[经济学]IntermediateAccounting6eSpicelandChap020_answer.doc

Chapter 20 - Accounting Changes and Error Corrections 20-1 Chapter 20 Accounting Changes and Error Corrections QUESTIONS FOR REVIEW OF KEY TOPICS Question 20-1 Accounting changes are categorized as: 1. Changes in principle (when companies switch from one acceptable accounting method to another) 2. Changes in estimate (when new information causes companies to revise estimates made previously) 3. Changes in reporting entity (the group of companies comprising the reporting entity changes) Question 20-2 Accounting changes can be accounted for: 1.Retrospectively (prior years revised), or 2.Prospectively (only current and future years affected). Question 20-3 In general, we report voluntary changes in accounting principles retrospectively. This means revising all previous periods financial statements as if the new method were used in those periods. In other words, for each year in the comparative statements reported, we revise the balance of each account affected. Specifically, we make those statements appear as if the newly adopted accounting method had been applied all along. Also, if retained earnings is one of the accounts whose balance requires adjustment (and it usually is), we revise the beginning balance of retained earnings for the earliest period reported in the comparative statements of shareholders equity (or statements of retained earnings if theyre presented instead). Then we create a journal entry to adjust all account balances affected as of the date of the change. In the first set of financial statements after the change, a disclosure note would describe the change and justify the new method as preferable. It also would describe the effects of the change on all items affected, including the fact that the retained earnings balance was revised in the statement of shareholders equity. Chapter 20 - Accounting Changes and Error Corrections 20-2 Answers to Questions (continued) Question 20-4 Lynch should report its change in depreciation method as a change in estimate, rather than as a change in accounting principle. This is because a change in depreciation method is considered a change in accounting estimate reflected by a change in accounting principle. In other words, a change in the depreciation method is adopted to reflect a change in (a) estimated future benefits from the asset, (b) the pattern of receiving those benefits, or (c) the companys knowledge about those benefits. The effect of the change in depreciation method is inseparable from the effect of the change in accounting estimate. Such changes frequently are related to the ongoing process of obtaining new information and revising estimates and, accordingly, are actually changes in estimates not unlike changing the estimated useful life of a depreciable asset. Logically, the two events should be reported the same way. Accordingly, Lynch reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life. A disclosure note should justify that the change is preferable and describe the effect of a change on any financial statement line items and per share amounts affected for all periods reported. Question 20-5 In general, we report voluntary changes in accounting principles retrospectively. This means Sugarbaker will revise all previous periods financial statements, including 2010, as if the average cost method always had been used. Sugarbaker will revise cost of goods sold for 2010 as well as any other income statement amounts affected by that revision, including income taxes and net income. Since the change affects income, retained earnings also changes. Sugarbaker reflects the cumulative prior year difference in cost of goods sold (after tax) as a difference in prior years income and therefore in the balance in retained earnings. It also revises inventory in the balance sheet. The company also will revise deferred taxes. Income tax effect is reflected in the deferred income tax asset because retrospectively decreasing accounting income, but not taxable income, creates a temporary difference between the two that will reverse over time as the unsold inventory becomes cost of goods sold. When that happens, taxable income will become lower than accounting income a future deductible amount, creating a deferred tax asset. Recall from Chapter 16 that in the meantime, the temporary difference is reflected in the deferred tax asset. Chapter 20 - Accounting Changes and Error Corrections 20-3 Answers to Questions (continued) Question 20-6 Voluntary changes in accounting principles usually are reported retrospectively. We dont report changes in depreciation method that way, though, because such changes are considered to be changes in estimate and thus reported prospectively. Also, its not practicable to report some changes in principle retrospectively because insufficient information is available. Revising balances in prior years means knowing what those balances should be. For instance, suppose were switching from the FIFO method of inventory costing to the LIFO method. Recall that LIFO inventory consists of “layers” added in prior years at costs existing in those years. So, if FIFO has been used, the company probably hasnt kept track of those costs. Accounting records of prior years typically are inadequate to report the change retrospectively, so a company changing to LIFO usually reports the change prospectively. The beginning inventory in the year the LIFO method is adopted becomes the base year inventory for all future LIFO calculations. Another exception is when authoritative accounting literature requires prospective application for specific changes in accounting methods. For example, when theres a change from the equity method to another method of accounting for long-term investments, APBO No. 18 requires the prospective application of the new method. From Chapter 12, recall that if an investors level of influence over an investee changes, it may be necessary to change from the equity method to another method. This might happen if a sale of shares causes the investors ownership interest to fall from, say, 20% to 10%, resulting in the equity method no longer being appropriate. In such a case, we make no adjustment to the carrying amount of the investment, but instead, simply discontinue the equity method and apply the new method applied from then on. The existing balance in the investment account when the equity method is discontinued serves as the new “cost” basis from then on. Question 20-7 Accounting records of prior years usually are inadequate to determine the cumulative income effect of the change for prior years when a company changes to the LIFO inventory method from another inventory method. For example, it would be necessary to make assumptions as to when specific LIFO inventory layers were created in years prior to the change. Accordingly, a company changing to LIFO generally does not revise the balance in retained earnings. Rather, the beginning inventory in the year the LIFO method is adopted becomes the base year inventory for all future LIFO calculations. A disclosure note would be included in the financial statements describing the nature of and justification for the change as well as an explanation as to why retrospective application was impracticable. Chapter 20 - Accounting Changes and Error Corrections 20-4 Answers to Questions (continued) Question 20-8 A change in estimate is accounted for prospectively. When a company revises an estimate, previous financial statements are not revised. Rather, the company simply incorporates the new estimate in any related accounting determinations from then on. The unamortized cost remaining after three years would be amortized over the new estimate of the remaining useful life. A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per share amounts for the current period. Question 20-9 When its not possible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in estimate. Question 20-10 The situations deemed to constitute a change in reporting entity are (1) presenting consolidated financial statements in place of statements of individual companies and (2) changing the specific companies that comprise the group for which consolidated or combined statements are prepared. Question 20-11 Ford reported the situation as a change in reporting entity. This means that Ford needed to recast all previous periods financial statements as if the new reporting entity existed in those periods. In the first set of financial statements after the change, a disclosure note described the nature of the change and the reason it occurred. Also, the effect of the change on net income, income before extraordinary items, and related per share amounts would have been indicated for all periods presented. Question 20-12 When an error is discovered, previous years financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. Any account balances that currently are incorrect as a result of the error should be corrected by a journal entry. Also, if retained earnings is one of the accounts whose balance is incorrect, the correction is reported net of tax as a “prior period adjustment” to the beginning balance in a Statement of Shareholders Equity (or Statement of Retained Earnings if thats presented instead). A disclosure note is needed also to describe the nature of the error and the impact of its correction on operations. Question 20-13 If merchandise inventory is understated at the end of 2010, that years cost of goods sold would be overstated, causing 2010 net income to be understated. Because 2010 ending inventory is 2011 beginning inventory, the opposite effect on net income would occur in 2011. 2011 cost of goods sold would be understated, causing 2011 net income to be overstated by the same amount it was understated the year before. Chapter 20 - Accounting Changes and Error Corrections 20-5 Answers to Questions (concluded) Question 20-14 The error would have caused the previous years expenses to be overstated, and therefore its net income to be understated. Therefore, retained earnings would be understated as a result of the error. So, the correction to that account would be reported net of tax as a “prior period adjustment” (increase in this case) to the beginning retained earnings balance in the retained earnings column of the Statement of Shareholders Equity. Question 20-15 During the two-year period, insurance expense would have been overstated by $30,000, so net income during the period was understated by $30,000. This means beginning retained earnings is currently understated by that amount. During the two-year period, prepaid insurance would have been understated, and continues to be understated by $30,000. So, a correcting entry would debit prepaid insurance and credit retained earnings. Also, the financial statements that were incorrect as a result of the error would be retrospectively restated to report the prepaid insurance acquired and reflect the correct amount of insurance expense when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported since retained earnings is one of the accounts incorrect as a result of the error. And, a disclosure note should describe the nature of the error and the impact of its correction on each years net income, income before extraordinary items, and earnings per share. Question 20-16 If the error in the previous question is not discovered until the insurance coverage has expired, no correcting entry at all would be needed. By then, the sum of the omitted insurance expense amounts ($10,000 x 5 years) would equal the expense incorrectly recorded when the error occurred, so the retained earnings balance would be the same as if the error never had occurred. Also, the asset prepaid insurance would have expired so it also would not need to be recorded. Of course, any statements of prior years that were affected and are reported again in comparative statements still would be restated, and a footnote would describe the error. Question 20-17 When correcting errors in previously issued financial statements, IFRS (IAS No. 8) permits the effect of the error to be reported in the current period if its not considered practicable to report it retrospectively. Retrospective application is required by U.S. GAAP with no practicability exception. Chapter 20 - Accounting Changes and Error Corrections 20-6 BRIEF EXERCISES Brief Exercise 20-1 To record the change:($ in millions) Retained earnings . 8.2 Inventory ($32 million 23.8 million).8.2 Carney applies the average cost method retrospectively; that is, to all prior periods as if it always had used that method. In other words, all financial statement amounts for individual periods that are included for comparison with the current financial statements are revised for period-specific effects of the change. Then, the cumulative effects of the new method on periods prior to those presented are reflected in the reported balances of the assets and liabilities affected as of the beginning of the first period reported and a corresponding adjustment is made to the opening balance of retained earnings for that period. Lets say Carney reports 2011-2009 comparative statements of shareholders equity. The $8.2 million adjustment above is due to differences prior to the 2011 change. The portion of that amount due to differences prior to 2009 is subtracted from the opening balance of retained earnings for 2009. The effect of the change on each line item affected should be disclosed for each period reported as well as any adjustment for periods prior to those reported. Also, the nature of and justification for the change should be described in the disclosure notes. Brief Exercise 20-2 To record the change:($ in millions) Inventory ($47.6 million 64 million).16.4 Retained earnings . 16.4 Chapter 20 - Accounting Changes and Error Corrections 20-7 Brief Exercise 20-3 When a company changes to the LIFO inventory method from another inventory method, accounting records of prior years often are inadequate to determine the cumulative income effect of the change for prior years. For instance, it would be necessary to make assumptions as to when specific LIFO inventory layers were created in years prior to the change. So, a company changing to LIFO generally does not revise the balance in retained earnings. This is the case for Dorsey Markets. No entry is made. Instead, the beginning inventory in the year the LIFO method is adopted ($96 million for Dorsey) becomes the base year inventory for all future LIFO calculations. A disclosure note would be included in the financial statements describing the nature of and justification for the change as well as an explanation as to why retrospective application was impracticable. Chapter 20 - Accounting Changes and Error Corrections 20-8 Brief Exercise 20-4 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Irwin reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight- line over the remaining useful life. ($ in millions) Assets cost$35.0 Accumulated depreciation to date (calculated below) (16.2) Undepreciated cost, Jan. 1, 2011$18.8 Estimated residual value (2.0) To be depreciated over remaining 7 years$16.8 7 years Annual straight-line depreciation 2011-2017$ 2.4 Calculation of SYD depreciation (10+9+8) x $35 2 million) = $16.2 million 55* * n (n = 1) 2 = 10 (11) 2 = 55 Adjusting entry (2011 depreciation): ($ in millions) Depreciation expense (calculated above)2.4 Accumulated depreciation 2.4 Chapter 20 - Accounting Changes and Error Corrections 20-9 Brief Exercise 20-5 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Irwin reports the change prospectively; previous financial statements are not revised. Instead, the undepreciated cost remaining at the time of the change would be depreciated by the sum-of-the-years-digits method over the remaining useful life. ($ in millions) Assets cost$35.0 Accumulated depreciation to date (calculated below) (9.9) Undepreciated cost, Jan. 1, 2011$25.1 Estimated residual value (2.0) To be depreciated over remaining 7 years$23.1 Calculation of straight-line depreciation to date ($35 -2) 10 years = $3.3 x 3 years = $9.9 Adjusting entry (2011 depreciation): ($ in millions) Depreciation expense (calculated below).5.78 Accumulated depreciation 5.78 Calculation of SYD depreciation 7 x 23.1 million = $5.775 million 28* * n (n + 1) 2 = 7 (8) 2 = 28 Chapter 20 - Accounting Changes and Error Corrections 20-10 Brief Exercise 20-6 The fact that more royalty revenue was received in April than anticipated in December represents a change in estimate. No adjustments are made to any 2011 financial statements. Feenix would record the foll