Ch22 - Chapter 22 solution for Intermediate Accounting by Donald E. Kieso, Jerry J. PDF

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Chapter 22 solution for Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield (16E)...

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CHAPTER 22 Accounting Changes and Error Analysis ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics

Questions

1.

Differences between change in principle, change in estimate, change in entity, errors.

2, 4, 6, 7, 8, 9, 12, 13, 15, 21

2.

Accounting changes:

3.

*4.

Brief Exercises Exercises

Problems

Concepts for Analysis

8, 10

3, 5

1, 2, 3, 4

a.

Comprehensive.

1, 3

10

3, 6

1, 2, 4, 5

b.

Changes in estimate, changes in depreciation methods.

2, 3, 8, 18

4, 5, 9

8, 9, 11, 12, 13, 14

1, 2, 3, 4, 6, 7

1, 2, 3, 4, 5, 6

c.

Changes in accounting for long-term construction contracts.

2, 10

1, 2, 10

1, 6

3

1, 2

d.

Change from FIFO to average cost.

e.

Change from FIFO to LIFO. 2, 11

10

f.

Change from LIFO.

8

3

g.

Miscellaneous.

1, 3, 4, 5, 6, 7, 8, 10

8, 9, 10

4, 7

3 1, 2

2, 3, 5, 7

3 1, 5

Correction of an error. a.

Comprehensive.

8, 14, 15, 17, 19

8, 9, 10

10, 15, 16, 18, 19, 20, 21

3, 4, 6, 7, 8, 9, 10

b.

Depreciation.

2, 18, 21

6, 7

11, 15, 17, 18

2, 6, 8

c.

Inventory.

9, 16, 20

10

9, 17, 18

8, 10

11, 12

22, 23

11, 12

Changes between fair value and equity methods.

2, 3, 4

1, 2

*This material is dealt with in an Appendix to the chapter.

Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

22-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Questions

Brief Exercises

Exercises

Problems

Concepts for Analysis

1. Identify types of accounting changes and understand the accounting for changes in accounting principles.

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11

1, 2, 3, 9, 10

1, 2, 3, 4, 5, 6, 7, 10

1, 2, 3, 4, 5, 6

1, 2, 3, 4, 5

2. Describe the accounting for changes in estimates and changes in the reporting entity.

12, 13

4, 5, 9

8, 9, 10, 11, 12, 13, 14

2, 3, 4, 5

1, 2, 3, 4, 5, 6

3. Describe the accounting for correction of errors.

15, 16, 17, 18, 19, 20, 21

6, 7, 8, 10

9, 10, 11, 15, 16, 17, 18, 19, 20, 21

2, 3, 4, 6, 7, 8, 9, 10

1, 2, 3, 4

4. Analyze the effect of errors.

14

18, 19, 20, 21

6, 7, 8, 9, 10

22, 23

11, 12

*5.

22-2

Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.

Copyright © 2016 John Wiley & Sons, Inc.

11, 12

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE Item

Description

Level of Difficulty

Time (minutes)

E22-1 E22-2 E22-3 E22-4 E22-5 E22-6 E22-7 E22-8 E22-9 E22-10 E22-11 E22-12 E22-13 E22-14 E22-15 E22-16 E22-17 E22-18 E22-19 E22-20 E22-21 *E22-22 *E22-23

Change in principle—long-term contracts. Change in principle—inventory methods. Accounting change. Accounting change. Accounting change. Change in principle—long-term contracts. Various changes in principle—inventory methods. Accounting changes—depreciation. Change in estimate and error; financial statements. Accounting for accounting changes and errors. Error and change in estimate—depreciation. Depreciation changes. Change in estimate—depreciation. Change in estimate—depreciation. Error correction entries. Error analysis and correcting entry. Error analysis and correcting entry. Error analysis. Error analysis and correcting entries. Error analysis. Error analysis. Change from fair value to equity. Change from equity to fair value.

Moderate Moderate Difficult Difficult Difficult Simple Moderate Difficult Moderate Simple Simple Moderate Simple Simple Simple Simple Simple Moderate Simple Moderate Moderate Complex Moderate

10–15 10–15 25–30 25–30 30–35 10–15 20–25 30–35 25–30 5–10 15–20 20–25 10–15 20–25 15–20 10–15 10–15 25–30 20–25 20–25 10–15 25–30 15–20

P22-1 P22-2 P22-3 P22-4 P22-5 P22-6 P22-7 P22-8 P22-9 P22-10 *P22-11 *P22-12

Change in principle—inventory—periodic. Change in estimate and error correction. Comprehensive accounting change and error analysis problem. Error corrections and accounting changes. Accounting changes. Accounting change and error analysis. Error corrections. Comprehensive error analysis. Error analysis. Error analysis and correcting entries. Fair value to equity method with goodwill. Change from fair value to equity method.

Moderate Moderate Complex Complex Moderate Moderate Moderate Difficult Moderate Complex Moderate Moderate

30–35 30–35 30–40 30–40 40–50 25–30 25–30 30–35 20–25 50–60 20–25 20–25

Analysis of various accounting changes and errors. Analysis of various accounting changes and errors. Analysis of three accounting changes and errors. Analysis of various accounting changes and errors. Change in principle, estimate. Change in estimate, ethics.

Moderate Moderate Moderate Moderate Moderate Moderate

25–35 20–30 30–35 20–30 20–30 20–30

CA22-1 CA22-2 CA22-3 CA22-4 CA22-5 CA22-6

Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

22-3

ANSWERS TO QUESTIONS 1.

The major reasons why companies change accounting methods are: (a) Desire to show better profit picture. (b) Desire to increase cash flows through reduction in income taxes. (c) Requirement by Financial Accounting Standards Board to change accounting methods. (d) Desire to follow industry practices. (e) Desire to show a better measure of the company’s income.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

2.

(a) Change in accounting principle; retrospective application is generally not made because it is impracticable to determine the effect of the change on prior years. The FIFO inventory amount is therefore generally the beginning inventory in the current period. (b) Correction of an error and therefore prior period adjustment; adjust the beginning balance of retained earnings. (c) Increase income for litigation settlement, assuming it was not accrued. (d) Change in accounting estimate; currently and prospectively. Part of operating section of income statement. (e) Reduction of accounts receivable and the allowance for doubtful accounts. (f) Change in accounting principle; retrospective application to prior period financial statements.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

3.

The three approaches suggested for reporting changes in accounting principles are: (a) Currently—the cumulative effect of the change is reported in the current year’s income as a special item. (b) Retrospectively—the cumulative effect of the change is reported as an adjustment to retained earnings. The prior year’s statements are changed on a basis consistent with the newly adopted principle. (c) Prospectively—no adjustment is made for the cumulative effect of the change. Previously reported results remain unchanged. The change shall be accounted for in the period of the change and in subsequent periods if the change affects future periods.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

4.

The FASB believes that the retrospective approach provides financial statement users the most useful information. Under this approach, the prior statements are changed on a basis consistent with the newly adopted standard; any cumulative effect of the change for prior periods is recorded as an adjustment to the beginning balance of retained earnings of the earliest period reported.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

5.

The indirect effect of a change in accounting principle reflects any changes in current or future cash flows resulting from a change in accounting principle that is applied retrospectively. An example is the change in payments to a profit-sharing plan that is based on reported net income. Indirect effects are not included in the retrospective application, but instead are reported in the period in which the accounting change occurs (current period).

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

6.

22-4

A change in an estimate is simply a change in the way an individual perceives the realizability of an asset or liability. Examples of changes in estimate are: (1) change in the realizability of trade receivables, (2) revisions of estimated lives, (3) changes in estimates of warranty costs, and (4) change in estimate of deferred charges or credits. A change in accounting estimate effected by a change in accounting principle occurs when a change in accounting estimate is inseparable from the effect of a related change in accounting principle. An example would be switching from

Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

capitalizing advertising expenditures to expensing them if the future benefit of the expenditures can no longer be estimated with reasonable certainty. LO: 1, Bloom: K, C, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

22-5

Questions Chapter 22 (Continued) 7.

This is an example of a situation in which it is difficult to differentiate between a change in accounting principle and a change in estimate. In such a situation, the change should be considered a change in estimate, and accordingly, should be handled currently and prospectively. Thus, all costs presently capitalized and viewed as providing doubtful future values should be expensed immediately, and costs currently incurred should also be expensed immediately.

LO: 1, Bloom: C, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

8.

(f)

(a) Charge to expense—possibly separately disclosed. (b) Change in estimate that is effected by a change in accounting principle—currently and prospectively. (c) Charge to expense—possibly separately disclosed. (d) Correction of an error and reported as a prior period adjustment—adjust the beginning balance of retained earnings. (e) Change in accounting principle—retrospective application to all affected prior-period financial statements. Change in accounting estimate—currently and prospectively.

LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

9.

This change is to be handled as a correction of an error. As such, the portion of the change attributable to prior periods ($23,000 = $52,000 − $29,000) should be reported as an adjustment to the beginning balance of retained earnings in the 2017 financial statements. If statements for previous years are presented for comparative purposes, these statements should be restated to correct for the error. The remainder of the inventory value ($29,000) should be reported in the 2017 income statement as a reduction of materials cost.

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

10.

Preferability is a difficult concept to apply. The problem is that there are no basic objectives to indicate which is the most preferable method, assuming a selection between two generally accepted accounting practices is possible, such as LIFO and FIFO. If a FASB standard creates a new principle or expresses preference for or rejects a specific accounting principle, a change is considered clearly acceptable. A more appropriate matching of revenues and expenses is often given as the justification for a change in accounting principle.

LO: 1, Bloom: C, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

11.

When a company changes to the LIFO method, the base-year inventory for all subsequent LIFO calculations is the beginning inventory in the year the method is adopted. This assumes that prior years’ income is not changed because it would be too impractical to do so. The only adjustment necessary may be to adjust the beginning inventory from a lower-of-cost-or-market approach to a cost basis. This establishes the beginning LIFO layer.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

12.

Where individual company statements were reported in prior years and consolidated financial statements are to be prepared this year, the following reporting and disclosure practices should be implemented: (1) The financial statements of all prior periods presented should be restated to show the financial information for the new reporting entity for all periods. (2) The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it. (3) The effect of the change on income from continuing operations, net income, and earnings per share amounts should be disclosed for all periods presented.

LO: 2, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

22-6

Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 22 (Continued) 13.

This change represents a change in reporting entity. This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods. The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it. The effect of the change on income from continuing operations, net income, and earnings per share amounts should be disclosed for all periods presented.

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

14.

Counterbalancing errors are errors that will be offset or corrected over two periods. Noncounterbalancing errors are errors that are not offset in the next accounting period. An example of a counterbalancing error is the failure to record accrued wages or prepaid expenses. Failure to capitalize equipment and record depreciation is an example of a noncounterbalancing error.

LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

15.

A correction of an error in previously issued financial statements should be handled as a priorperiod adjustment. Thus, such an error should be reported in the year that it is discovered as an adjustment to the beginning balance of retained earnings. And, if comparative statements are presented, the prior periods affected by the error should be restated. The disclosures need not be repeated in the financial statements of subsequent periods. As an illustration, assume that credit sales of $40,000 were inadvertently overlooked at the end of 2017. When the error was discovered in a subsequent period, the appropriate entry to record the correction of the error would have been (ignoring income tax effects):

............................................................................................Accounts Receivable 40,000 ............................................................................................................................. Retained Earnings ............................................................................................................................. 40,000 LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

16.

This change represents a change from an accounting principle that is not generally accepted to an accounting principle that is acceptable. As such, this change should be handled as a correction of an error. Thus, in the 2017 statements, the cumulative effect of the change should be reported as an adjustment to the beginning balance of retained earnings. If 2016 statements are presented for comparative purposes, these statements should be restated to correct for the accounting error.

LO: 3, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

17.

Retained earnings is correctly stated at December 31, 2019. Failure to accrue salaries in earlier years is a counterbalancing error that has no effect on 2019 ending retained earnings.

LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

18. December 31, 2018 .............................................................................................................Machinery 6,000 ............................................................................................................................. Accumulated Depreciation—Equipment ($6,000 ÷ 10)............................................................... 600 ............................................................................................................................. Retained Earnings ............................................................................................................................. 5,400 ............................................................................................................................. (To correct for the error of expensing installation costs ............................................................................................................................. on machinery acquired in January, 2017) ..............................................Depreciation Expense [($36,000* – $3,600**) ÷ 20] ...............................