stice19e ppt ch20 student

8/19/2019 Stice19e PPT Ch20 Student

1/55

20-1

Intermediate

AccountingJames D. Stice Earl K. Stice

© 2014 Cengage Learning

PowerPoint presented by Douglas Cloud

ro!essor Emeritus o! Accounting" e##erdine

$ni%ersit&

AccountingC'anges and ErrorCorrections

C'a#ter 20C'a#ter 20

1(t' Edition


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20-2

Accounting C'anges

• The accounting profession has identified twomain categories of accounting changes: Change in accounting estimate

Change in accounting principle• The basic accounting issue is whetheraccounting changes should be reported asadjustments of the prior periods’ statements or

whether the changes should affect only thecurrent and future years.

)continued*


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20-+

Accounting C'anges

Several alternatives have been suggested forreporting annual changes.

1. estate the financial statements presented forprior years to reflect the effect of the change.

!. "a#e no adjustment to statements presentedin prior years.

$. Same as %!&' e(cept report the cumulativeeffect of the change as a special item in theincome statement.

)continued*


4/55

20-4

Accounting C'anges

). eport the cumulative effect in the currentyear as in %$& but also present limited proforma information for all periods included inthe financial statements reporting what mighthave been if the change had been made inthe prior year.

*. "a#e the change effective only for current

and future periods with no catch+upadjustment.

)continued*


5/55

20-,

Accounting C'anges

• ,nder the provisions of International Accounting Standard (IAS) 8 , companieswould debit the beginning balance in the

retained earnings account.• The -S/ adopted Statement No. !" in

"ay !00*.

• This change brought ,.S. accounting intoconformity with IAS 8 .


6/55

20-

C'ange in Accounting Estimate

• Contrary to what many people believe'accounting information cannot always bemeasured precisely.

• To be reported on a timely basis for decisionma#ing' accounting information often must bebased on estimates of future events.

• These estimates' which are based on the best

professional judgment given the informationavailable at the time' may have to be revisedat a later time.

)continues*


7/55


8/55


9/55

20-(

C'ange in Accounting Estimate

• Some changes in accounting principle areactually just another form of a change inestimate.

• 7f a company changes its depreciationmethod' it is really ma#ing a statement abouta change in the e(pected usage pattern withrespect to that asset.

• change in depreciation method is accountedfor as a change in estimate and is called 8achange in accounting estimate effected by achange in accounting principle.9


10/55

20-10

C'ange in Accounting rinci#le

• change in accounting principle involves a change from one generallyaccepted principle or method to another.

• change from a principle that is notgenerally accepted to one that isgenerally accepted is considered to bean error correction rather than a change

in accounting principle.

)continued*


11/55

20-11

The effect of the accounting change fromone accepted accounting principle toanother is reflected by retrospectivelyadjusting the financial statements for all years reported ' and reporting thecumulative effect of the change in theincome for all preceding years as an

adjustment to the beginning balance inretained earnings for the earliest yearreported.

)continued*



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20-12

s of anuary 1' !01$' -orester Companychanged from the ;7-< inventory costingmethod to the -7-< method for both

financial reporting and income ta( purposes.The income ta( rate is $0=.

)continued*



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20-1+

The following ;7-< and -7-< inventory valuationdata have been assembled:

)continued*



14/55

20-14

etained Earnings

• s of anuary 1' !011' a retrospective switchto -7-< means that cumulative before+ta(profits from the year !011 are increased by>!*0' corresponding to the amount of the

;7-< reserve on that date.

• The increase in cumulative after+ta( profits is>15* %>!*0 ( ?1 @ 0.$0A&.

• ccordingly' retained earnings of anuary 1'!011' is increased by >15*.

)continued*


15/55


16/55

20-1

I 3aes a&a5le

• /ecause the switch is being made for bothboo# and ta( purposes' the increase in ta(ableprofits of >!*0 creates a 8-7-< ta(es payable9of >5* %>!*0 ( 0.$0&.

• 7n addition' the >)* increased ta( e(pense for!011 %>1$* -7-< @ >0 ;7-


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20-1

Im#ractical to Determineeriod-S#eci!ic E!!ects

7f -orrester were only able to determine theanuary 1' !01$' inventory balances under ;7-<%>$'000& and -7-< %>$'400&' the followingretained earnings computation would be

presented for !01$:


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20-1/

ro orma Disclosures a!tera 6usiness Com5ination

• The supplemental disclosure reBuiredfollowing a business combination ise(plained in #AS$ ASC

Section 8% -%&!% .• The combined company is reBuired to

disclose pro forma results for the year of

the combination as if the combination hadoccurred at the beginning of the year.

)continued*


19/55

20-1(

• *00'000. This amount e(ceeded therecorded value of oc# 2all Company’snet assets by >100'000 on the acBuisitiondate.

• The entire e(cess was attributed to a pieceof oc# 2all’s eBuipment that had aremaining useful life of five years as of theacBuisition date.

)continued*



20/55

20-20

Sump Eump Company:evenue >$'*00'000 >$'000'0006et income !*0'000 !00'000

oc# 2all Company:

evenue >!*0'000 >)00'0006et income )0'000 5*'000

Sump Eump Company:evenue >$'*00'000 >$'000'0006et income !*0'000 !00'000

oc# 2all Company:

evenue >!*0'000 >)00'0006et income )0'000 5*'000

!01! !01$

7nformation reported on the two companies for!01! and !01$ was as follows:

)continued*



21/55

20-21

The pro forma information included in the !01$financial statements notes was as follows:

evenue >$'*00'000 >$'5*0'0006et income !*0'000 !50'000

evenue >$'*00'000 >$'5*0'0006et income !*0'000 !50'000

!01$ !01$ esultseported for Combined

esults Companies

evenue >$'000'000 >$')00'0006et income !00'000 !**'000

evenue >$'000'000 >$')00'0006et income !00'000 !**'000

!01! !01! esults

eported for Combinedesults Companies



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20-22

Errors Disco%ered Currentl& in t'e CourseErrors Disco%ered Currentl& in t'e Course

o! 7ormal Accounting rocedureso! 7ormal Accounting rocedures

• Clerical errors• Eosting to the wrong account• "isstating an account•


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20-2+

• Debiting accounts receivable instead ofnotes receivable

• Crediting interest payable instead ofnotes payable

• 6ot recording the e(change of convertiblebonds for stoc#

)continued*

Errors Limited to 6alanceErrors Limited to 6alance

S'eet AccountsS'eet Accounts

3es o! Errors


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20-24

• Debiting office salaries instead of salessalaries

• Crediting rent revenue instead ofcommissions revenue

)continued*

3es o! Errors

Errors Limited to IncomeErrors Limited to Income

Statement AccountsStatement Accounts


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20-2,

• Debiting office eBuipment instead ofepairs (pense

• Crediting depreciation e(pense insteadof accumulated depreciation

•


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20-2

• rrors in net income that' when notdetected' are automaticallycounterbalanced in the following fiscalperiod.

•rrors in net income that' when notdetected' are not automaticallycounterbalanced in the following fiscalperiod.

3es o! Errors

rrors in this fourth group may be classifiedinto two groups:


27/55

20-2

Illustrati%e Eam#le o!Error Corrections

• Supply "aster' 7nc.' began operations atthe beginning of !011.

• /efore the accounts are adjusted and

closed for !01$' the auditor reviews theboo#s and accounts and discovers theerrors beginning with the

understatement of merchandiseinventory )error 81* that begins on Slide'%&'8 .

)continued*

$ d t t t !


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20-2/

)1* "erchandise inventory on December $1'!011' was understated by >1'000. The effectsof the misstatement were as follows:

/ecause the error counterbalances after twoyears' no correcting entry is reBuired in !01$.

)continued*

$nderstatement o!9erc'andise In%entor&

$ d t t t !


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20-2(

Anal&sis S'eet to S'o: E!!ects o!Anal&sis S'eet to S'o: E!!ects o!Errors on inancial StatementErrors on inancial Statement

)continued*


$ d t t t !


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20-+0

Anal&sis S'eet to S'o: E!!ects o!Anal&sis S'eet to S'o: E!!ects o!Errors on inancial StatementErrors on inancial Statement


)continued*

$ d t t t !


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20-+1

The correcting entry in !01! would have beenas follows:

9erc'andise In%entor& 1"000etained Earnings 1"000

The correcting entry is the same whether thecompany uses a periodic or a perpetualinventory system.


$ d t t t !


32/55

20-+2


)continued*

il t d


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20-++

)2* 7t is discovered that purchase invoicesfrom December !F' !011' for >F*0' hadnot been recorded until !01!. The goodshad been included in the inventory at the

end of !011. The effects of failure torecord the purchase were as follow:

)continued*

ailure to ecord9erc'andise urc'ases

il t d


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20-+4

etained Earnings /,0urc'ases /,0

)continued*


• /ecause this is a counterbalancing error'no correcting entry is reBuired in !01$.

• 7f the error had been discovered in !01!

instead of !01$' the following correctingentry would be necessary' assuming thecompany uses a periodic inventory system:

il t d


35/55

20-+,


etained Earnings /,0In%entor& /,0

• 7f the company had used a perpetualsystem' the entry that would have to bemade in !01! follows:

il t d


36/55

20-+

ailure to ecord9erc'andise Sales

)+* 7t is discovered that sales on account of>1'F00 for the last wee# of December !01!had not been recorded until !01$. Thegoods were not included in the inventory at

the end of !01!. The effects of the failure toreport the revenue in !01! follow:

)continued*

il t d


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20-+

ailure to ecord9erc'andise Sales

2hen the error is discovered in !01$' thefollowing entry is made:

Sales 1"/00etained Earnings 1"/00


38/55

ail re to ecord


39/55

20-+(

ailure to ecordAccrued E#ense

• 6o entry is reBuired in !01$ to correct the

accounts because the misstatement in !011has been counterbalanced by themisstatement in !01!.

)continued*

ailure to ecord


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20-40

ailure to ecordAccrued E#ense

• 7f this error had been discovered in !01!' thefollowing correcting entry would have to bemade.

etained Earnings 4,0

Sales Salaries 4,0


41/55

ailure to ecord


42/55

20-42

ailure to ecordre#aid E#enses

)continued*

ailure to ecord


43/55

20-4+

ailure to ecordre#aid E#enses

/ecause this is a counterbalancing error' noentry to correct the accounts is reBuired in !01$.7f this error had been discovered in !01! insteadof !01$' the following correcting entry would

have been made in !01!.9iscellaneous ;eneral E#ense 2,

etained Earnings 2,

ailure to ecord


44/55

20-44

)* ccrued interest on notes receivable of >1*0was overloo#ed in adjusting the accounts onDecember $1' !011. The revenue wasrecogniGed when the interest was collected in

!01!. The effects of the failure to record theaccrued revenue follow:

)continued*

ailure to ecordAccrued e%enue

ailure to ecord


45/55

20-4,

ailure to ecordAccrued e%enue

/ecause the balance sheet items at the end of!01! were correctly stated' no entry is reBuiredin !01$. 7f this error had been discovered in!01! instead of !01$' the following entry would

be necessary to correct the account balances:Interest e%enue 1,0

etained Earnings 1,0

ailure to ecord


46/55

20-4

)* -ees of >!!* received in advance formiscellaneous services as of December $1'!01!' were overloo#ed in adjusting theaccounts. "iscellaneous revenue had been

credited when fees were received. The effectsof the failure to recogniGe the unearnedrevenue were as follows:

)continued*

ailure to ecord$nearned e%enue

ailure to ecord


47/55

20-4

The following entry is reBuired to correct theaccounts:

etained Earnings 22,9iscellaneous e%enue 22,

ailure to ecord$nearned e%enue


48/55


49/55

20-4(

ailure to ecord De#reciation

)continued*


50/55

20-,0

)continued*

The misstatements arising from the failure torecord depreciation are not counterbalanced inthe succeeding year.

ailure to ecord De#reciation

The correcting entry in !01$ for depreciation that

should have been recogniGed for !011 and !01!is as follows:

etained Earnings 2"400Accumulated De#reciation< Deli%er& E=ui#ment 2"400>1"200 #er &ear>1"200 #er &ear ?? 22

Incorrectl& Ca#itali@ing


51/55

20-,1

)(* !'000 were paid incash at the beginning of !011. However' thepayment was incorrectly debited toeBuipment. The 8eBuipment9 was assumed to

have an estimated *+year life and no residualvalueI thus' depreciation of >)00 wasrecogniGed at the end of !011 and !01!. Theeffects of this incorrect capitaliGation of ane(penditure are shown in Slide '%&!' .

)continued*

Incorrectl& Ca#itali@ingan E#enditure

Incorrectl& Ca#itali@ing


52/55

20-,2

etained Earnings 1"200Accumulated De#reciation


53/55

20-,+

e=uired Disclosure !orError estatements

7f an error %either accidental or intentional innature& is subseBuently discovered thataffected a prior period' the nature of the error'its effect on previously issued financialstatements' and the effect of its correction oncurrent period’s net income and ES shouldbe disclosed in the period in which the error is

corrected.


54/55

20-,4

Chapter !0Chapter !0

The ndThe nd

>

₵


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