ACCT 557 Intermediate Accounting III
(DeVry Keller – Winter 2016)
Workout Room Application (graded)
This week, we will cover accounting changes and errors. (See the Assignments area to get a jump on some of the problems we’ll be concentrating on in this thread.) Before we start doing problems together, what is the difference in retrospective or prospective for accounting changes? Let’s start with BE 21-2 and BE 20-6 for practice.
As in the previous weeks, please use this Workout room to increase learning by answering any question at the end of the chapter (i.e. Brief Exercises, Exercises, Problems, Cases, etc.). Once someone has already answered one question, choose another and make sure to label your title accordingly (e.g. BE 22-4) so the class can easily see what you worked on.
Roundtree Manufacturing Co. is preparing its year-end financial statements and is considering the accounting for the following items.
1. The vice president of sales had indicated that one product line has lost its customer appeal and will be phased out over the next 3 years. Therefore, a decision has been made to lower the estimated lives on related production equipment from the remaining 5 years to 3 years.
2. The Hightone Building was converted from a sales office to offices for the Accounting Department at the beginning of this year. Therefore, the expense related to this building will now appear as an administrative expense rather than a selling expense on the current year’s income statement.
3. Estimating the lives of new products in the Leisure Products Division has become very difficult because of the highly competitive conditions in this market. Therefore, the practice of deferring and amortizing preproduction costs has been abandoned in favor of expensing such costs as they are incurred.
Identify and explain whether each of the above items is a change in principle, a change in estimate, or an error.
E22-4 (Accounting Change) Gordon Company started operations on January 1, 2009, and has used the FIFO method of inventory valuation since its inception. In 2015, it decides to switch to the average-cost method. You are provided with the following information.
Under FIFO Under Average-Cost Retained Earnings (Ending Balance)
2009 100,000 90,000 100,000
2010 70,000 65,000 160,000
2011 90,000 80,000 235,000
2012 120,000 130,000 340,000
2013 300,000 290,000 590,000
2014 305,000 310,000 780,000
(a) What is the beginning retained earnings balance at January 1, 2011, if Gordon prepares comparative financial statements starting in 2011?
(a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?
(c) What is the beginning retained earnings balance at January 1, 2015, if Gordon prepares single- period financial statements for 2015?
(d) What is the net income reported by Gordon in the 2014 income statement if it prepares comparative financial statements starting with 2012?