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Chapter 22: Question 12 (page 1306)

How should consolidated financial statements be reported this year when statements of individual companies were presented last year?

Short Answer

Expert verified

The consolidated financial statement is for the firms which own various subsidiaries and divisions. The consolidated statements should report the new entity, describe the nature and reason for the change, and the effect of change in net income, EPS should be disclosed.

Step by step solution

01

Definition of consolidated financial statement

It is defined as the financial statements of a business organization that has multiple divisions or various subsidiaries

02

Reporting to the consolidated financial statements

  1. The financial statement of previous years should be restated to show the financial information related to the new reporting entity.
  2. The financial statement of the year in which the change is made should describe the nature of the change and its reason.
  3. The effect of the change on the income, net income, and EPS should also be disclosed,

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Most popular questions from this chapter

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.

(Change from Fair Value to Equity) On January 1, 2017, Beyonce Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for \(1,400,000.

At the time, the book value and the fair value of John’s net assets were \)13,000,000. On July 1, 2018, Beyonce paid \(3,040,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John’s identifiable assets net of liabilities was equal to their carrying amount of \)14,200,000. As a result of this transaction, Beyonce owns 30% of John and can exercise significant influence over John’s operating and financial policies.

John reported the following net income and declared and paid the following dividends.

Net Income Dividend per Share

Year ended 12/31/17 \(700,000 None

Six months ended 6/30/18 500,000 None

Six months ended 12/31/18 815,000 \)1.55

Instructions

(Any excess fair value is attributed to goodwill.) Determine the ending balance that Beyonce Co. should report as its investment in John Corp. at the end of 2018

(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.)
  1. On January 1, 2014, Jackson Company purchased a building and equipment that have the following useful lives, salvage values, and costs. Building, 40-year estimated useful life, \(50,000 salvage value, \)800,000 cost Equipment, 12-year estimated useful life, \(10,000 salvage value, \)100,000 cost The building has been depreciated under the double-declining-balance method through 2017. In 2018, the company decided to switch to the straight-line method of depreciation. Jackson also decided to change the total useful life of the equipment to 9 years, with a salvage value of $5,000 at the end of that time. The equipment is depreciated using the straight-line method.
  2. Instructions (a) Prepare the journal entry(ies) necessary to record the depreciation expense on the building in 2018.
  3. (b) Compute depreciation expense on the equipment for 2018.

Prior to 2017, Heberling Inc. excluded manufacturing overhead costs from work in process and finished goods inventory. These costs have been expensed as incurred. In 2017, the company decided to change its accounting methods for manufacturing inventories to full costing by including these costs as product costs. Assuming that these costs are material, how should this change be reflected in the financial statements for 2016 and 2017?
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