Accounting Alternatives:
LO 1
22-2
LO 2
Rationale - Users can then better compare results from one period to
the next.
22-3
LO 2
22-4
LO 3
22-5
LO 3
22-6
LO 3
Journal entry
beginning of
2014
22-7
Construction in Process
Deferred Tax Liability
Retained Earnings
220,000
88,000
132,000
LO 3
22-8
1.
2.
b.
c.
22-9
Illustration 22-3
LO 3
Before Change
22-10
LO 3
Illustration 22-5
22-11
After Change
LO 3
22-12
LO 3
LO 3
190,000
66,500
123,500
LO 3
Income
Statement
Statement
of Retained
Earnings
22-15
LO 3
22-16
LO 3
2.
3.
If any of the above conditions exists, the company prospectively applies the
new accounting principle.
22-17
LO 4
22-18
LO 5
LO 5
22-20
No Entry
Required
LO 5
After 7
years
$510,000
First,
First,establish
establishNBV
NBV
- 10,000
at
atdate
dateof
ofchange
changeinin
estimate.
500,000
estimate.
10 years
$ 50,000 x 7 years = $350,000
22-21
Equipment
Accumulated depreciation
$510,000
350,000
$160,000
LO 5
$160,000
5,000
155,000
8 years
$ 19,375
Second,
Second,calculate
calculate
depreciation
depreciationexpense
expense
for
for2014.
2014.
22-22
19,375
19,375
LO 5
22-23
LO 5
LO 6
Accounting Errors
Types of Accounting Errors:
1. A change from an accounting principle that is not generally
accepted to an accounting policy that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. Failure to accrue or defer certain expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.
22-25
LO 7
Accounting Errors
Illustration 22-18
Accounting-Error Types
Accounting Category
Type of Restatement
Expense recognition
Revenue recognition
Misclassification
Equityother
Reserves/Contingencies
Long-lived assets
22-26
LO 7
Accounting Errors
Illustration 22-18
Accounting-Error Types
Accounting Category
Type of Restatement
Taxes
Equityother
comprehensive income
Inventory
Equitystock options
Other
22-27
Source: T. Baldwin and D. Yoo, RestatementsTraversing Shaky Ground, Trend Alert, Glass
Lewis & Co. (June 2, 2005), p. 8.
LO 7
Accounting Errors
22-28
LO 7
22-29
LO 7
What are the entries that Selectro should have made and did make
for recording depreciation expense and income taxes?
22-30
LO 7
Entries that Selectro should have made and did make for recording
depreciation expense and income taxes.
Illustration 22-20
22-31
Advance
slide in
presentation
mode to
reveal
complete
illustration.
22-32
LO 7
Correcting
Entry in
2015
22-33
Retained Earnings
12,000
LO 7
Correcting
Entry in
2015
22-34
Retained Earnings
Deferred Tax Liability
12,000
Reversal
8,000
LO 7
Correcting
Entry in
2015
22-35
Retained Earnings
Deferred Tax Liability
12,000
8,000
Accumulated DepreciationBuildings
20,000
LO 7
22-36
LO 7
Accounting Errors
Comparative Statements
Company should
1. make adjustments to correct the amounts for all affected
accounts reported in the statements for all periods
reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest period it
reported.
22-37
LO 7
Accounting Errors
Before issuing the report for the year ended December 31, 2014, you discover
a $62,500 error that caused the 2013 inventory to be overstated (overstated
inventory caused COGS to be lower and thus net income to be higher in
2013). Would this discovery have any impact on the reporting of the
Statement of Retained Earnings for 2014? Assume a 20% tax rate.
22-38
LO 7
Accounting Errors
22-39
LO 7
Accounting Errors
Summary of Accounting Changes and
Correction of Errors
Illustration 22-23
22-40
LO 7
22-41
LO 7
Accounting Errors
Motivations for Changes of Accounting
Method
Why companies may prefer certain accounting methods.
Some reasons are:
1. Political costs.
2. Capital Structure.
3. Bonus Payments.
4. Smooth Earnings.
22-42
LO 8
Error Analysis
Companies must answer three questions:
1. What type of error is involved?
2. What entries are needed to correct for the error?
3. After discovery of the error, how are financial statements to
be restated?
Companies treat errors as prior-period adjustments and report
them in the current year as adjustments to the beginning
balance of Retained Earnings.
22-43
LO 9
Error Analysis
Balance Sheet Errors
Balance sheet errors affect only the presentation of an asset,
liability, or stockholders equity account.
22-44
Prior year error - restate the balance sheet of the prior year
for comparative purposes.
LO 9
Error Analysis
Income Statement Errors
Improper classification of revenues or expenses.
22-45
LO 9
Error Analysis
Balance Sheet and Income Statement Errors
Counterbalancing Errors
Will be offset or corrected over two periods.
1. If company has closed the books:
a. If the error is already counterbalanced, no entry is necessary.
b. If the error is not yet counterbalanced, make entry to adjust
the present balance of retained earnings.
LO 9
Error Analysis
Balance Sheet and Income Statement Errors
Counterbalancing Errors
Will be offset or corrected over two periods.
2. If company has not closed the books:
a. If error already counterbalanced, make entry to correct the
error in the current period and to adjust the beginning
balance of Retained Earnings.
b. If error not yet counterbalanced, make entry to adjust the
beginning balance of Retained Earnings.
22-47
LO 9
Error Analysis
Balance Sheet and Income Statement Errors
Noncounterbalancing Errors
Not offset in the next accounting period.
Companies must make correcting entries, even if they have
closed the books.
22-48
LO 9
Error Analysis
E22-19 (Error Analysis; Correcting Entries): A partial trial balance of
Julie Hartsack Corporation is as follows on December 31, 2015.
Instructions: (a) Assuming that the books have not been closed, what
are the adjusting entries necessary at December 31, 2015?
22-49
LO 9
Error Analysis
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2015?
1.
1,600
Supplies on Hand
2.
22-50
1,600
2,900
2,900
LO 9
Error Analysis
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2015?
3.
750
Interest Receivable
4.
22-51
750
25,000
25,000
LO 9
Error Analysis
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2015?
5.
$28,000 was received on January 1, 2015 for the rent of a building for
both 2015 and 2016. The entire amount was credited to rental
income.
Rental Income ($28,000 2)
14,000
Unearned Rent
6.
22-52
14,000
45,000
45,000
LO 9
Error Analysis
E22-19 (Error Analysis; Correcting Entries) A partial trial balance of
Dickinson Corporation is as follows on December 31, 2015.
Instructions: (b) Assuming that the books have been closed, what are
the adjusting entries necessary at December 31, 2015?
22-53
LO 9
Error Analysis
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2015?
1.
1,600
Supplies
2.
22-54
1,600
2,900
2,900
LO 9
Error Analysis
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2015?
3.
750
Interest Receivable
4.
22-55
750
25,000
25,000
LO 9
Error Analysis
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2015?
5.
$24,000 was received on January 1, 2015 for the rent of a building for
both 2015 and 2016. The entire amount was credited to rental
income.
Retained Earnings
14,000
Unearned Rent
6.
22-56
14,000
45,000
45,000
LO 9
APPENDIX
22A
22-57
The cost basis is the carrying amount of the investment at the date
of the change.
At the next reporting date, the investor should record the unrealized
holding gain or loss to recognize the difference between the carrying
amount and fair value.
LO 10 Make the computations and prepare the entries necessary to
record a change from or to the equity method of accounting.
APPENDIX
22A
22-58
LO 10
APPENDIX
22A
22-59
LO 10
APPENDIX
22A
22-60
LO 10
APPENDIX
22A
2014 and
2015
2016
22-61
Illustration 22A-2
Cash
Dividend Revenue
400,000
Cash
Equity Investments (AFS)
Dividend Revenue
210,000
400,000
60,000
150,000
LO 10
APPENDIX
22A
22-62
LO 10