Intermediate Accounting Kieso 16e Test Bank 22.3
BRIEF EXERCISES
BE. 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.
BE. 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
BE. 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 2018.
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 these choices
1. In 2018, the company changed its method of recognizing income from the completed-contract method to the percentage-of-completion method.
2. At the end of 2018, 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 2017, the allowance seemed appropriate.
3. Depreciation on a truck, acquired in 2015, was understated because the service life had been overestimated. The understatement had been made in order to show higher net income in 2016 and 2017.
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 2018, 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 2016 were established at $42,900. They were originally estimated to be $28,600.
8. In 2018, the company incurred interest expense of $29,000 on a 20-year bond issue.
9. In computing the depreciation in 2016 for equipment, an error was made which overstated income in that year $75,000. The error was discovered in 2018.
10. In 2018, the company changed its method of depreciating plant assets from the double-declining balance method to the straight-line method.
EXERCISES
Ex. 22-80—Change in accounting principle.
In 2019, 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
2016 $78,200 $87,700
2017 84,500 88,100
2018 87,000 90,400
2019 92,500 92,700
Instructions
(a) Indicate the net income that would be shown on comparative financial statements issued at 12/31/19 for each of the four years, assuming that the company changed to the FIFO method in 2019.
(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: 2016, $80,400; 2017, $86,120; 2018, $90,300; and 2015, $93,600. Indicate the net income that would be shown on comparative financial statements issued at 12/31/19 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 12/31/19 for 2016, 2017, and 2018?
Ex. 22-81—Change in estimate, change in reporting entity, correction of errors.
Discuss the accounting procedures for and illustrate the following:
(a) Change in estimate
(b) Change in reporting entity
(c) Correction of an error
Ex. 22-82—Changes in depreciation methods, estimates.
On January 1, 2013, Powell Company purchased a building and machinery that have the following useful lives, salvage value, and costs.
Building, 25-year estimated useful life, $9,000,000 cost, $900,000 salvage value
Machinery, 10-year estimated useful life, $1,200,000 cost, no salvage value
The building has been depreciated under the straight-line method through 2017. In 2018, 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 $60,000 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 2018.
(b) Compute depreciation expense on the machinery for 2018.
Ex. 22-83—Noncounterbalancing error.
Quigley Co. bought a machine on January 1, 2016 for $2,800,000. It had a $240,000 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 2018.
Instructions
Prepare the entry or entries related to the machine for 2018. Ignore taxes.
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.
2017 2018
Income Balance Income Balance
Statement Sheet Statement Sheet
1. Ending inventory in 2017 overstated.
2. Failed to accrue 2017 interest
revenue.
3. A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to Maintenance Expense in 2017.
Ex. 22-84 (cont.)
2017 2017
Income Balance Income Balance
Statement Sheet Statement Sheet
4. Failed to count office supplies on hand at 12/31/17. Cash expenditures have been charged to Supplies Expense during the year 2017.
5. Failed to accrue 2017 wages.
6. Ending inventory in 2017 understated.
7. Overstated 2017 depreciation
expense; 2018 expense correct.
Ex. 22-85—Effects of errors.
Joseph Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 contained the following errors:
Dec. 31, 2017 Dec. 31, 2018
Ending inventory $80,000 overstated $114,000 overstated
Depreciation expense 48,000 understated —
Accumulated depreciation 48,000 understated 48,000 understated
Insurance expense 42,000 overstated 42,000 understated
Prepaid insurance 42,000 understated
In addition, on December 26, 2018 fully depreciated equipment was sold for $53,000, but the sale was not recorded until 2019. 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 2018 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 (ignore taxes):
2019 2018 2017
$480,000 $450,000 $360,000
During the 2019 year-end audit, the following items come to your attention:
1. Dyke bought equipment on January 1, 2016 for $490,000 with a $40,000 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 2019, 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:
2019 2018 2017
Straight-line 36,000 36,000 36,000
Double-declining 46,080 57,600 72,000
Pr. 22-86 (cont.)
The net income for 2019 was computed using the double-declining balance method, on the January 1, 2019 book value, over the useful life remaining at that time. The depreciation recorded in 2019 was $72,000.
3. Dyke, in reviewing its provision for uncollectibles during 2019, 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 2017 and 2018 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2019. The company would have recorded $6,000 less of bad debt expense on December 31, 2019 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 2017 through 2019. Ignore taxes.
(c) Assume that the beginning retained earnings balance (unadjusted) for 2017 was $1,260,000. At what adjusted amount should this beginning retained earnings balance for 2017 be stated, assuming that comparative financial statements were prepared?
(d) Assume that the beginning retained earnings balance (unadjusted) for 2019 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:
2016, $191,000; 2017, $199,000; 2018, $180,000.
In reviewing the accounts in 2019 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:
2016 2017 2018
Overstatement of ending inventory $42,000 $51,000 $31,000
Understatement of accrued advertising expense 6,600 12,000 7,200
Instructions
(a) Determine corrected net incomes for 2016, 2017, and 2018.
(b) Give the entry to bring the books of the company up to date in 2019, assuming that the books have been closed for 2018.
Pr. 22-88—Error corrections and adjustments.
The controller for Haley Corporation is concerned about certain business transactions that the company experienced during 2018. 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-receivables approach. Assume that Haley Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way:
2017 2018
From 2017 sales 31,800 20,000
From 2018 sales 45,000
The controller estimates that an additional $60,400 will be charged off in 2019: $11,400 applicable to 2017 sales and $49,000 to 2018 sales.
Pr. 22-88 (cont.)
2. Starting in 2018, inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such on account. At December 31, 2018, 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.
Instructions
(a) Assume that Haley Corporation reported net income of $1,200,000 for 2018. Present a schedule showing the corrected net income after reviewing the above transactions.
(b) Prepare the journal entries necessary at December 31, 2018, 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. Under IFRS, the direct effects of changes in the accounting policies are applied retrospectively.
4. Both IFRS and 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. Under IFRS, errors in financial statements are considered as an accounting change.
Multiple Choice
6. Is the following exception applicable to IFRS or 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
7. Is the following exception applicable to IFRS or 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 GAAP
a. Yes Yes
b. Yes No
c. No Yes
d. No No
8. Detailed guidance regarding the accounting and reporting for the indirect effects of changes in accounting principle is available under
a. both GAAP and IFRS.
b. neither GAAP nor IFRS.
c. GAAP only.
d. IFRS only.
9. Ridge, Inc. follows IFRS for its external financial reporting, and Cannon Company follows GAAP for its external financial reporting. During 2018, 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 $90,000, and for Cannon Company the change resulted in a reported decrease in depreciation expense of $105,000. 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, 2018?
Ridge, Inc. Cannon Company
a. Decrease $90,000 Decrease $105,000
b. Increase $9,000 Increase $10,500
c. Increase $90,000 Increase $105,000
d. Increase $90,000 Increase $10,500
10. Mars, Inc. follows IFRS for its external financial reporting, while Jerome Company uses GAAP for its external financial reporting. During the year ended December 31, 2018, 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 2018, of $30,000. 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, 2018?
Mars, Inc. Jerome Company
a. $30,000 $30,000
b. $30,000 $-0-
c. $-0- $-0-
d. $-0- $30,000
