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Chapter 22: Q2CE (page 1325)
When a company has to restate its financial statements to correct an error, what information must the company disclose?
The business should disclose two things in the case of restatement of financial statements due to error.
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Peter Henning Tool Company’s December 31 year-end financial statements contained the following errors.
December 31, 2017 December 31, 2018
Ending inventory \(9,600 understated \)8,100 overstated
Depreciation expense \(2,300 understated —
An insurance premium of \)66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017.
In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019.
There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
Instructions
(a) Compute the total effect of the errors on 2018 net income.
(b) Compute the total effect of the errors on the amount of Henning’s working capital at December 31, 2018.
(c) Compute the total effect of the errors on the balance of Henning’s retained earnings at December 31, 2018.
(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.
These items are:
1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.
2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.
3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.
4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.
5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.
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.
(Change in Principle, Estimate) As a certified public accountant, you have been contacted by Joe Davison, CEO of Sports-Pro Athletics, Inc., a manufacturer of a variety of athletic equipment. He has asked you how to account for the following changes.
1. Sports-Pro appropriately changed its depreciation method for its machinery from the double-declining-balance method to the units-of-production method effective January 1, 2017.
2. Effective January 1, 2017, Sports-Pro appropriately changed the salvage values used in computing depreciation for its office equipment.
3. On December 31, 2017, Sports-Pro appropriately changed the specific subsidiaries constituting the group of companies for which consolidated financial statements are presented.
Instructions
Write a 1–1.5 page letter to Joe Davison explaining how each of the above changes should be presented in the December 31, 2017, financial statements.
(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.
1. Depreciation of equipment for 2017 was overstated \(17,000.
2. Depreciation of equipment for 2018 was understated \)38,500.
3. December 31, 2017, inventory was understated \(50,000.
4. December 31, 2018, inventory was overstated \)16,200.
Instructions
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)
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