to believe that corporate officersdo 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 securities clearly manipulates the income to the benefit of the president. While legal and within GAAP guidelines, the ethics of this situation are borderline. Any auditor would automatically bringthis transactionto the attention of the board of directors.

CFO Placed in ethical dilemma between the interests of the president and the corporation. Stockholders Increased income from higher paper income may increase demand for dividends. Also, paying a bonusmaydecreasecashavailablefor dividends. This could have been used to start a pension plan for all of the employees.

This may lead to a miss-representation ofcreditworthiness. If desired,only the restated balances mightbe reported.

The adjustments are simply the cumulative difference in income between the two inventory methods, net of tax. Therefore,the neteffects on income and retained earnings are effectively rounded down to the next whole dollar.

Equipment Asset C Explanations: 1. The net income would be understated in because interest income is understated. The net income would be overstated in because interest income is overstated. The errors, however, would counter- balance wash so that the BalanceSheet Retained Earnings would be correct at the end of GAAP requires that all research and development costs should be ex- pensedwhen incurred.

The security deposit should be a long-term asset, called refundable deposits. The ending inventory would be understated since the merchandise was omitted. Becauseendinginventoryandnetincomehavea directrelation- ship, net income in would be understated.

Theending inventory of becomes the beginning inventory of If beginning inventory of is understated, then net income of is overstated inverse relationship. The omission in inventory over the two-year period will counterbalance, and retained earnings at the end of will be correct.

To correct C. Adjustment for contract financing 3, 3, 5, 7. December 31, Cash 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.

This case describes three independent situations with whichthe 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 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 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 Time 20—30 minutes Purpose—to provide the student with an opportunity to explain the ethical issues related to changes in estimates.

Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement of prior periods is not appropriate. Restatement of opening retained earnings is not appropriate. This is a new method for a new class of assets. No change is involved. Mathematical Error. This is a correction of an error and prior period treatment would be in order. 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. This is a change in accounting principle. Restatement of December31, retained earnings is not appropriate, given that the effect on net income in prior periods cannot be determined.

Percentage of Completion. Retained earnings should be adjusted. A change in accounting principle. Yes 2. A change in an accounting estimate. An accounting change involving both a change in accounting principle and a change in accounting estimate.

Referred to as an change in accounting estimate effected by a change in principle. Handle as a change in estimate. Not an accounting change but rather a change in classification. Yes 5. An error correction not involving a change in accounting principle.

Yes 6. An accounting change involving a change in the reporting entity which is a special type of change in accounting principle. Yes 7. Not a change in accounting principle. Simply, a change in tax accounting. An accounting change from one generally accepted accounting principle to another generally accepted accounting principle. CA Situation 1. When single period statements are presented, the required adjustments should be reported in the opening balance of retained earnings.

A description of the change and its effect on income before extraordinary items, net income, and the related per share amounts should be disclosed in the period of the change. Financial statements of subsequent periods need not repeat the disclosures. The income statement for the current year should report the correct approach for revenue recognition.

Under this approach, the cumulative effect of the new method on the financial statements at the beginning of the period is computed and recorded in retained earnings at the beginning of the period. Prior statements are changed to be reported on a basis consistent with the new standard. Cost of goods sold will also be different higher , resulting in lower income.

Situation 3. Unlike a change in accounting principle, the change in accounting estimate should not be accounted for by presenting prior earnings data giving effect to the change as if it had been applied retrospectively. CA 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: a Reporting current and future financial statements on the new basis.

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. This situation is considered a correctionof an error. The general rule is that careful estimates which later prove to be incorrect should be considered changes in estimates. Where the estimate was obviously computed incorrectly because of lack of expertise or in bad faith, the adjustment should be considered an error.

Changes due to error should employ the retroactive approach by: a Restating, via a prior period adjustment, the beginning balance of retained earnings for the current period. No adjustment is necessary—a change in accounting principle is not considered to have happened if a new principle is adopted in recognition of events that have occurred for the first time.

This situation is considered a change in accounting principle. A change in accounting principle should employ the retrospective approach by: a Reporting current results on the new basis.

CA Mr. Dear Mr. Davison: You recently contacted me about several accounting changes made at Sports-ProAthletics, Inc. This letter details how you should account for each change. Your change from one method of depreciation to another constitutes a change in accounting estimate effected by a change in accounting principle.

A change in estimate employs the prospective approach by reporting current and future financial statements on the new basis. Prior periods financial statements are presented as previously reported. 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 prospectively.

The change is included in the most current period being reported. Finally, your change in specific subsidiaries results in a change in reporting entity which must be reported by restating the financial statements for all periods presented.

The effect of this change should be shown on income before extraordinary items, net income, and earnings per share amounts. GAAP requires that indirect effects do not change prior period amounts.

There is a difference between U. Depreciation Expense Overstated Overstated b. Overstated Understated c. Understated Overstated d. Overstated Understated e. The change to a three-year remaining life for the purpose of computing depreciation on production equipment is a change in estimate due to a change in conditions. This is an expense classification change arising from a change in the use of the building for a different purpose. Thus, it is not a change in policy, a change in estimate, or an error.

The change to expensing preproduction costs writing the costs off in one year as opposed to several years is a change in estimate due to a change in conditions. Both FIFO and average cost are generally accepted accounting policies; thus, this item is a change in accounting policy. This oversight is a mistake that should be corrected. Such a correction is considered a change due to error. Both the cost-recovery method and the percentage-of-completion method are generally accepted policies; thus, such a change is a change in accounting policy.

The new method of accounting for inventory was adopted because it better reflects the current cost of the inventory on the statement of financial position and comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items for fiscal years and were affected by the change in accounting policy.

Under IFRS, indirect effects from periods before the change are recorded in the year of the change. Additional disclosures would be as necessitated as indicated in the chapter. Another acceptable presentation for the retained earnings statement for is: Retained earnings, January 1, as reported Changes in estimates are treated prospectively.

Accumulated Depreciation—Machinery Retained Earnings No entry necessary. Amortization Expense—Copyright Wages Expense Vacation Wages Expense Same as in a.

Problem 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 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 Time 30—35 minutes Purpose—to develop an understanding of the impact which a change in the method of inventory pricing from FIFO 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 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 Time 25—30 minutes Purpose—to provide a problem that requires the student to analyze ten transactions and to prepare adjusting or correcting entries for these transactions. Problem Time 30—35 minutes Purpose—to help a student understand the effect of errors on income and retained earnings. Problem 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. 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. Cost of equipment Cost of Building A change in the experience rate is considered a change in estimate, which should be handled prospectively. A change from Average Cost to FIFO is considered a change in accounting policy, which must be handled retrospectively.

Bad debt expense adjustment 10, 2. Inventory adjustment FIFO 15, 5, 10, 16, 3. Accumulated Depreciation— Equipment Construction in Process There is nothing unethical about changing the first-year election of depreciation back to the straight-line method provided that it meets with the approval of appropriate corporate decision makers.

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 investment reclassification for the selected investments clearly manipulates the income to the benefit of the president. While legal and within IFRS guidelines, the ethics of this situation are borderline.

Any auditor would automatically bring this transaction to the attention of the board of directors. CFO Placed in ethical dilemma between the interests of the president and the corporation. Shareholders Increased income from higher paper income may increase demand for dividends. Also, paying a bonus may decrease cash available for dividends. This could have been used to start a pension plan for all of the employees. This may lead to a missrepresentation of creditworthiness.

If desired, only the restated balances might be reported. The adjustments are simply the cumulative difference in income between the two inventory methods, net of tax.

Therefore, the net effects on income and retained earnings are effectively rounded down to the next whole dollar. Asset C Explanations: 1. The net income would be understated in because interest income is understated.

The net income would be overstated in because interest income is overstated. The errors, however, would counter- balance wash so that the statement of financial position Retained Earnings would be correct at the end of IFRS requires that all research costs should be expensed when incurred. The security deposit should be a long-term asset, called refundable deposits. The ending inventory would be understated since the merchandise was omitted.

Because ending inventory and net income have a direct relation- ship, net income in would be understated. The ending inventory of becomes the beginning inventory of If beginning inventory of is understated, then net income of is overstated inverse relationship. The omission in inventory over the two-year period will counterbalance, and retained earnings at the end of will be correct.

To correct C. Adjustment for contract financing 3, 3, 5, 7. This case describes several proposed accounting changes with which the student is required to identify whether the change involves an accounting policy, accounting estimate, or correction of an error, plus the necessary reporting requirements for each proposal.

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 IFRS, and the effects of each change on the financial statements. CA 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 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, and change in policy are communicated in a written letter. CA Time 20—30 minutes Purpose—to provide the student with an opportunity to explain the ethical issues related to changes in estimates.

Uncollectible Accounts Receivable. This is a change in accounting estimate. Restatement of prior periods is not appropriate. Restatement of opening retained earnings is not appropriate. This is a new method for a new class of assets. No change is involved. Mathematical Error. This is a correction of an error and prior period adjustment treatment would be in order. 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 policy amortization on a per- unit basis.

Consequently, it is treated as a change in accounting estimate. This is a change in accounting policy. Restatement of December 31, retained earnings is not appropriate, given that the effect on net income in prior periods cannot be determined. Retained earnings should be adjusted. A change in accounting policy. Yes 2. A change in an accounting estimate.

An accounting change involving both a change in accounting No policy and a change in accounting estimate. Handle as a change in estimate. Not an accounting change but rather a change in classification. An error correction not involving a change in accounting policy. Yes 6. Not a change in accounting policy. Simply, a change in tax No accounting. Yes CA Situation 1.

When single period statements are presented, the required adjustments should be reported in the opening balance of retained earnings. A description of the change and its effect on net income, and the related per share amounts should be disclosed in the period of the change. Financial statements of subsequent periods need not repeat the disclosures.

The income statement for the current year should report the correct approach for revenue recognition. Situation 2. Under this approach, the cumulative effect of the new method on the financial statements at the beginning of the period is computed and recorded in retained earnings at the beginning of the period.

Prior statements are changed to be reported on a basis consistent with the new standard. Cost of goods sold will also be different higher , resulting in lower income.

Unlike a change in accounting policy, the change in accounting estimate should not be accounted for by presenting prior earnings data giving effect to the change as if it had been applied retrospectively.

CA 1. This situation is a change in estimate. Whenever it is impossible to determine whether a change in policy or a change in estimate has occurred, the change should be considered a change in estimate. A change in estimate employs the current and prospective approach by: a Reporting current and future financial statements on the new basis. 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. This situation is considered a correction of an error. The general rule is that careful estimates which later prove to be incorrect should be considered changes in estimates. Where the estimate was obviously computed incorrectly because of lack of expertise or in bad faith, the adjustment should be considered an error. Changes due to error should employ the retroactive approach by: a Restating, via a prior period adjustment, the beginning balance of retained earnings for the current period.

No adjustment is necessary—a change in accounting policy is not considered to have happened if a new policy is adopted in recognition of events that have occurred for the first time.

This situation is considered a change in accounting policy. A change in accounting policy should employ the retrospective approach by: a Reporting current results on the new basis.

CA Mr. This letter details how you should account for each change. Your change from one method of depreciation to another constitutes a change in accounting estimate.

A change in estimate employs the current and prospective approach by reporting current and future financial statements on the new basis.