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Chapter 22: 2CA (page 1322)

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with 鈥淩etirement benefits鈥� on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year鈥檚 financial statements should be recast when presented in comparative form with the current year鈥檚 financial statements

Short Answer

Expert verified

The required changes are indicated.

Step by step solution

01

Part 1

The change from the completed contract method to the percentage method of accounting for long-term, construction type contracts. It is a change in accounting principle. Thus, the prior change should be recorded by recasting the financial statement when presented in the comparative form.

02

Part 2

The change in the estimated useful life of the asset which is previously recorded as a result of newly acquired information will be considered as the change in estimates, hence, there will be no recast to the financial statements of the company

03

Part 3

The change from deferring and amortizing preproduction costs to recording such as costs as an expense when incurred is a change in accounting estimate

Thus, the change will be shown in current period. There will be no change to recast when the comparative statements are prepared.

04

Part 4

The change from including the employer share of FICA taxes with payroll tax expenses to including this in the retirement benefits on the income statement of the company. It will not be considered as an accounting change. So, the financial statement will not be recast.

05

Part 5

The correction of the mathematical error in inventory pricing made in a prior period will be considered as the accounting error. Hence, there will be restatement of the financial statements to represent the comparative statements

06

Part 6

The change from presentation of statements of individual companies to presentation of consolidated statements, this is the change in accounting entity and there should be restatement of financial statement.

07

Part 7

The change in method of accounting for the leases for the tax purposes to conform with the financial accounting method is neither a change in accounting principle which means this is not the change in accounting. So, there is no need to recast the financial statement for preparing the comparative form of financial statement.

08

Part 8

The change from FIFO method of inventory pricing to the LIFO method of pricing will be considered as the change in accounting method. SO, there should be recast of financial statements of the company to present it comparative form.

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Most popular questions from this chapter

The before-tax income for Lonnie Holdiman Co. for 2017 was \(101,000 and \)77,400 for 2018. However, the accountant noted that the following errors had been made:

1. Sales for 2017 included amounts of \(38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2. The inventory on December 31, 2017, was understated by \)8,640.

3. The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis. Interest Expense 15,000 Cash 15,000

The bonds have a face value of \(250,000 and pay a stated interest rate of 6%. They were issued at a discount of \)15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)

4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of \(8,500 in 2017 and \)9,400 in 2018 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges.

Instructions

Prepare a schedule showing the determination of corrected income before taxes for 2017 and 2018

In 2017, Bailey Corporation discovered that equipment purchased on January 1, 2015, for $50,000 was expensed at that time. The equipment should have been depreciated over 5 years, with no salvage value. The effective tax rate is 30%. Prepare Bailey鈥檚 2017 journal entry to correct the error. Bailey uses straight-line depreciation

As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in accounting. It has been a few years since he took intermediate accounting, and he cannot remember whether this change would be treated in a retrospective or prospective manner. Your supervisor wants you to research the authoritative guidance on a change in accounting policy related to depreciation methods.

Instructions

(a) What are the accounting and reporting guidelines for a change in accounting policy related to depreciation methods?

(b) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.?

Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:

Equity Investments \(185,000

Fair Value Adjustment (AFS) 34,000 Dr.

Accumulated Unrealized Holding Gain or Loss鈥擨ncome (recorded in Retained Earnings) 34,000 Cr.

On January 1, 2018, Oliver purchased additional stock of Conrad Company for \)475,000 and now has significant influence over Conrad. If the equity method had been used in 2014鈥�2017, Oliver鈥檚 share of income would have been $33,000 greater than dividends received. Prepare Oliver鈥檚 journal entries to record the purchase of the investment and the change to the equity method.

Refer to the accounting change by Wertz Construction Company in BE22-1. Wertz has a profit-sharing plan, which pays all employees a bonus at year-end based on 1% of pre-tax income. Compute the indirect effect of Wertz鈥檚 change in accounting principle that will be reported in the 2017 income statement, assuming that the profit-sharing contract explicitly requires adjustment for changes in income numbers.
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