CHAPTER 22

BRIEF EXERCISE 22-1

Construction in Process ($120,000 – $80,000).......... 40,000

Deferred Tax Liability
 [($120,000 – $80,000) X 35%]............................ 14,000
Retained Earnings................................................ 26,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 22-3

Inventory....................................................................... 1,200,000
Deferred Tax Liability ($1,200,000 X 40%).......... 480,000
Retained Earnings................................................ 720,000

LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only) 22-1
BRIEF EXERCISE 22-4

This is a change in estimate effected by a change in accounting principle.

Cost of depreciable assets.......................................... $250,000

Accumulated depreciation.......................................... (90,000)
Carrying value at January 1, 2017.............................. 160,000
Salvage value............................................................... (40,000)
Depreciable base.......................................................... $120,000

Depreciation in 2017 = $120,000 ÷ 8 = $15,000.

Depreciation Expense.................................................. 15,000

Accumulated Depreciation.................................. 15,000

[FORGET ABOUT ESTIMATED $50,000 IN PAST; FORGET THE PAST?]

LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 22-5

Depreciation Expense........................................................ 24,000

Accumulated Depreciation—Equipment................... 24,000
 $58,000* – $10,000 
 = $24,000
4– 2
[THE NEW 4 YEARS INCLUDE THE PAST 2 YEARS]

*Book value before change

Cost..................................................... $74,000
Less: Accumulated depreciation...... 16,000**
$58,000
**[($74,000 – $18,000) ÷ 7] X 2
LO: 2, Bloom: AP, Difficulty: Difficult, 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 22-6

[DID NOT DEBIT EQUIPMENT BUT EXPENSE?]

Equipment........................................................................... 50,000
Accumulated Depreciation—Equipment................... 20,000
Retained Earnings....................................................... 21,000
Deferred Tax Liability.................................................. 9,000
($20,000 = $50,000 X 2/5; $9,000 = $30,000 X 30%)

22-2 Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only)
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only) 22-3
BRIEF EXERCISE 22-7

BEIDLER COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2017

Retained earnings, January 1, as previously reported........ $2,000,000

Less: Correction of depreciation error, net of tax.......... 240,000*
Retained earnings, January 1, as adjusted...................... 1,760,000
Add: Net income............................................................... 900,000
Less: Dividends................................................................. 250,000
Retained earnings, December 31....................................... $2,410,000

*$400,000 X (1 – .4)
LO: 3, Bloom: AN, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 22-8

2017 2018
a. Overstated Overstated
b. Overstated Understated
c. Understated Overstated
d. Overstated Understated
e. No effect Overstated
LO: 3, Bloom: AN, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

22-4 Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only)
 SOLUTIONS TO EXERCISES

EXERCISE 22-1 (10–15 minutes)

(a) The net income to be reported in 2018, using the retrospective

approach, would be computed as follows:
Income before income tax $700,000
Income tax (35% X $700,000) 245,000
Net income $455,000

(b) Construction in Process........................................ 190,000

Deferred Tax Liability ($190,000 X 35%)......... 66,500
Retained Earnings.......................................... 123,500*

*($190,000 X 65% = $123,500)

IN-CLASS:
E) RE ........................................................................ 190k
A) CIP ...............................................................190K
E) RE ..............................................................65500
L)DTL ........................................................................ 65500

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 22-2 (10–15 minutes)

(a) Inventory...................................................................... 14,000*

Retained Earnings.............................................. 14,000

*($19,000 + $23,000 + $25,000) – ($15,000 + $18,000 + $20,000)

(b) Net Income (FIFO) 2015 $19,000

2016 23,000
2017 25,000

(c) Inventory..................................................................... 24,000*

Retained Earnings.............................................. 24,000

*($19,000 + $23,000 + $25,000) – ($12,000 + $14,000 + $17,000)

Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only) 22-5
IN CLASS
WHERE ARE WE NOW?
Between end of 2017 and end of 2018

Inventory............................................................................ 24,000*
Retained Earnings.............................................................
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

22-6 Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only)
EXERCISE 22-8 (30–35 minutes)

(a) Depreciation to date on equipment

Sum-of-the-years’-digits depreciation
2015 (5/15 X $510,000*) $170,000
2016 (4/15 X $510,000) 136,000
2017 (3/15 X $510,000) 102,000
$408,000
*525,000 − $15,000

Cost of equipment $525,000

Less: Depreciation to date 408,000
Book value (December 31, 2017) $117,000

Book value – Salvage value = Depreciable cost

$117,000 – $15,000 = $102,000

Depreciation for 2018: $102,000/2 = $51,000

Depreciation Expense............................................. 51,000

Accumulated Depreciation—Equipment....... 51,000

(b) Depreciation to date on building

$693,000/30 years = $23,100 per year

$23,100 X 3 = $69,300 depreciation to date

Cost of building $693,000

Less: Depreciation to date 69,300
Book value (December 31, 2017) $623,700

Depreciation for 2018: $623,700/(40 – 3) = $16,857

Depreciation Expense............................................. 16,857

Accumulated Depreciation—Buildings.......... 16,857
LO: N/A, Bloom: AP, Difficulty: Complex, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only) 22-7
EXERCISE 22-9 (25–30 minutes)

Change from sum-of-the-years digit to straight-line

Cost of depreciable assets.................................. $100,000

Less: Depreciation in 2017 ($100,000 X 4/10).... 40,000
Book value at December 31, 2017....................... $ 60,000

Depreciation for 2018 using straight-line depreciation

Book value at December 31, 2017....................... $60,000

Estimated useful life............................................. 3 years
Depreciation for 2018 ($60,000 ÷ 3)..................... $20,000

DENISE HABBE INC.

Retained Earnings Statement
For the Year Ended

2018 2017
Retained earnings, January 1, unadjusted............ $125,000
Less: Correction of error for inventory
overstatement................................................... 24,000
Retained earnings, January 1, adjusted................ 101,000 $ 72,000
Add: Net income 86,000 54,000
Less: Dividends....................................................... 30,000 25,000
Retained earnings, December 31........................... $157,000 $101,000

Note to instructor:

1. 2017 Cost of sales increased $24,000; 2018 cost of sales decreased

$24,000. As a result, net income for 2017 is overstated $24,000 and
net income for 2018 is understated $24,000 as a result of the
inventory error.

2. 2017 expenses remained unchanged.

3. 2018 expenses decreased $10,000 ($30,000 – $20,000). Net income

in 2018 is therefore $86,000 ($52,000 + $24,000 + $10,000).

4. Additional disclosures would be a necessitated as indicated in the

chapter.
LO: 2, 3, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

22-8 Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only)
Copyright © 2016 John Wiley & Sons, Inc.   Kieso, Intermediate Accounting, 16/e, Solutions Manual    (For Instructor Use Only) 22-9