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Chapter 22: Question 2 (page 1305)

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.

Short Answer

Expert verified

Inventory can be raw material or finished goods. They affect the financial statement in various ways.

Step by step solution

01

Definition of Inventory

The inventory is defined as the raw material used in the productions process or the finished goods that can be sold directly.

02

Affects the financial statements

  1. It will affect the beginning inventory of the current period; it is not possible to change the method retrospectively.
  2. There will be the correction of the error and, therefore, the prior period adjustment, and there should be an adjustment to the beginning balance of retained earnings.
  3. Increase the income for litigation settlement.
  4. There will be a change in accounting estimates, currently and retrospectively.
  5. There should be a reduction in accounts receivables and allowance for doubtful accounts.
  6. There should be a change in principles, and retrospective application should be there.

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Most popular questions from this chapter

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin鈥檚 common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd鈥檚 accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd鈥檚 long-term investment in Martin Company securities.

Which of the following is false?

(a) GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

(b) The accounting for changes in estimates is similar between GAAP and IFRS.

(c) Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors.

(d) GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

On December 31, 2017, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three pieces of equipment.

1. Equipment A was purchased January 2, 2014. It originally cost \(540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from straight-line to sum-of-the-years鈥�-digits, and the estimates relating to useful life and salvage value remained unchanged.

2. Equipment B was purchased January 3, 2013. It originally cost \)180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2017, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at \(3,000.

3. Equipment C was purchased January 5, 2013. The asset鈥檚 original cost was \)160,000, and this amount was entirely expensed in 2013. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes.

Additional data:

1. Income in 2017 before depreciation expense amounted to \(400,000.

2. Depreciation expense on assets other than A, B, and C totaled \)55,000 in 2017.

3. Income in 2016 was reported at \(370,000.

4. Ignore all income tax effects.

5. 100,000 shares of common stock were outstanding in 2016 and 2017.

Instructions

(a) Prepare all necessary entries in 2017 to record these determinations.

(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2016 and 2017. The company had retained earnings of \)200,000 at December 31, 2015.

An entry to record Purchases and related Accounts Payable of $13,000 for merchandise purchased on December 23, 2018, was recorded in January 2019. This merchandise was not included in inventory at December 31, 2018. What effect does this error have on reported net income for 2018? What entry should be made to correct for this error, assuming that the books are not closed for 2018?
See all solutions

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