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Chapter 22: Question 3 (page 1305)
Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.
The three approaches are currently, retrospectively, and prospectively.
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On March 5, 2018, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company鈥檚 records for 2016 and 2017, you discover that no adjustments have yet been made for the following items. Items
1. Interest income of \(14,100 was not accrued at the end of 2016. It was recorded when received in February 2017.
2. A computer costing \)4,000 was expensed when purchased on July 1, 2016. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.
3. Research and development costs of \(33,000 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of \)11,000 was recorded for 2016 and \(11,000 for 2017.
4. On January 2, 2016, Hemingway leased a building for 5 years at a monthly rental of \)8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit \(20,000 First month鈥檚 rent 8,000 Last month鈥檚 rent 8,000 \)36,000
5. The company received \(36,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.
6. Merchandise inventory costing \)18,200 was in the warehouse at December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.
Instructions
Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.
Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year鈥檚 income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon鈥檚 2017 journal entry to record the change in accounting principle.
(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.
1. Depreciation of equipment for 2017 was overstated \(17,000.
2. Depreciation of equipment for 2018 was understated \)38,500.
3. December 31, 2017, inventory was understated \(50,000.
4. December 31, 2018, inventory was overstated \)16,200.
Instructions
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)
Identify and describe the approach the FASB requires for reporting changes in accounting principles.
Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.
Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 \(100,000 \) 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000
Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?
(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?
(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?
(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?
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