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Chapter 22: 22-5IFRS (page 1328)
Discuss how a change in accounting policy is handled when it is impracticable to determine previous amounts
Accounting policies are the rules and regulations which are followed to maintain the financial accounts, and the previous amounts should be used.
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(Change in Principle鈥擫ong-Term Contracts) Cullen Construction Company, which began operations in 2017, changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows.
Pretax Income Percentage-of-Completion Completed-Contract Difference 2017 \(880,000 \)590,000 $290,000 2018 900,000 480,000 420,000
Instructions (a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?
Indicate the effect鈥擴nderstate, Overstate, No Effect鈥攖hat each of the following errors has on 2017 net income and 2018 net income. 2017 2018 (a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015. (b) Wages payable were not recorded at 12/31/17. (c) Equipment purchased in 2017 was expensed. (d) 2017 ending inventory was overstated. (e) Patent amortization was not recorded in 2018.
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.
Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.
Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?
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