Chapter20

AccountingChangesand
ErrorCorrections

EXERCISES

Exercise201

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, 2013
Estimated residual value
To be depreciated over remaining 7 years
Annual straight-line depreciation 2013-2019

$105,000
(48,600)
$ 56,400
(6,000)
$ 50,400
7 years
$ 7,200

Calculation of SYD depreciation

(10+9+8) x [$105,000 6,000]) = $48,600
55
Adjusting entry (2013 depreciation):
Depreciation expense (calculated above).............................................. 7,200
Accumulated depreciation.............................................................
7,200

Alternate Exercise and Problem Solutions

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Exercise202
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 20132011 comparative statements of shareholders equity. The $24,600 adjustment above is
due to differences prior to the 2013 change. The portion of that amount due to
differences prior to 2011 is subtracted from the opening balance of retained earnings for
2011.
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.

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Intermediate Accounting, 7e

Exercise203
Requirement1
Accruedliabilityandexpense
Warrantyexpense(4%x$720,000).............................................................
Estimatedwarrantyliability...............................................

28,800

Actualexpenditures(summaryentry)
Estimatedwarrantyliability...................................................
Cash,wagespayable,partsandsupplies,etc.....................

17,600

28,800

17,600

Requirement2
Actualexpenditures(summaryentry)
Estimatedwarrantyliability($15,0004,600)..........................
Lossonproductwarranty(4%3%]x$500,000)......................
Cash,wagespayable,partsandsupplies,etc.....................

10,400
5,000

15,400*

*(4%x$500,000)$4,600=$10,400

PROBLEMS

Problem201
a.Thisisachangeinestimate.

Alternate Exercise and Problem Solutions

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Noentryisneededtorecordthechange
2013adjustingentry:
Warrantyexpense(3%x$800,000)..............................................
Estimatedwarrantyliability.....................................

24,000

24,000

Adisclosurenoteshoulddescribetheeffectofachangeinestimateonincome
beforeextraordinaryitems,netincome,andrelatedpershareamountsforthecurrent
period.
b.Thisisachangeinestimate.
Noentryisneededtorecordthechange
2013adjustingentry:
Depreciationexpense(determinedbelow)...................... 180,000
Accumulateddepreciation.......................................
180,000
Calculationofannualdepreciationaftertheestimatechange:
$4,000,000
Cost
$100,000
Olddepreciation($4,000,00040years)
x3yrs (300,000)
Depreciationtodate(20102012)
$3,700,000
Undepreciatedcost
(2,800,000)
Newestimatedsalvagevalue
$900,000
Tobedepreciated
5
Estimatedremaininglife(5years:20132017)
$180,000
Newannualdepreciation
Adisclosurenoteshoulddescribetheeffectofachangeinestimateonincome
beforeextraordinaryitems,netincome,andrelatedpershareamountsforthecurrent
period.

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Intermediate Accounting, 7e

Problem201(continued)
c. This is a change in accounting principle that usually is reported prospectively.
No entry is needed to record the change.
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.

Alternate Exercise and Problem Solutions

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Problem 20-1 (continued)

d. This is a change in accounting estimate resulting from a change in accounting
principle.
No entry is needed to record the change
2013 adjusting entry:
Depreciation expense (determined below) ......................
Accumulated depreciation .......................................

72,000
72,000

A change in depreciation method is considered a change in accounting estimate

resulting from a change in accounting principle. Accordingly, DD reports the change
prospectively; previous financial statements are not revised. Instead, the company
simply employs the straight-line method from now on. The undepreciated cost
remaining at the time of the change is depreciated straight-line over the remaining
useful life.
($ in 000s)

Assets cost
Accumulated depreciation to date (calculated below)
Undepreciated cost, Jan. 1, 2013
Estimated residual value
To be depreciated over remaining 7 years
Annual straight-line depreciation 2013-2019

$990
(486)
$504
(0)
$504
7
$ 72

years

Calculation of SYD depreciation:

(10+9+8) x $990,000) = $486,000
55

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Intermediate Accounting, 7e

Problem201(concluded)
e. Thisisachangeinestimate.
Torevisetheliabilityonthebasisofthenewestimate:
Losslitigation.................................................................. 5,000,000
Liabilitylitigation($45million40million).........................
5,000,000
Adisclosurenoteshoulddescribetheeffectofachangeinestimateonincome
beforeextraordinaryitems,netincome,andrelatedpershareamountsforthecurrent
period.
f. This is a change in accounting principle accounted for prospectively.
Because the change will be effective only for assets placed in service after the date
of change, the change doesnt affect assets depreciated in prior periods. The nature of
and justification for the change should be described in the disclosure notes. Also, the
effect of the change on the current periods financial statements should be disclosed.

Alternate Exercise and Problem Solutions

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Problem202
a.Tocorrecttheerror:
Equipment(cost)......................................................................
Accumulateddepreciation([$9,0005]x2years))...................
Retainedearnings($9,000[$1,800x2years)).....................................

9,000

3,600
5,400

2013adjustingentry:

Depreciationexpense($9,0005)...........................................
Accumulateddepreciation.................................................

1,800

b.Toreverseerroneousentry:
Cash......................................................................................
Officesupplies.................................................................

51,000

Torecordcorrectentry:
Storageboxes.......................................................................
Cash..................................................................................

51,000

c.Tocorrecttheerror:
Inventory............................................................................................................
Retainedearnings....................................................................................

112,000

d.Tocorrecttheerror:
Retainedearnings([$10x4,000shares]$4,000)......................
Paidincapitalexcessofpar...........................................

36,000

1,800

51,000

51,000

112,000

36,000

Note:Asmallstockdividend(<25%)requiresthatthemarketvalueoftheadditionalsharesbe
capitalized..

e.Tocorrecttheerror:
Retainedearnings(overstatementof2012income)............................
Interestexpense(overstatementof2013interest)...................
2013adjustingentry:
Interestexpense(4/6x$180,000).............................................

120,000

120,000

Interestpayable(4/6x$180,000)..........................................

f.Tocorrecttheerror:
Prepaidinsurance($216,0003yrsx2years:20132014).........
Retainedearnings($216,000[$216,0003years])............
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120,000

120,000
144,000

144,000

Intermediate Accounting, 7e

2013adjustingentry:
Insuranceexpense($216,0003years)................................................

Prepaidinsurance.............................................................

Alternate Exercise and Problem Solutions

72,000

72,000

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