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EXERCISES
Error Corrections
Exercise 20-1
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,
Bearing 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 straightline over the remaining useful life.
Assets cost
Accumulated depreciation to date (calculated below)
Undepreciated cost, Jan. 1, 2011
Estimated residual value
To be depreciated over remaining 7 years
Annual straight-line depreciation 2011-2017
$105,000
(48,600)
$ 56,400
(6,000)
$ 50,400
7 years
$ 7,200
Exercise 20-2
Requirement 1
To record the change:
Retained earnings ............................................................................................ 24,600
Inventory ($96,000 71,400).................................................
24,600
Requirement 2
Emerson 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 Emerson reports 20112009 comparative statements of shareholders equity. The $24,600 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.
Intermediate Accounting, 6e
Exercise 20-3
Requirement 1
Accrued liability and expense
Warranty expense (4% x $720,000)............................................................
Estimated warranty liability ...............................................
28,800
17,600
28,800
17,600
Requirement 2
Actual expenditures (summary entry)
Estimated warranty liability ($15,000 4,600)..........................
Loss on product warranty (4% 3%] x $500,000)......................
Cash, wages payable, parts and supplies, etc. ....................
10,400
5,000
15,400*
PROBLEMS
Problem 20-1
a. This is a change in estimate.
24,000
Intermediate Accounting, 6e
When a company changes to the LIFO inventory method from another inventory
method, accounting records usually are insufficient to determine the cumulative income
effect of the change necessary to retrospectively revise accounts. So, a company
changing to LIFO usually reports the beginning inventory in the year the LIFO method
is adopted ($13 million in this case) as the base year inventory for all future LIFO
calculations. The disclosure required is a footnote to the financial statements
describing the nature of and justification for the change as well as an explanation as to
why the retrospective application was impracticable.
Intermediate Accounting, 6e
72,000
Assets cost
Accumulated depreciation to date (calculated below)
Undepreciated cost, Jan. 1, 2011
Estimated residual value
To be depreciated over remaining 7 years
Annual straight-line depreciation 2011-2013
$990
(486)
$504
(0)
$504
7
$ 72
years
Intermediate Accounting, 6e
Problem 20-2
a. To correct the error:
Equipment (cost)......................................................................
Accumulated depreciation ([$9,000 5] x 2 years))...................
Retained earnings ($9,000 [$1,800 x 2 years)).....................................
9,000
3,600
5,400
1,800
1,800
51,000
51,000
51,000
51,000
112,000
112,000
36,000
36,000
Note: A small stock dividend (<25%) requires that the market value of the additional shares be
capitalized..
120,000
120,000
120,000
120,000
144,000
144,000
72,000
72,000
Intermediate Accounting, 6e