经济学IntermediateAccounting6eSpicelandChap020answer实用精品资料(00001)

1、CHAPTER 20ACCOUNTING CHANGES AND ERROR CORRECTIONSQUESTIONS FOR REVIEW OF KEY TOPICSQuestion 20-1Accounting 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

2、 estimates made previously)3.Changes in reporting entity (the group of companies comprising the reporting entity changes)Question 20-2Accounting changes can be accounted for:1.Retrospectively (prior years revised),or 2.Prospectively (only current and future years affected).Question 20-3In general, w

3、e 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. Spe

4、cifically, 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 report

5、ed 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 w

6、ould 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.Answers to Questions (continued)Question 20-4Lynch shou

7、ld report its change in depreciationmethod as a change in estimate, rather than as a change in accountingprinciple. This is because a change in depreciation method is considered a change inaccounting estimate reflected by a change in accounting principle. In other words, a change in the depreciation

8、 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 companysknowledge about those benefits. The effect of the change indepreciation method is inseparable from the effect of the change in accounting estimate.S

9、uch changesfrequently are related to the ongoing process of obtaining newinformation and revising estimates and, accordingly, are actually changes in estimates not unlike changing the estimated useful life of adepreciable asset. Logically, the two events should be reported the same way.Accordingly,

10、Lynch reports the change prospectively; previous financial statements are notrevised. 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

11、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 20-5In general, we report voluntary changes in accounting principles retrospectively. This means Sugarbaker wi

12、ll 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

13、 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 r

14、evise 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

15、 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. Answers to Questions (continued)Question 20-6Voluntary changes in

16、 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 be

17、cause 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 e

18、xisting 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, soa company changing to LIFO usually reports the change prospectively. The beginning inventory in

19、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

20、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 investor's level of influence over an investee changes, it may be necessary to change from the equity method to another method. This migh

21、t 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

22、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 20-7Accounting records of prior years usually are inadequate to determine the cumulative income effect of the change for pri

23、or years when a company changes tothe 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

24、 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. Adisclosure notewould be included in the financial statements describing the nature of and justification for the change as well as a

25、n explanation as to why retrospective application was impracticable. Answers to Questions (continued)Question 20-8A change in estimate is accounted for prospectively. When a company revises an estimate, previous financial statements are notrevised. Rather, the company simply incorporates the new est

26、imate 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,

27、and related per share amounts for the current period. Question 20-9When 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 20-10The situations deemed to constitute a change in reporting entity are (1)

28、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 20-11Ford reported the situation as a change in reporting entity. This means

29、 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

30、 net income, income before extraordinary items, and related per share amounts would have been indicated for all periods presented. Question 20-12When an error is discovered, previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect

31、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 balan

32、ce 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 20-13If merchandise inventory is understated at the end of 2010, that

33、 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 sa

34、me amount it was understated the year before. Answers to Questions (concluded)Question 20-14The 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 co

35、rrection 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 20-15During the two-year period, insurance expense would have been

36、 overstated by $30,000, so net income during the period was understated by $30,000. This means beginningretained 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 e

37、ntry 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 report

38、ed 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 c

39、orrection on each years net income, income before extraordinary items, and earnings per share.Question 20-16If 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

40、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 state

41、ments 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 20-17When correcting errors in previously issued financial statements, IFRS (IAS No. 8) permits the effect of the error to be reported in

42、 the current period if its not considered practicable to report it retrospectively. Retrospective application is required by U.S. GAAP with no practicability exception.BRIEF EXERCISES Brief Exercise 20-1To record the change:($ in millions)Retained earnings 8.2Inventory ($32 million 23.8 million)8.2C

43、arney 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 eff

44、ects 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 retai

45、ned 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 retai

46、ned 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

47、To record the change:($ in millions)Inventory ($47.6 million 64 million)16.4Retained earnings 16.4Brief Exercise 20-3When a company changes tothe LIFO inventory method from another inventory method, accounting records of prior years often are inadequate to determine the cumulative income effect of t

48、he 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 e

49、ntry 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 a

50、s well as an explanation as to why retrospective application was impracticable. Brief Exercise 20-4A 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

51、 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 undepreci

52、ated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life. ($ in millions)Assets cost$35.0Accumulated depreciation to date (calculated below) (16.2)Undepreciated cost, Jan. 1, 2011$18.8Estimated residual value (2.0)To be depreciated over remainin

53、g 7 years$16.87 yearsAnnual straight-line depreciation 2011-2017$ 2.4Calculation of SYD depreciation(10+9+8) x $35 2 million) = $16.2 million55* n (n = 1) ¸ 2 = 10 (11)¸ 2 = 55Adjusting entry (2011 depreciation):($ in millions)Depreciation expense (calculated above)2.4Accumulated depreciat

54、ion2.4Brief Exercise 20-5A 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 ev

55、ents 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. ($

56、in millions)Assets cost$35.0Accumulated depreciation to date (calculated below) (9.9)Undepreciated cost, Jan. 1, 2011$25.1Estimated residual value (2.0)To be depreciated over remaining 7 years$23.1Calculation of straight-line depreciation to date ($35 -2) ¸ 10 years = $3.3 x 3 years = $9.9 Adju

57、sting entry (2011 depreciation):($ in millions)Depreciation expense (calculated below)5.78Accumulated depreciation5.78Calculation of SYD depreciation7 x 23.1 million = $5.775 million28* n (n + 1) ¸ 2 = 7 (8)¸ 2 = 28Brief Exercise 20-6The fact that more royalty revenue was received in April

58、 than anticipated in December represents a change in estimate. No adjustments are made to any 2011 financial statements. Feenix would record the following entry at February 1, 2012 upon receiving the 2011 royalties (not required):Cash36,500Receivableroyalty revenue 36,000Royalty revenue 500Brief Exercise 20-7The fact that claims were less than expected represents a change in estimate. As a result, no adjustments are made to any 2010 financial