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Chapter 22: 22-1IFRS (page 1328)
Where can authoritative IFRS related to accounting changes be found?
IFRS is the set of accounting rules and authoritative for an accounting change found in IAS 8 and IAS 1.
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On January 1, 2017, Millay Inc. paid \(700,000 for 10,000 shares of Genso Company鈥檚 voting common stock, which was a 10% interest in Genso. At that date, the net assets of Gensototaled \)6,000,000. The fair values of all of Genso鈥檚 identifiable assets and liabilities were equal to their book values. Millay does not have the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(1.50 per share from Genso on October 1, 2017. Genso reported net income of \)550,000 for the year ended December 31, 2017.
On July 1, 2018, Millay paid \(2,325,000 for 30,000 additional shares of Genso Company鈥檚 voting common stock which represents a 30% investment in Genso. The fair values of all of Genso鈥檚 identifiable assets net of liabilities were equal to their book values of \)6,550,000. As a result of this transaction, Millay has the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(2.00 per share from Genso on April 1, 2018, and \)2.50 per share on October 1, 2018. Genso reported net income of \(650,000 for the year ended December 31, 2018, and \)350,000 for the 6 months ended December 31, 2018.
Instructions (For both purchases, assume any excess of cost over book value is due to goodwill.)
(a) Prepare a schedule showing the income or loss before income taxes for the year ended December 31, 2017, that Millay should report from its investment in Genso in its income statement issued in March 2018.
(b) During March 2019, Millay issues comparative financial statements for 2017 and 2018. Prepare schedules showing the income or loss before income taxes for the years ended December 31, 2017 and 2018, that Millay should report from its investment in Genso.
Equipment was purchased on January 2, 2017, for $24,000, but no portion of the cost has been charged to depreciation. The corporation wishes to use the straight-line method for these assets, which have been estimated to have a life of 10 years and no salvage value. What effect does this error have on net income in 2017? What entry is necessary to correct for this error, assuming that the books are not closed for 2017?
Peter Henning Tool Company鈥檚 December 31 year-end financial statements contained the following errors.
December 31, 2017 December 31, 2018
Ending inventory \(9,600 understated \)8,100 overstated
Depreciation expense \(2,300 understated 鈥�
An insurance premium of \)66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017.
In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019.
There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
Instructions
(a) Compute the total effect of the errors on 2018 net income.
(b) Compute the total effect of the errors on the amount of Henning鈥檚 working capital at December 31, 2018.
(c) Compute the total effect of the errors on the balance of Henning鈥檚 retained earnings at December 31, 2018.
State how each of the following items is reflected in the financial statements. (a) Change from FIFO to LIFO method for inventory valuation purposes. (b) Charge for failure to record depreciation in a previous period. (c) Litigation won in current year, related to prior period. (d) Change in the realizability of certain receivables. (e) Write-off of receivables. (f) Change from the percentage-of-completion to the completed-contract method for reporting net income.
What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.
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