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Transcript of Chapter 22-1. Chapter 22-2 C H A P T E R 22 ACCOUNTING CHANGES AND ERROR ANALYSIS Intermediate...
Chapter 22-1
Chapter 22-2
C H A P T E R C H A P T E R 2222
ACCOUNTING CHANGES AND ACCOUNTING CHANGES AND ERROR ANALYSISERROR ANALYSIS
Intermediate Accounting13th Edition
Kieso, Weygandt, and Warfield
Chapter 22-3
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Chapter 22-4
Changes in accounting Changes in accounting principleprinciple
Changes in accounting Changes in accounting estimateestimate
Reporting in reporting entityReporting in reporting entity
Correction of errorsCorrection of errors
SummarySummary
Motivations for change of Motivations for change of methodmethod
Accounting ChangesAccounting Changes Error AnalysisError Analysis
Balance sheet errorsBalance sheet errors
Income statement errorsIncome statement errors
Balance sheet and income Balance sheet and income statement effectsstatement effects
Comprehensive exampleComprehensive example
Preparation of statements Preparation of statements with error correctionswith error corrections
Accounting Changes and Error Accounting Changes and Error AnalysisAnalysis
Accounting Changes and Error Accounting Changes and Error AnalysisAnalysis
Chapter 22-5
Types of Accounting Changes:
Change in Accounting Principle.
Changes in Accounting Estimate.
Change in Reporting Entity.
Errors are not considered an accounting change.
LO 1 Identify the types of accounting changes.
Accounting Alternatives:
1) Diminish the comparability of financial information.
2) Obscure useful historical trend data.
Accounting ChangesAccounting ChangesAccounting ChangesAccounting Changes
Chapter 22-6
Average cost to LIFO.
Completed-contract to percentage-of-completion.
A change from one generally accepted accounting principle to another. Examples include:
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 2 Describe the accounting for changes in accounting principles.
Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.
Chapter 22-7
Three approaches for reporting changes:
1) Currently.
2) Retrospectively.
3) Prospectively (in the future).
FASB requires use of the retrospective
approach.
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 2 Describe the accounting for changes in accounting principles.
Rationale - Users can then better compare results from one period to the next.
Chapter 22-8
Retrospective Accounting Change Approach
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 3 Understand how to account for retrospective accounting changes.
Company reporting the change
1) adjusts its financial statements for each prior period
presented to the same basis as the new accounting
principle.
2) adjusts the carrying amounts of assets and
liabilities as of the beginning of the first year
presented, plus the opening balance of retained
earnings.
Chapter 22-9
Illustration: Denson Company has accounted for its
income from long-term construction contracts using the
completed-contract method. In 2010 the company
changed to the percentage-of-completion method.
Management believes this approach provides a more
appropriate measure of the income earned. For tax
purposes, the company uses the completed-contract
method and plans to continue doing so in the future.
(We assume a 40 percent enacted tax rate.)
LO 3 Understand how to account for retrospective accounting changes.
Retrospective Accounting Change: Long-Term Contracts
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-10 LO
3
Income statements for 2008–2010
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Illustration 22-1Illustration 22-1
Chapter 22-11
Data for Retrospective Change Example
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Illustration 22-2Illustration 22-2
Construction in Process 220,000
Deferred Tax Liability
88,000
Retained Earnings
132,000LO 3 Understand how to account for retrospective accounting
changes.
Journal entry to record change at beginning of 2010:
Chapter 22-12
Reporting a Change in Principle
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 3 Understand how to account for retrospective accounting changes.
Major disclosure requirements are as follows.
1. Nature and reason for the change in accounting principle.
2. The method of applying the change, and:
a. A description of the prior-period information that
has been retrospectively adjusted, if any.
b. The effect of the change on income from
continuing operations, net income, any other
affected line items.
c. The cumulative effect of the change on retained
earnings or other components of equity or net
assets as of the beginning of the earliest period
presented.
Chapter 22-13
Reporting a Change in Principle
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 3 Understand how to account for retrospective accounting changes.
Illustration 22-3Illustration 22-3
Chapter 22-14
Retained Earnings Adjustment
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 3 Understand how to account for retrospective accounting changes.
Illustration 22-4Illustration 22-4
Assuming a retained earnings balance of $1,360,000 at the beginning of 2008.
Before Before ChangeChange
Chapter 22-15
Retained Earnings Adjustment
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
LO 3 Understand how to account for retrospective accounting changes.
Illustration 22-5Illustration 22-5
After ChangeAfter Change
Chapter 22-16
E22-1 (Change in Principle—Long-Term
Contracts): Cherokee Construction Company changed
from the completed-contract to the percentage-of-
completion method of accounting for long-term
construction contracts during 2010. For tax purposes,
the company employs the completed-contract method
and will continue this approach in the future. (Hint:
Adjust all tax consequences through the Deferred Tax
Liability account.) The appropriate information related
to this change is as follows.
LO 3 Understand how to account for retrospective accounting changes.
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-17
E22-1 (Change in Principle—Long-Term
Contracts):
LO 3 Understand how to account for retrospective accounting changes.
Instructions: (assume a tax rate of 35%)
(b) What entry(ies) are necessary to adjust the accounting
records for the change in accounting principle?
(a) What is the amount of net income and retained earnings
that would be reported in 2010? Assume beginning retained
earnings for 2009 to be $100,000.
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-18
Example: Pre-Tax Income from Long-Term Contracts
LO 3 Understand how to account for retrospective accounting changes.
35%Percentage- Completed Tax Net of
Date of -Completion Contract Diff erence Eff ect Tax
2009 780,000$ 610,000$ 170,000 59,500 110,500$
2010 700,000 480,000 220,000 77,000 143,000
J ournal entry
2010 Construction in progress 170,000
Deferred tax liability 59,500
Retained earnings 110,500
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-19
Example: Comparative Statements
LO 3 Understand how to account for retrospective accounting changes.
Restated2010 2009
Pre-tax income 700,000$ 780,000$
I ncome tax (35%) 245,000 273,000
Net income 455,000$ 507,000$
Beg. Retained earnings 100,000$
Accounting change 110,500
Beg. R/ Es restated 717,500$ 210,500
Net income 455,000 507,000
End. Retained earnings 1,172,500$ 717,500$
Income Income StatemenStatemen
tt
StatemenStatement of t of
Retained Retained EarningsEarnings
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-20 LO 3 Understand how to account for retrospective accounting
changes.
Direct and Indirect Effects of Changes
Direct Effects - The FASB takes the position that
companies should retrospectively apply the direct
effects of a change in accounting principle.
Indirect Effects do not change prior-period
amounts.
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-21
Impracticability
LO 4 Understand how to account for impracticable changes.
Companies should not use retrospective application if one of the following conditions exists:1. Company cannot determine the effects of the
retrospective application.
2. Retrospective application requires assumptions about management’s intent in a prior period.
3. Retrospective application requires significant estimates that the company cannot develop.
If any of the above conditions exists, the company prospectively applies the new accounting principle.
Changes in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting PrincipleChanges in Accounting Principle
Chapter 22-22
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
The following items require estimates.
1. Uncollectible receivables.
2. Inventory obsolescence.
3. Useful lives and salvage values of assets.
4. Periods benefited by deferred costs.
5. Liabilities for warranty costs and income taxes.
6. Recoverable mineral reserves.
7. Change in depreciation methods.
Chapter 22-23
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Prospective Reporting
The FASB views changes in estimates as normal recurring corrections and adjustments and prohibits retrospective treatment.
Companies report prospectively changes in accounting
estimates. They account for changes in estimates in
1. the period of change if the change affects that
period only, or
2. the period of change and future periods if the
change affects both.
Chapter 22-24
Illustration: Arcadia High School (Phoenix), purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2008 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.
Required:
What is the journal entry to correct prior years’ depreciation expense?
Calculate depreciation expense for 2008.
No Entry No Entry RequiredRequired
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
LO 5 Describe the accounting for changes in estimates.
Chapter 22-25
EquipmenEquipmentt
$510,000$510,000
Fixed Assets:Fixed Assets:
Accumulated depreciationAccumulated depreciation 350,000350,000
Net book value (NBV)Net book value (NBV) $160,000$160,000
Balance SheetBalance Sheet (Dec. 31, (Dec. 31, 2007)2007)
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleAfter 7 yearsAfter 7 years
Equipment cost cost $510,000$510,000
Salvage valueSalvage value - 10,000 - 10,000
Depreciable baseDepreciable base 500,000500,000
Useful life (original)Useful life (original) 10 years 10 years
Annual depreciationAnnual depreciation $ 50,000 $ 50,000 x 7 years = x 7 years = $350,000$350,000
First, establish First, establish NBV at date of NBV at date of
change in change in estimate.estimate.
First, establish First, establish NBV at date of NBV at date of
change in change in estimate.estimate.
LO 5 Describe the accounting for changes in estimates.
Chapter 22-26
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
Net book value $160,000Salvage value (if any) 5,000Depreciable base 155,000Useful life 8 yearsAnnual depreciation $ 19,375
Second, calculate Second, calculate depreciation depreciation
expense for 2008.expense for 2008.
Second, calculate Second, calculate depreciation depreciation
expense for 2008.expense for 2008.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2008
LO 5 Describe the accounting for changes in estimates.Solution on notes page
Chapter 22-27
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Disclosures
Companies need not disclose changes in accounting
estimate made as part of normal operations, such as
bad debt allowances or inventory obsolescence,
unless such changes are material.
However, for a change in estimate that affects several
periods (such as a change in the service lives of
depreciable assets), companies should disclose the
effect on income from continuing operations and
related per-share amounts of the current period.
Chapter 22-28
Change in Reporting EntityChange in Reporting EntityChange in Reporting EntityChange in Reporting Entity
LO 6 Identify changes in a reporting entity.
Examples of a change in reporting entity are:1. Presenting consolidated statements in place of
statements of individual companies.
2. Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements.
3. Changing the companies included in combined financial statements.
4. Changing the cost, equity, or consolidation method of accounting for subsidiaries and investments.
Reported by changing the financial statements of all prior periods presented.
Chapter 22-29
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Accounting errors include the following types:1. A change from an accounting principle that is not
generally accepted to an accounting principle that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did not prepare the estimates in good faith.
4. Failure to accrue or defer certain expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of an asset, and vice versa.
Chapter 22-30
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
All material errors must be corrected.
Record corrections of errors from prior periods
as an adjustment to the beginning balance of
retained earnings in the current period.
Such corrections are called prior period
adjustments.
For comparative statements, a company should
restate the prior statements affected, to correct
for the error.
Chapter 22-31
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: In 2011 the bookkeeper for Selectro
Company discovered an error:
In 2010 the company failed to record $20,000 of
depreciation expense on a newly constructed building.
This building is the only depreciable asset Selectro
owns. The company correctly included the depreciation
expense in its tax return and correctly reported its
income taxes payable.
Chapter 22-32
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: Selectro’s income statement for 2010
with and without the error.Illustration 22-19Illustration 22-19
Show the entries that Selectro should have made and did
make for recording depreciation expense and income taxes.
Chapter 22-33
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: Show the entries that Selectro should
have made and did make for recording depreciation
expense and income taxes.Illustration 22-20Illustration 22-20
CorrectinCorrecting Entry g Entry in 2011in 2011
Chapter 22-34
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: Show the entries that Selectro should
have made and did make for recording depreciation
expense and income taxes.Illustration 22-20Illustration 22-20
Retained Earnings 12,000CorrectinCorrecting Entry g Entry in 2011in 2011
Chapter 22-35
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: Show the entries that Selectro should
have made and did make for recording depreciation
expense and income taxes.Illustration 22-20Illustration 22-20
Retained Earnings 12,000
Deferred Tax Liability 8,000CorrectinCorrecting Entry g Entry in 2011in 2011
ReversaReversall
Chapter 22-36
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration: Show the entries that Selectro should
have made and did make for recording depreciation
expense and income taxes.Illustration 22-20Illustration 22-20
Retained Earnings 12,000
Deferred Tax Liability 8,000
Accumulated Depreciation—Buildings
20,000
CorrectinCorrecting Entry g Entry in 2011in 2011
RecordRecord
Chapter 22-37
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Illustration (Single-Period Statement): Assume
that Selectro Company has a beginning retained
earnings balance at January 1, 2011, of $350,000. The
company reports net income of $400,000 in 2011.Illustration 22-21Illustration 22-21
Chapter 22-38
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 7 Describe the accounting for correction of errors.
Comparative Statements
A company should
1. make adjustments to correct the amounts for all
affected accounts reported in the statements for all
periods reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest
period it reported.
Chapter 22-39
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2010, you discover a $62,500 error that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2009). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010? Assume a 20% tax rate.
LO 7 Describe the accounting for correction of errors.
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Chapter 22-40
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1, as previously reported 1,050,000$ Prior period adjustment, net of tax (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
LO 7 Describe the accounting for correction of errors.
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Solution on notes page
Chapter 22-41
Summary of Accounting Changes and Summary of Accounting Changes and ErrorsErrors
Summary of Accounting Changes and Summary of Accounting Changes and ErrorsErrors
LO 7 Describe the accounting for correction of errors.
Illustration 22-23Illustration 22-23
Chapter 22-42
Summary of Accounting Changes and Summary of Accounting Changes and ErrorsErrors
Summary of Accounting Changes and Summary of Accounting Changes and ErrorsErrors
LO 7 Describe the accounting for correction of errors.
Illustration 22-23Illustration 22-23
Chapter 22-43
Motivations for Change of Motivations for Change of Accounting MethodAccounting Method
Motivations for Change of Motivations for Change of Accounting MethodAccounting Method
LO 8 Identify economic motives for changing accounting methods.
Why companies may prefer certain accounting methods. Some reasons are:
1. Political costs.
2. Capital Structure.
3. Bonus Payments.
4. Smooth Earnings.
Chapter 22-44
Error AnalysisError AnalysisError AnalysisError Analysis
LO 9 Analyze the effect of errors.
Companies must answer three questions:
1. What type of error is involved?
2. What entries are needed to correct for the
error?
3. After discovery of the error, how are financial
statements to be restated?
Companies treat errors as prior-period
adjustments and report them in the current year
as adjustments to the beginning balance of
Retained Earnings.
Chapter 22-45
Balance sheet errors affect only the presentation of an asset, liability, or stockholders’ equity account.
When the error is discovered in the error year, the company reclassifies the item to its proper position.
If the error is discovered in a prior year, the company should restate the balance sheet of the prior year for comparative purposes.
Balance Sheet ErrorsBalance Sheet ErrorsBalance Sheet ErrorsBalance Sheet Errors
LO 9 Analyze the effect of errors.
Chapter 22-46
Improper classification of revenues or expenses.
A company must make a reclassification entry when it discovers the error in the error year.
If the error is discovered in a prior year, the company should restate the income statement of the prior year for comparative purposes.
Income Statement ErrorsIncome Statement ErrorsIncome Statement ErrorsIncome Statement Errors
LO 9 Analyze the effect of errors.
Chapter 22-47
Errors affecting both balance sheet and income statement.
This type of error classified as:
1. Counterbalancing errors
2. Noncounterbalancing errors
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
LO 9 Analyze the effect of errors.
Chapter 22-48
Counterbalancing Errors
Will be offset or corrected over two periods.
If company has closed the books:
a. If the error is already counterbalanced, no entry is necessary.
b. If the error is not yet counterbalanced, make entry to adjust the present balance of retained earnings.
LO 9 Analyze the effect of errors.
For comparative purposes, restatement is necessary even if a correcting journal entry is not required.
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Chapter 22-49
Counterbalancing Errors
Will be offset or corrected over two periods.
If company has not closed the books:
a. If error already counterbalanced, make entry to correct the error in the current period and to adjust the beginning balance of Retained Earnings.
b. If error not yet counterbalanced, make entry to adjust the beginning balance of Retained Earnings.
LO 9 Analyze the effect of errors.
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Chapter 22-50
Noncounterbalancing Errors
Not offset in the next accounting period.
Companies must make correcting entries, even if they have closed the books.
LO 9 Analyze the effect of errors.
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Balance Sheet and Income Statement Balance Sheet and Income Statement ErrorsErrors
Chapter 22-51
E22-19 (Error Analysis; Correcting Entries): A partial trial balance of Dickinson Corporation is as follows on December 31, 2010.
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
I nterest receivable 5,100
Prepaid insurance 90,000
Unearned rent 0
Accured interest payable 15,000
LO 9 Analyze the effect of errors.
Instructions(a) Assuming that the books have not been closed, what are
the adjusting entries necessary at December 31, 2010?
Chapter 22-52
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Supplies expense 1,400
Supplies on hand 1,400
LO 9 Analyze the effect of errors.
1. A physical count of supplies on hand on December 31, 2010, totaled $1,100.
Salaries and wages expense 2,900
Accured salaries and wages 2,900
2. Accrued salaries and wages on December 31, 2010, amounted to $4,400.
(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2010?
Solution on notes page
Chapter 22-53
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
I nterest revenue 750
I nterest receivable 750
LO 9 Analyze the effect of errors.
3. Accrued interest on investments amounts to $4,350 on December 31, 2010.
I nsurance expense 25,000
Prepaid insurance 25,000
4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2010.
(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2010?
Solution on notes page
Chapter 22-54
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Rental income 12,000
Unearned rent 12,000
LO 9 Analyze the effect of errors.
(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2010?
5. $24,000 was received on January 1, 2010 for the rent of a building for both 2010 and 2011. The entire amount was credited to rental income.
Depreciation expense 45,000
Accumulated depreciation 45,000
6. Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.
Solution on notes page
Chapter 22-55
E22-19 (Error Analysis; Correcting Entries) A partial trial balance of Dickinson Corporation is as follows on December 31, 2010.
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
I nterest receivable 5,100
Prepaid insurance 90,000
Unearned rent 0
Accured interest payable 15,000
LO 9 Analyze the effect of errors.
Instructions(b) Assuming that the books have been closed, what are
the adjusting entries necessary at December 31, 2010?
Chapter 22-56
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Retained earnings 1,400
Supplies on hand 1,400
LO 9 Analyze the effect of errors.
(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2010?
1. A physical count of supplies on hand on December 31, 2010, totaled $1,100.
Retained earnings 2,900
Accured salaries and wages 2,900
2. Accrued salaries and wages on December 31, 2010, amounted to $4,400.
Solution on notes page
Chapter 22-57
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Retained earnings 750
I nterest receivable 750
LO 9 Analyze the effect of errors.
3. Accrued interest on investments amounts to $4,350 on December 31, 2010.
Retained earnings 25,000
Prepaid insurance 25,000
4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2010.
(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2010?
Solution on notes page
Chapter 22-58
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Retained earnings 12,000
Unearned rent 12,000
LO 9 Analyze the effect of errors.
5. $24,000 was received on January 1, 2010 for the rent of a building for both 2010 and 2011. The entire amount was credited to rental income.
Retained earnings 45,000
Accumulated depreciation 45,000
6. Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.
(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2010?
Solution on notes page
Chapter 22-59
One area in which iGAAP and U.S. GAAP differ is the reporting of error corrections in previously issued financial statements. While both GAAPs require restatement, U.S. GAAP is an absolute standard—that is, there is no exception to this rule.
The accounting for changes in estimates is similar between U.S. GAAP and iGAAP.
Under U.S. GAAP and iGAAP, 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, which may be the current period.
Chapter 22-60
Under iGAAP, the impracticality exception applies both to changes in accounting principles and to the correction of errors. Under U.S. GAAP, this exception applies only to changes in accounting principle.
IAS 8 does not specifically address the accounting and reporting for indirect effects of changes in accounting principles. As indicated in the chapter, U.S. GAAP has detailed guidance on the accounting and reporting of indirect effects.
Chapter 22-61
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Change From The Equity Method
Change from the equity method to the fair-value method.
Earnings or losses previously recognized under the equity method should remain as part of the carrying amount of the investment.
The cost basis is the carrying amount of the investment at the date of the change.
The investor applies the new method in its entirety.
At the next reporting date, the investor should record the unrealized holding gain or loss to recognize the difference between the carrying amount and fair value.
Chapter 22-62
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Dividends in Excess of Earnings
Accounted for such dividends as a reduction of the
investment carrying amount, rather than as revenue.
Reason: Dividends in excess of earnings are viewed as
a ________________with this excess then accounted for as
a reduction of the equity investment.
liquidating dividend
Chapter 22-63
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Dividends in Excess of Earnings
Illustration: On January 1, 2009, Investor Company
purchased 250,000 shares of Investee Company’s 1,000,000
shares of outstanding stock for $8,500,000. Investor correctly
accounted for this investment using the equity method. After
accounting
for dividends received and investee net income, in 2009,
Investor reported its investment in Investee Company at
$8,780,000 at December 31, 2009. On January 2, 2010,
Investee Company sold 1,500,000 additional shares of its own
common stock to the
public, thereby reducing Investor Company’s ownership from
25 percent to 10 percent.
Chapter 22-64
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Dividends in Excess of EarningsIllustration 22A-1Illustration 22A-1
Chapter 22-65
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Illustration 22A-2Illustration 22A-2Impact on Investment Carrying Amount
Cash 400,000Dividend Revenue
400,000
Cash 210,000Available-for-Sale Securities
60,000Dividend Revenue
150,000
2010 2010 & &
20112011
20122012
Solution on notes page
Chapter 22-66
LO 10 Make the computations and prepare the entries LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity necessary to record a change from or to the equity method of accounting.method of accounting.
Change To The Equity Method
Companies use retrospective application.
The carrying amount of the investment, results of
current and prior operations, and retained earnings
of the investor are adjusted as if the equity method
has been in effect during all of the previous periods.
Companies also eliminate any balances in the
Unrealized Holding Gain or Loss—Equity account and
the Securities Fair Value Adjustment account.
Chapter 22-67
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