Solution manual intermediate accounting 13e kieso ch22

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 22 Accounting Changes and Error Analysis ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Differences between change in principle, change in estimate, change in entity, errors 2, 4, 6, 7, 8, 9, 12, 13, 15, 21, 22, 23 Accounting changes: *4 Brief Exercises Exercises Concepts Problems for Analysis 1, 2, 3, 3, 6, 1, 2, 4, a Comprehensive b Changes in estimate, changes in depreciation methods 8, 4, 5, 3, 4, 6, 7, 8, 9, 10, 11, 12, 16, 17 1, 2, 4, 6, 1, 2, 3, 4, 5, c Changes in accounting for long-term construction contracts 2, 10 1, 2, 10 1, 8, 13 1, d Change from FIFO to average cost e Change from FIFO to LIFO 2, 11 f Change from LIFO g Miscellaneous 2, 8, 14 10 1, 2, 3, 5, 8, 14 1, 3, 4, 5, 8, 24 8, 9, 10 2, 1, Correction of an error a Comprehensive 8, 14, 15, 17, 19 8, 9, 10 8, 15, 16, 18, 19, 20, 21 3, 6, 7, 8, 9, 10 b Depreciation 2, 18, 21 6, 9, 15, 17, 18 1, 6, c Inventory 9, 16, 20 10 7, 17, 18 2, 10 11, 12 22, 23 11, 12 Changes between fair value and equity methods 2, 3, 1, *This material is dealt with in an Appendix to the chapter Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Brief Exercises Learning Objectives Exercises Problems Identify the types of accounting changes Describe the accounting for changes in accounting principles Understand how to account for retrospective accounting changes 1, 2, 3, 9, 10 1, 2, 3, 4, 5, 8, 13, 14 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 1, 2, 3, 4, 6, 7, 8, 10 7, 8, 9, 15, 16, 17, 18, 19, 20, 21 1, 2, 3, 6, 7, 8, 9, 10 18, 19, 20, 21 6, 7, 8, 9, 10 22, 23 11, 12 Understand how to account for impracticable changes Describe the accounting for changes of estimates Identify changes in a reporting entity Describe the accounting for correction of errors Identify economic motives for changing accounting methods Analyze the effect of errors *10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting 22-2 Copyright © 2010 John Wiley & Sons, Inc 11, 12 Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ASSIGNMENT CHARACTERISTICS TABLE Item Description Level of Difficulty Time (minutes) E22-1 E22-2 E22-3 E22-4 E22-5 E22-6 E22-7 E22-8 E22-9 E22-10 E22-11 E22-12 E22-13 E22-14 E22-15 E22-16 E22-17 E22-18 E22-19 E22-20 E22-21 *E22-22 *E22-23 Change in principle—long-term contracts Change in principle—inventory methods Accounting change Accounting change Accounting change Accounting changes—depreciation Change in estimate and error; financial statements Accounting for accounting changes and errors Error and change in estimate—depreciation Depreciation changes Change in estimate—depreciation Change in estimate—depreciation Change in principle—long-term contracts Various changes in principle—inventory methods Error correction entries Error analysis and correcting entry Error analysis and correcting entry Error analysis Error analysis and correcting entries Error analysis Error analysis Change from fair value to equity Change from equity to fair value Moderate Moderate Difficult Difficult Difficult Difficult Moderate Simple Simple Moderate Simple Simple Simple Moderate Simple Simple Simple Moderate Simple Moderate Moderate Complex Moderate 10–15 10–15 25–30 25–30 30–35 30–35 25–30 5–10 15–20 20–25 10–15 20–25 10–15 20–25 15–20 10–15 10–15 25–30 20–25 20–25 10–15 25–30 15–20 P22-1 P22-2 P22-3 P22-4 P22-5 P22-6 P22-7 P22-8 P22-9 P22-10 *P22-11 *P22-12 Change in estimate and error correction Comprehensive accounting change and error analysis problem Error corrections and accounting changes Accounting changes Change in principle—inventory—periodic Accounting changes and error analysis Error corrections Comprehensive error analysis Error analysis Error analysis and correcting entries Fair value to equity method with goodwill Change from fair value to equity method Moderate Complex Complex Moderate Moderate Moderate Moderate Difficult Moderate Complex Moderate Moderate 30–35 30–40 30–40 40–50 30–35 25–30 25–30 30–35 20–25 50–60 20–25 20–25 Analysis of various accounting changes and errors Analysis of various accounting changes and errors Analysis of three accounting changes and errors Analysis of various accounting changes and errors Change in principle, estimate Change in estimate, ethics Moderate Moderate Moderate Moderate Moderate Moderate 25–35 20–30 30–35 20–30 20–30 20–30 CA22-1 CA22-2 CA22-3 CA22-4 CA22-5 CA22-6 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS TO CODIFICATION EXERCISES CE22-1 Master Glossary (a) A change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities A change in accounting estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities Changes in accounting estimates result from new information Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations (b) A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted A change in the method of applying an accounting principle also is considered a change in accounting principle (c) The process of revising previously issued financial statements to reflect the correction of an error in those financial statements (d) The application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period, as if that principle had always been used, or a change to financial statements of prior accounting periods to present the financial statements of a new reporting entity as if it had existed in those prior years CE22-2 According to FASB ASC 250-10-50-7 (Accounting Changes and Error Corrections—Disclosure): When financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error The entity also shall disclose both of the following: (a) The effect of the correction on each financial statement line item and any per-share amounts affected for each prior period presented (b) The cumulative effect of the change on retained earnings or other appropriate components of equity or net assets in the statement of financial position, as of the beginning of the earliest period presented 22-4 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CE22-3 According to FASB ASC 250-10-45-5 (Accounting Changes and Error Corrections—Other Presentation Matters): Retrospective application requires all of the following: (a) The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented (b) An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period (c) Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle CE22-4 According to FASB ASC 250-10-S99-4 (Accounting Changes and Error Corrections—SEC Materials): Question 5: If a registrant justified a change in accounting method as preferable under the circumstances, and the circumstances change, may the registrant revert to the method of accounting used before the change? Any time a registrant makes a change in accounting method, the change must be justified as preferable under the circumstances Thus, a registrant may not change back to a principle previously used unless it can justify that the previously used principle is preferable in the circumstances as they currently exist Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO QUESTIONS The major reasons why companies change accounting methods are: (1) Desire to show better profit picture (2) Desire to increase cash flows through reduction in income taxes (3) Requirement by Financial Accounting Standards Board to change accounting methods (4) Desire to follow industry practices (5) Desire to show a better measure of the company’s income (a) Change in accounting principle; retrospective application is generally not made because it is impracticable to determine the effect of the change on prior years The FIFO inventory amount is therefore generally the beginning inventory in the current period (b) Correction of an error and therefore prior period adjustment; adjust the beginning balance of retained earnings (c) Increase income for litigation settlement (d) Change in accounting estimate; currently and prospectively Part of operating section of income statement (e) Reduction of accounts receivable and the allowance for doubtful accounts (f) Change in accounting principle; retrospective application to prior period financial statements The three approaches suggested for reporting changes in accounting principles are: (a) Currently—the cumulative effect of the change is reported in the current year’s income as a special item (b) Retrospectively—the cumulative effect of the change is reported as an adjustment to retained earnings The prior year’s statements are changed on a basis consistent with the newly adopted principle (c) Prospectively—no adjustment is made for the cumulative effect of the change Previously reported results remain unchanged The change shall be accounted for in the period of the change and in subsequent periods if the change affects future periods The FASB believes that the retrospective approach provides financial statement users the most useful information Under this approach, the prior statements are changed on a basis consistent with the newly adopted standard; any cumulative effect of the change for prior periods is recorded as an adjustment to the beginning balance of retained earnings of the earliest period reported The indirect effect of a change in accounting principle reflects any changes in current or future cash flows resulting from a change in accounting principle that is applied retrospectively An example is the change in payments to a profit-sharing plan that is based on reported net income Indirect effects are not included in the retrospective application, but instead are reported in the period in which the accounting change occurs (current period) A change in an estimate is simply a change in the way an individual perceives the realizability of an asset or liability Examples of changes in estimate are: (1) change in the realizability of trade receivables, (2) revisions of estimated lives, (3) changes in estimates of warranty costs, and (4) change in estimate of deferred charges or credits A change in accounting estimate effected by a change in accounting principle occurs when a change in accounting estimate is inseparable from the effect of a related change in accounting principle An example would be switching from capitalizing advertising expenditures to expensing them if the future benefit of the expenditures can no longer be estimated with reasonable certainty 22-6 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Questions Chapter 22 (Continued) This is an example of a situation in which it is difficult to differentiate between a change in accounting principle and a change in estimate In such a situation, the change should be considered a change in estimate, and accordingly, should be handled currently and prospectively Thus, all costs presently capitalized and viewed as providing doubtful future values should be expensed immediately, and costs currently incurred should also be expensed immediately (a) Charge to expense—possibly separately disclosed (b) Change in estimate that is effected by a change in accounting principle—currently and prospectively (c) Charge to expense—possibly separately disclosed (d) Correction of an error and reported as a prior period adjustment—adjust the beginning balance of retained earnings (e) Change in accounting principle—retrospective application to all affected prior-period financial statements (f) Change in accounting estimate—currently and prospectively This change is to be handled as a correction of an error As such, the portion of the change attributable to prior periods ($23,000) should be reported as an adjustment to the beginning balance of retained earnings in the 2010 financial statements If statements for previous years are presented for comparative purposes, these statements should be restated to correct for the error The remainder of the inventory value ($29,000) should be reported in the 2010 statements as a reduction of materials cost 10 Preferability is a difficult concept to apply The problem is that there are no basic objectives to indicate which is the most preferable method, assuming a selection between two generally accepted accounting practices is possible, such as completed-contract and percentage-of-completion If a FASB standard creates a new principle or expresses preference for or rejects a specific accounting principle, a change is considered clearly acceptable A more appropriate matching of revenues and expenses is often given as the justification for a change in accounting principle 11 When a company changes to the LIFO method, the base-year inventory for all subsequent LIFO calculations is the beginning inventory in the year the method is adopted This assumes that prior years’ income is not changed because it would be too impractical to so The only adjustment necessary may be to adjust the beginning inventory from a lower-of-cost-or-market approach to a cost basis 12 Where individual company statements were reported in prior years and consolidated financial statements are to be prepared this year, the following reporting and disclosure practices should be implemented: (1) The financial statements of all prior periods presented should be restated to show the financial information for the new reporting entity for all periods (2) The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it (3) The effect of the change on income before extraordinary items, net income, and earnings per share amounts should be disclosed for all periods presented 13 This change represents a change in reporting entity This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it The effect of the change on income before extraordinary items, net income, and earnings per share amounts should be disclosed for all periods presented Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Questions Chapter 22 (Continued) 14 Counterbalancing errors are errors that will be offset or corrected over two periods Noncounterbalancing errors are errors that are not offset in the next accounting period An example of a counterbalancing error is the failure to record accrued wages or prepaid expenses Failure to capitalize equipment and record depreciation is an example of a noncounterbalancing error 15 A correction of an error in previously issued financial statements should be handled as a priorperiod adjustment Thus, such an error should be reported in the year that it is discovered as an adjustment to the beginning balance of retained earnings And, if comparative statements are presented, the prior periods affected by the error should be restated The disclosures need not be repeated in the financial statements of subsequent periods As an illustration, assume that credit sales of $40,000 were inadvertently overlooked at the end of 2010 When the error was discovered in a subsequent period, the appropriate entry to record the correction of the error would have been (ignoring income tax effects): Accounts Receivable Retained Earnings 40,000 40,000 16 This change represents a change from an accounting principle that is not generally accepted to an accounting principle that is acceptable As such, this change should be handled as a correction of an error Thus, in the 2010 statements, the cumulative effect of the change should be reported as an adjustment to the beginning balance of retained earnings If 2009 statements are presented for comparative purposes, these statements should be restated to correct for the accounting error 17 Retained earnings is correctly stated at December 31, 2012 Failure to accrue salaries in earlier years is a counterbalancing error that has no effect on 2012 ending retained earnings 18 December 31, 2011 Machinery Accumulated Depreciation—Machinery Retained Earnings (To correct for the error of expensing installation costs on machinery acquired in January, 2010) Depreciation Expense [($36,000 – $3,600) ÷ 20] Accumulated Depreciation—Machinery (To record depreciation on machinery for 2011 based on a 20-year useful life) 19 6,000 600 5,400 1,620 1,620 The amortization error decreases net income by $2,700 in 2010 Interest expense related to the discount should have been charged for $300, but was charged for $3,000 The entry to correct for this error is as follows: Discount on Bonds Payable Interest Expense 2,700 2,700 The entry to record accrued interest on the $100,000 of principal at 11% for months is: Interest Expense Interest Payable 22-8 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual 5,500 5,500 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Questions Chapter 22 (Continued) 20 This error has no effect on net income because both purchases and inventory were understated The entry to correct for this error, assuming a periodic inventory system, is: Purchases Accounts Payable 21 13,000 13,000 This error increases net income by $2,400 in 2010 Depreciation should have been charged to net income The entry to correct for this error is as follows: Depreciation Expense Accumulated Depreciation—Equipment 2,400 2,400 22 The iGAAP standard addressing accounting and reporting for changes in accounting principles, changes in estimates, and errors is IAS (“Accounting Policies, Changes in Accounting Estimates and Errors”) Various presentation issues related to restatements are addressed in IAS 23 As indicated in the chapter, the FASB has issued guidance on changes in accounting principles, changes in estimates, and corrections of errors, which essentially converges U.S GAAP to IAS Key remaining differences are as follows • • • 24 One area in which iGAAP and U.S GAAP differ is the reporting of error corrections in previously issued financial statements While both GAAPs require restatement, U.S GAAP is an absolute standard—that is, there is no exception to this rule Under U.S GAAP and iGAAP, if determining the effect of a change in accounting principle is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to so, which may be the current period Under iGAAP, the impracticality exception applies to both changes in accounting principles and to the correction of errors Under U.S GAAP, this exception only applies to changes in accounting principle IAS does not specifically address the accounting and reporting for indirect effects of changes in accounting principles As indicated in the chapter, U.S GAAP has detailed guidance on the accounting and reporting of indirect effects Currently, under U.S GAAP, when a company prepares financial statements on a new basis, comparative information must be provided for a three-year period Under iGAAP, up to two years of comparative data must be provided Use of the shorter comparative data period must be addressed before U.S companies can adopt iGAAP Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 22-1 Construction in Process ($120,000 – $80,000) Deferred Tax Liability [($120,000 – $80,000) X 35%] Retained Earnings 40,000 14,000 26,000 BRIEF EXERCISE 22-2 Difference in profit-sharing expense—prior years Pre-tax income—percentage-of-completion Pre-tax income—completed-contract $120,000 80,000 $ 40,000 X 1% $ 400 Indirect effect The indirect effect from prior years will be reported as a profit-sharing expense for year (2011) BRIEF EXERCISE 22-3 Inventory Deferred Tax Liability ($1,200,000 X 40%) Retained Earnings 1,200,000 480,000 720,000 BRIEF EXERCISE 22-4 This is a change in estimate effected by a change in accounting principle Cost of depreciable assets Accumulated depreciation Carrying value at January 1, 2010 Salvage value Depreciable base $250,000 (90,000) 160,000 (40,000) $120,000 Depreciation in 2010 = $120,000 ÷ = $15,000 Depreciation Expense Accumulated Depreciation 22-10 Copyright © 2010 John Wiley & Sons, Inc 15,000 Kieso, Intermediate Accounting, 13/e, Solutions Manual 15,000 (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CA 22-2 Item Change Type of Change Should Prior Years’ Statements Be Retrospectively Applied or Restated? A change in accounting principle Yes A change in an accounting estimate No An accounting change involving both a change in accounting principle and a change in accounting estimate Referred to as an change in accounting estimate effected by a change in principle Handle as a change in estimate No Not an accounting change but rather a change in classification Yes An error correction not involving a change in accounting principle Yes An accounting change involving a change in the reporting entity which is a special type of change in accounting principle Yes Not a change in accounting principle Simply, a change in tax accounting No An accounting change from one generally accepted accounting principle to another generally accepted accounting principle No* *Generally impracticable to determine what LIFO inventory would be in prior periods CA 22-3 Situation (a) A change from an accounting principle not generally accepted to one generally accepted is a correction of an error (b) When comparative statements are presented, net income, components of net income, retained earnings, and any other affected balances for all periods presented should be restated to correct for the error When single period statements are presented, the required adjustments should be reported in the opening balance of retained earnings A description of the change and its effect on income before extraordinary items, net income, and the related per share amounts should be disclosed in the period of the change Financial statements of subsequent periods need not repeat the disclosures (c) The beginning balance of retained earnings in the balance sheet is restated The income statement for the current year should report the correct approach for revenue recognition If prior years’ financial statements are presented, they should be restated directly 22-58 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CA 22-3 (Continued) Situation (a) The change in method of inventory pricing represents a change in accounting principle, as defined by GAAP (b) Changes in accounting principle are accounted for through retrospective application Under this approach, the cumulative effect of the new method on the financial statements at the beginning of the period is computed (and recorded in retained earnings at the beginning of the period) Prior statements are changed to be reported on a basis consistent with the new standard (c) As a result of the change to weighted-average costing, the current year balance sheet will reflect weighted-average costing (at relatively higher prices in times of rising prices) Cost of goods sold will also be different (higher), resulting in lower income Situation (a) A change in the depreciable lives of fixed assets is a change in accounting estimate (b) In accordance with GAAP, the change in estimate should be reported in the current period and in future periods Unlike a change in accounting principle, the change in accounting estimate should not be accounted for by presenting prior earnings data giving effect to the change as if it had been applied retrospectively (c) This change in accounting estimate will affect the balance sheet in that the accumulated depreciation in the current and future years will increase at a different rate than previously reported, and this will also be reflected in depreciation expense in the income statement in the current and future years CA 22-4 This situation is a change in estimate Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate This is often referred to as a change in accounting estimate effected by a change in accounting principle A change in estimate employs the current and prospective approach by: (a) Reporting current and future financial statements on the new basis (b) Presenting prior periods’ financial statements as previously reported (c) Making no adjustments to current opening balances for purposes of catch-up This situation is considered a change in estimate because new events have occurred which call for a change in estimate The accounting should be the same as discussed in This situation is considered a correction of an error The general rule is that careful estimates which later prove to be incorrect should be considered changes in estimates Where the estimate was obviously computed incorrectly because of lack of expertise or in bad faith, the adjustment should be considered an error Changes due to error should employ the retroactive approach by: (a) Restating, via a prior period adjustment, the beginning balance of retained earnings for the current period Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-59 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CA 22-4 (Continued) (b) Correcting all prior period statements presented in comparative financial statements The amount of the error related to periods prior to the earliest year’s statement presented for comparative purposes should be included as an adjustment to the beginning balance of retained earnings of that earliest year’s statement No adjustment is necessary—a change in accounting principle is not considered to have happened if a new principle is adopted in recognition of events that have occurred for the first time This situation is considered a change in estimate because new events have occurred which call for a change in estimate The accounting should be the same as discussed in This situation is considered a change in accounting principle A change in accounting principle should employ the retrospective approach by: (a) Reporting current results on the new basis (b) Presenting prior period financial statements on a basis consistent with the newly adopted method (c) Computing the cumulative effect of the new method in beginning retained earnings on the earliest year presented CA 22-5 Mr Joe Davison, CEO Sports-Pro Athletics Dear Mr Davison: You recently contacted me about several accounting changes made at Sports-Pro Athletics, Inc in 2010 This letter details how you should account for each change Your change from one method of depreciation to another constitutes a change in accounting estimate effected by a change in accounting principle A change in estimate employs the current and prospective approach by reporting current and future financial statements on the new basis Prior periods financial statements are presented as previously reported Your change in salvage values for your office equipment is considered a change in estimate This type of change does not really affect previous financial statements and is thus accounted for currently and prospectively The change is included in the most current period being reported There is no need to restate prior periods’ financial statements Finally, your change in specific subsidiaries results in a change in reporting entity which must be reported by restating the financial statements for all periods presented The effect of this change should be shown on income before extraordinary items, net income, and earnings per share amounts In addition, you must disclose in a footnote the nature of the change as well as the reasons for it I hope that this information helps you account for the various changes which have taken place at Sports-Pro Athletics If you need further information, please contact me Sincerely, 22-60 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CA 22-6 (a) The ethical issues are the honesty and integrity of Frost’s financial reporting practices versus the Corporation’s and the accounting manager’s profit motives Shortening the life of fixed assets from 10 to years may be evidence that depreciation expense during the first five years were understated Such a practice distorts Frost’s operating results and misleads users of Frost’s financial statements If this practice is intentional, it is unethical (b) The primary stakeholders in the above situation include Frost’s stockholders and creditors Crane and his auditing firm are stakeholders because they know of the depreciation practices at Frost (c) Crane should report his finding to the partner-in-charge of the Frost engagement If this practice is deemed to be intentional and fraudulent, then Crane’s firm has a professional responsibility to report this incident to the highest levels of management within Frost (the Audit Committee of the Board of Directors) Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-61 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL REPORTING PROBLEM (a) New Pronouncements and Reclassifications P&G reported the following changes in accounting principles: ADOPTION OF SFAS 158, “EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIMENT PLANS, an amendment of FASB Statements No 87, 88, 106, and 132(R)” In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106, and 132(R).” SFAS 158 requires companies to recognize the over-funded and under-funded status of defined benefit pension and other postretirement plans as assets or liabilities on their balance sheets In addition, changes in the funded status must be recognized through other comprehensive income in shareholders’ equity in the year in which the changes occur We adopted SFAS 158 on June 30, 2007 In accordance with the transition rules in SFAS 158, this standard is being adopted on a prospective basis The adoption of SFAS 158 resulted in an adjustment to our balance sheet, but had no impact on our net earnings or cash flow, nor did it impact any debt covenants SFAS 158 had no impact on our measurement date, which continues to be as of our fiscal year end Refer to Note for additional information regarding our pension and postretirement plans FASB INTERPRETATION 48, “ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES” In July 2006, the FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the accounting and disclosure of uncertain tax positions FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return We will adopt FIN 48 on July 1, 2007 We estimate that the adoption of FIN 48 will result in a net decrease to beginning retained earnings of approximately $200 – $250 million, primarily related to the accrual of additional interest and penalties on unrecognized tax benefits 22-62 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL REPORTING PROBLEM (Continued) (b) Use of Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying disclosures These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future Estimates are used in accounting for, among other items, consumer and trade promotion accruals, pensions, postemployment benefits, stock options, valuation of acquired intangible assets, useful lives for depreciation and amortization, future cash flows associated with impairment testing for goodwill and long-lived assets, deferred tax assets, potential income tax assessments and contingencies Actual results may ultimately differ from estimates, although management does not believe such differences would materially affect the financial statements in any individual year Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-63 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com COMPARATIVE ANALYSIS CASE THE COCA-COLA COMPANY VS PEPSICO, INC (a) and (c) for Coca-Cola Company: NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Recent Accounting Standards and Pronouncements In December 2007, the FASB issued SFAS No 141 (revised 2007), “Business Combinations.” SFAS No 141(R) amends the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired SFAS No 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination SFAS No 141(R) is effective for our Company on January 1, 2009, and the Company will apply prospectively to all business combinations subsequent to the effective date In December 2007, the FASB issued SFAS No 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No 51.” SFAS No 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary SFAS No 160 also establishes disclosure requirements that clearly identify and distinguish between the controlling and noncontrolling interests and requires the separate disclosure of income attributable to controlling and noncontrolling interests SFAS No 160 is effective for fiscal years beginning after December 15, 2008 The Company is currently evaluating the impact that the adoption of SFAS No 160 will have on our consolidated financial statements In February 2007, FASB issued the SFAS No 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No 115.” SFAS No 159 permits entities to choose to measure many financial instruments and certain other items at fair value Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date SFAS No 159 was effective for our Company on January 1, 2008 The adoption of SFAS No 159 did not have a material impact on our consolidated financial statements 22-64 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com COMPARATIVE ANALYSIS CASE (Continued) In September 2006, the SEC staff published SAB No 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements SAB No 108 was effective for fiscal years ending after November 15, 2006 The adoption of SAB No 108 by our Company in the fourth quarter of 2006 did not have a material impact on our consolidated financial statements As previously discussed, Our Company adopted SFAS No 158 related to defined benefit pension and other postretirement plans Refer to Note 16 In September 2006, the FASB issued SFAS No 157, “Fair Value Measurements.” SFAS No 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements SFAS No 157 was effective for our Company on January 1, 2008 However, in February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective Date of FASB Statement No 157) which delayed the effective date of SFAS No 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) The adoption of SFAS No 157 for our financial assets and liabilities did not have a material impact upon adoption We not believe the adoption of SFAS No 157 for our non-financial assets and liabilities, effective January 1, 2009, will have a material impact on our consolidated financial statements In July 2006, the FASB issued Interpretation No 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No 109, “Accounting for Income Taxes.” Interpretation No 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return Interpretation No 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition For our Company, Interpretation No 48 was effective January 1, 2007 As a result of the adoption of Interpretation No 48, we recorded an approximate $65 million increase in accrued income taxes in our consolidated balance sheet for unrecognized tax benefits, which was accounted for as a cumulative effect adjustment to the January 1, 2007 balance of reinvested earnings Refer to Note 17 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-65 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com COMPARATIVE ANALYSIS CASE (Continued) In May 2005, the FASB issued SFAS No 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board (“APB”) Opinion No 20 and FASB Statement No 3.” SFAS No 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable APB Opinion No 20, “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle SFAS No 154 became effective for our Company on January 1, 2006 The adoption of SFAS No 154 did not have a material impact on our consolidated financial statements (b) and (c) for PepsiCo, Inc.: Reported one accounting change: Recent Accounting Pronouncements In September 2006, the SEC issued SAB 108 to address diversity in practice in quantifying financial statement misstatements SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures On December 30, 2006, we adopted SAB 108 Our adoption of SAB 108 did not impact our financial statements 22-66 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PROFESSIONAL RESEARCH: FINANCIAL ACCOUNTING AND REPORTING (a) According to FASB ASC 250-10-20 (Glossary), a change in accounting estimate that is inseparable from the effect of a related change in accounting principle is a change in estimate effected by a change in principle A change in the method of depreciation, amortization, or depletion for longlived, nonfinancial assets are examples of changes in estimate effected by a change in principle Under FASB ASC 250-10-45-17, 19, a change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods (45-19) Like other changes in accounting principle, a change in accounting estimate that is effected by a change in accounting principle may be made only if the new accounting principle is justifiable on the basis that it is preferable For example, an entity that concludes that the pattern of consumption of the expected benefits of an asset has changed, and determines that a new depreciation method better reflects that pattern, may be justified in making a change in accounting estimate effected by a change in accounting principle (See paragraph 250-10-45-12.) (b) According to FASB ASC 250-10-45-18, distinguishing between a change in an accounting principle and a change in an accounting estimate is sometimes difficult In some cases, a change in accounting estimate is effected by a change in accounting principle One example of this type of change is a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets (hereinafter referred to as depreciation method) The new depreciation method is adopted in partial or complete recognition of a change in the estimated future benefits inherent in the asset, the pattern of consumption of those benefits, or the information available to the entity about those benefits The effect of the change in accounting principle, or the method of applying it, may be inseparable from the effect of the change in accounting estimate Changes of that type often are related to the continuing process of obtaining additional information and revising estimates and, therefore, shall be considered changes in estimates for purposes of applying this Subtopic (c) According to FASB ASC 250-10-S50-1-1—Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant when Adopted in a Future Period S50-1 See paragraph 250-10-S99-5, SAB Topic 11.M, for SEC Staff views regarding disclosure of the impact of recently issued accounting standards SAB Topic 11.M, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant when Adopted in a Future Period S99-5 The following is the text of SAB Topic 11.M, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant when Adopted in a Future Period Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-67 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL ACCOUNTING AND REPORTING (Continued) • Facts: An accounting standard has been issued that does not require adoption until some future date A registrant is required to include financial statements in fillings with the Commission after the Issuance of the standard but before it is adopted by the registrant.5 – 5Some registrants may want to disclose the potential effects of proposed accounting standards not yet issued, (e.g., exposure drafts) Such disclosures, which generally are not required because the final standard may differ from the exposure draft, are not addressed by this SAB See also FRR 26 • • Question 1: Does the staff believe that these filings should include disclosure of the impact that the recently issued accounting standard will have on the financial position and results of operations of the registrant when such standard is adopted in a future period? Interpretive Response: Yes The commission addressed a similar issue with respect to Statement 52 and concluded that “The Commission also believes that registrants that have not yet adopted Statement 52 should discuss the potential effects of adoption in registration statements and reports filed with the Commission.”6 The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.7 MD&A8 requires registrants to provide information with respect to liquidity, capital resources and results of operations and such other information that the registrant believes to be necessary to understand its financial condition and results of operations In addition, MD&A requires disclosure of presently known material changes, trends and uncertainties that have had or that the registrant reasonably expects will have a material impact on future sales, revenues or income from continuing operations The staff believes that disclosure of impending accounting changes is necessary to inform the reader about expected impacts on financial information to be reported in the future and, therefore, should be disclosed in accordance with the existing MD&A requirements With respect to financial statement disclosure, GAAS9 specifically address the need for the auditor to consider the adequacy of the disclosure of impending changes in accounting principles if (a) the financial statements have been prepared on the basis of accounting principles that were acceptable at the financial statement date but that will not be acceptable in the future and (b) the financial statements will be restated in the future as a result of the change The staff believes that recently issued accounting standards may constitute material matters and, therefore, disclosure in the financial statements should also be considered in situations where the change to the new accounting standard will be accounted for in financial statements of future periods, prospectively or with a cumulative catch-up adjustment – 6FRR 6, Section – 7In those instances where a recently issued standard will impact the preparation of, but not materially affect, the financial statements, the registrant is encouraged to disclose that a standard has been issued and that its adoption will not have a material effect on its financial position or results of operations – 8Item 303 of Regulation S-K – 9See AU 9410.13-18 • 22-68 Question 2: Does the staff have a view on the types of disclosure that would be meaningful and appropriate when a new accounting standard has been issued but not yet adopted by the registrant? Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com FINANCIAL ACCOUNTING AND REPORTING (Continued) • • Interpretive Response: The staff believes that the registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of information available to the registrant will differ with respect to various standards and from one registrant to another The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted The staff understands that the registrant will only be able to disclose information that is known The following disclosures should generally be considered by the registrant: – A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier – A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined – A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable In that case, a statement to that effect may be made – Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-69 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PROFESSIONAL SIMULATION Journal Entries (a) Inventory Retained Earnings 18,000* 18,000 *($20,000 + $24,000 + $27,000) – ($15,000 + $18,000 + $20,000) (b) Inventory Retained Earnings 28,000* 28,000 *($20,000 + $24,000 + $27,000) – ($12,000 + $14,000 + $17,000) Financial Statements Computation of EPS for 2011 Basic EPS Net income Outstanding shares Basic EPS $30,000 10,000 $3.00 ($30,000 ÷ 10,000) Diluted EPS Net income Add: Interest savings ($200,000 X 6%) Adjusted net income $30,000 12,000 $42,000 Adjusted net income Outstanding shares Shares upon conversion Diluted EPS $42,000 10,000 6,000* $2.63 ($42,000 ÷ 16,000) *$200,000 ÷ $1,000 = 200 bonds; 200 bonds X 30 = 6,000 shares 22-70 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PROFESSIONAL SIMULATION (Continued) Computation of EPS for 2010 Basic EPS Net income Outstanding shares Basic EPS $27,000 10,000 $2.70 ($27,000 ÷ 10,000) Diluted EPS Net income Add: Interest savings ($200,000 X 6%) Adjusted net income $27,000 12,000 $39,000 Adjusted net income Outstanding shares Shares upon conversion Diluted EPS $39,000 10,000 6,000 $2.44 ($39,000 ÷ 16,000) EPS Presentation Net income Basic EPS Diluted EPS 2011 2010 $30,000 $ 3.00 $ 2.63 $27,000 $ 2.70 $ 2.44 Copyright © 2010 John Wiley & Sons, Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-71 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ... method of accounting 22-2 Copyright © 2010 John Wiley & Sons, Inc 11, 12 Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) To download more slides, ebook, solutions... Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS... Inc Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS