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Chapter 22: 22-17Q (page 1306)
Elliott Corp. failed to record accrued salaries for 2016, \(2,000; 2017, \)2,100; and 2018, $3,900. What is the amount of the overstatement or understatement of Retained Earnings at December 31, 2019?
There is no overstatement or understatement in retained earnings.
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What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.
Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.
On December 31, 2017, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three pieces of equipment.
1. Equipment A was purchased January 2, 2014. It originally cost \(540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged.
2. Equipment B was purchased January 3, 2013. It originally cost \)180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2017, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at \(3,000.
3. Equipment C was purchased January 5, 2013. The asset’s original cost was \)160,000, and this amount was entirely expensed in 2013. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes.
Additional data:
1. Income in 2017 before depreciation expense amounted to \(400,000.
2. Depreciation expense on assets other than A, B, and C totaled \)55,000 in 2017.
3. Income in 2016 was reported at \(370,000.
4. Ignore all income tax effects.
5. 100,000 shares of common stock were outstanding in 2016 and 2017.
Instructions
(a) Prepare all necessary entries in 2017 to record these determinations.
(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2016 and 2017. The company had retained earnings of \)200,000 at December 31, 2015.
Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is \(3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information. ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017 Sales \)28,995,000 Interest revenue 5,000 Cost of goods sold \(14,000,000 Depreciation 2,600,000 Operating expenses 6,400,000 23,000,000 Income before income tax 6,000,000 Income tax 3,000,000 Net income \) 3,000,000 ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017 Estimated cash balance \( 5,000,000 Available-for-sale debt investments (at cost) 10,000,000 Fair value adjustment (1/1/17) —0— Estimated fair value at December 31, 2017: Security Cost Estimated Fair Value A \) 2,000,000 \( 2,200,000 B 4,000,000 3,900,000 C 3,000,000 3,100,000 D 1,000,000 1,800,000 Total \)10,000,000 \(11,000,000 Other information at December 31, 2017: Equipment \)3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/17) 5,000,000 Accumulated depreciation (5-year DDB) 2,000,000 The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a \(7,000,000 income before taxes because Aston receives a \)1,000,000 bonus if the income before taxes and bonus reaches \(7,000,000. Aston also does not want the company to pay more than \)3,000,000 in income taxes to the government.
Instructions (a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision. (b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren’s actions have on their interests?
Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.
Investment in Martin
1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000
12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000
12/31/16 Share of income 510,000
On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.
Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400
At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.
Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?
(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).
(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.
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