Professional Documents
Culture Documents
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Learning Objectives
1. 2. Identify the two types of accounting changes. Describe the accounting for changes in accounting policies.
3.
4. 5. 6. 7. 8.
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Accounting Changes
Error Analysis
Balance sheet errors Income statement errors Balance sheet and income statement effects Comprehensive example Preparation of statements with error corrections
Summary
Motivations for change of method
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Accounting Changes
Accounting Alternatives:
Diminish the comparability of financial information. Obscure useful historical trend data.
Completed-contract to percentage-of-completion.
Adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.
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Rationale - Users can then better compare results from one period to the next.
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Construction in Process
220,000
88,000
132,000
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LO 3
Before Change
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Illustration 22-5
After Change
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Instructions: (assume a tax rate of 35%) (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle? (a) What is the amount of net income and retained earnings that would be reported in 2012? Assume beginning retained earnings for 2011 to be $100,000.
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Journal entry 2012 Construction in progress Deferred tax liability Retained earnings 170,000 59,500 110,500
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2012
Income Statement
Pre-tax income Income tax (35%) Net income Beg. Retained earnings Accounting change Beg. R/Es restated Net income End. Retained earnings
$ $ $ $
$ 1,062,000
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Direct Effects - FASB takes the position that companies should retrospectively apply the direct
Indirect Effect is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.
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2.
3.
If any of the above conditions exists, the company prospectively applies the new accounting principle.
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What is the journal entry to correct prior years depreciation expense? Calculate depreciation expense for 2012.
No Entry Required
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After 7 years
$510,000 First, establish NBV - 10,000 at date of change in 500,000 estimate. 10 years $ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2011) Fixed Assets: Equipment Accumulated depreciation Net book value (NBV)
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Journal entry for 2012 Depreciation expense Accumulated depreciation 19,375 19,375
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2. Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements.
3. Changing the companies included in combined financial statements. 4. Changing the cost, equity, or consolidation method of accounting for subsidiaries and investments.
Reported by changing the financial statements of all prior periods presented.
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Correction of 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.
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Correction of Errors
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Correction of Errors
Illustration: In 2013 the bookkeeper for Selectro Company discovered an error: In 2012 the company failed to record $20,000of depreciation expense on a newly constructed building. This building is the only depreciable asset Selectro owns. The company correctly included the depreciation expense in its tax return and correctly reported its income taxes payable.
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Correction of Errors
Illustration: Selectros income statement for 2012 with and without the error.
Illustration 22-19
Show the entries that Selectro should have made and did make for
recording depreciation expense and income taxes.
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Correction of Errors
Illustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.
Illustration 22-18
Correction of Errors
Illustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.
Illustration 22-18
Retained Earnings
12,000
Correction of Errors
Illustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.
Illustration 22-18
Retained Earnings
Deferred Tax Liability
12,000
8,000
Reversal
Correction of Errors
Illustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.
Illustration 22-18
Retained Earnings
Deferred Tax Liability
12,000
8,000 Record 20,000
Accumulated DepreciationBuildings
Correction of Errors
Illustration (Single-Period Statement): Assume that Selectro Company has a beginning retained earnings balance at January 1, 2013, of $350,000. The company reports net income of $400,000 in 2013.
Illustration 22-21
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Correction of 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.
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Correction of Errors
Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2012 Balance, January 1 Net income Dividends Balance, December 31 $ 1,050,000 360,000 (300,000) 1,110,000
Before issuing the report for the year ended December 31, 2012, you discover a $62,500 error that caused the 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? Assume a 20% tax rate.
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Correction of Errors
Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2012 Balance, January 1, as previously reported Prior period adjustment, net of tax Balance, January 1, as restated Net income Dividends Balance, December 31 $ 1,050,000 (50,000) 1,000,000 360,000 (300,000) 1,060,000
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LO 7
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LO 7
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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
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Current year error - reclassify item to its proper position. Prior year error - restate the balance sheet of the prior year for comparative purposes.
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Current year error - reclassify item to its proper position. Prior year error - restate the income statement of the prior year for comparative purposes.
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Dr. Supplies Salaries and wages payable Interest receivable Prepaid insurance Unearned rent Interest payable 5,100 90,000 $ 2,500 $
Cr. 1,500
0 15,000
Instructions: (a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2012?
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1.
2.
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3.
4.
The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2012.
Insurance expense Prepaid insurance 25,000 25,000
LO 9 Analyze the effect of errors.
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5.
$24,000 was received on January 1, 2012 for the rent of a building for both 2012 and 2013. The entire amount was credited to rental income.
Rental income Unearned rent 12,000 12,000
6.
Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.
Depreciation expense Accumulated depreciation 45,000 45,000
LO 9 Analyze the effect of errors.
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Dr. Supplies Salaries and wages payable Interest receivable Prepaid insurance Unearned rent Interest payable 5,100 90,000 $ 2,500 $
Cr. 1,500
0 15,000
Instructions: (b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2012?
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1.
2.
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3.
4.
The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2012.
Retained earnings Prepaid insurance 25,000 25,000
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5.
$24,000 was received on January 1, 2012 for the rent of a building for both 2012 and 2013. The entire amount was credited to rental income.
Retained earnings Unearned rent 12,000 12,000
6.
Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.
Retained earnings Accumulated depreciation 45,000 45,000
LO 9 Analyze the effect of errors.
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APPENDIX
22A
Earnings or losses previously recognized under the equity method should remain as part of the carrying amount of the investment.
The cost basis is the carrying amount of the investment at the date of the change.
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APPENDIX
22A
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LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.
APPENDIX
22A
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LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.
APPENDIX
22A
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LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.
APPENDIX
22A
Illustration 22A-2
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APPENDIX
22A
Companies use retrospective application. The carrying amount of the investment, results of current and prior operations, and retained earnings of the investor are adjusted as if the equity method has been in effect during all of the previous periods.
Companies also eliminate any balances in the Unrealized Holding Gain or LossEquity account and the Securities Fair Value Adjustment account.
LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.
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RELEVANT FACTS
One area in which GAAP and IFRS differ is the reporting of error corrections in previously issued financial statements. While both sets of standards require restatement, GAAP is an absolute standard that is, there is no exception to this rule. The accounting for changes in estimates is similar between GAAP and IFRS. Under GAAP and IFRS, if determining the effect of a change in accounting policy is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so, which may be the current period.
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RELEVANT FACTS
Under IFRS, the impracticality exception applies both to changes in accounting principles and to the correction of errors. Under GAAP, this exception applies only to changes in accounting principle. IFRS (IAS 8) does not specifically address the accounting and reporting for indirect effects of changes in accounting principles. As indicated in the chapter, GAAP has detailed guidance on the accounting and reporting of indirect effects.
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d. GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.
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d. Averaging approach.
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Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
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