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Chapter 22: Q3ISTQ. (page 1328)
IFRS requires companies to use which method for reporting changes in accounting policies?
(a) Cumulative effect approach.
(b) Retrospective approach.
(c) Prospective approach.
(d) Averaging approach.
The correct answer to this question is option b which is a retrospective change
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How should consolidated financial statements be reported this year when statements of individual companies were presented last year?
Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative 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.)
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.
On January 3, 2016, Martin Company purchased for \(500,000 cash a 10% interest in Renner Corp. On that date, the net assets of Renner had a book value of \)3,700,000. The excess of cost over the underlying equity in net assets is attributable to undervalued depreciable assets having a remaining life of 10 years from the date of Martin’s purchase.
The fair value of Martin’s investment in Renner securities is as follows: December 31, 2016, \(560,000, and December 31, 2017, \)515,000. On January 2, 2018, Martin purchased an additional 30% of Renner’s stock for \(1,545,000 cash when the book value of Renner’s net assets was \)4,150,000. The excess was attributable to depreciable assets having a remaining life of 8 years. During 2016, 2017, and 2018, the following occurred.
Renner Dividends Paid by
Net Income Renner to Martin
2016 \(350,000 \)15,000
2017 450,000 20,000
2018 550,000 70,000
Instructions On the books of Martin Company,
prepare all journal entries in 2016, 2017, and 2018 that relate to its investment in Renner Corp., reflecting the data above and a change from the fair value method to the equity method.
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