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Intermediate Accounting 17th Edition James D. Stice, Earl K. Stice, Fred Skousen - Solutions

What alternative procedures have been suggested as solutions for reporting accounting changes?
a. List several examples of areas for which changes in accounting estimates are often made. b. Explain briefly the proper accounting treatment for a change in estimate. c. Why is this procedure considered proper for recording changes in accounting estimates?
What is the proper way to account for a change in depreciation method?
a. List several examples of changes in accounting principle that a company may make. b. Explain briefly the proper accounting treatment for recognizing currently a change in accounting principle.
Why does a change in accounting principle require justification?
a. When should the effects of a change in accounting principle be reported only as a direct adjustment to the current year’s beginning Retained Earnings balance? b. When should the effects of a change in accounting principle be reported only prospectively?
Dallas Company purchased a delivery van in 2008. At the time of purchase, the van’s service life was estimated to be seven years with a salvage value of $500. The company has been using the straight-line method of depreciation. During 2011, the company determined that because of extensive use,
Describe the required disclosures following a business combination.
Describe the effect of each of the following: a. Depreciation is changed from the straight-line method to an accelerated method.b. Depreciation is changed from an accelerated method to the straight-line method.c. Income on construction contracts that had been reported on a completed-contract basis
a. How are accounting errors to be treated?b. What are counterbalancing errors?
Mendez Manufacturing Company failed to record accrued interest for 2008, $800; 2009, $700; and 2010, $950. What is the amount of overstatement or understatement of the retained earnings account at December 31, 2011?
Goods purchased FOB shipping point were shipped to Merkley & Co. on December 31,2011. The purchase was recorded in 2011, but the goods were not included in ending inventory. (a) What effect would this error have had on reported income for 2011 had it not been discovered? (b) What entry should be
On January 1, 2007, the company purchased equipment for $100,000. Originally, the equipment had a 12-year expected useful life and $4,000 residual value. The company uses straight-line depreciation. On January 1, 2011, the company realized that the equipment would have a total useful life of 15
On January 1, 2008, the company purchased equipment for $600,000. The equipment has a 20-year expected useful life and $0 residual value. Initially, the company used double-declining-balance depreciation. On January 1, 2011, the company changed to straight-line depreciation. The expected useful
Refer to Practice 20-2. Assume that before 2011 the company used straight-line depreciation for tax purposes while using double-declining-balance depreciation for book purposes. The change to straight-line depreciation in 2011 is made for book purposes; the company continues to use straight-line
On January 1, 2008, the company purchased equipment for $400,000. The equipment has an 8-year expected useful life and $0 residual value. Initially, the company used straight-line depreciation. On January 1, 2011, the company changed to double-declining-balance depreciation. Compute depreciation
As of January 1, 2011, the company decided to change from the LIFO method of inventory valuation to the FIFO method. The change is being made for both book and tax purposes. Data for the past four years (including 2011) are as follows:The ending income taxes payable'LIFO amount is not given
Refer to Practice 20-5. Compute 1. The retrospectively recalculated Retained Earnings balances as of December 31, 2009, and December 31, 2010, and 2. The Retained Earnings balance as of December 31, 2011, after the change to FIFO is made. Note that the company does not pay dividends.
Refer to Practice 20-5. Compute TOTAL income taxes payable, after the change to FIFO is made, as of December 31, 2009, December 31, 2010, and December 31, 2011. Recall that the change to FIFO will necessitate the payment of any tax savings that had been created by the use of LIFO.
Refer to Practice 20-5. Prepare the comparative note disclosure that would be provided in the notes to the 2011 financial statements with respect to the income statements for 2009, 2010, and 2011.
Refer to Practice 20-5. Assume that the detailed information listed in Practice 20-5 is not available. Instead, the company only knows that the beginning inventory for 2011 is $150 using LIFO and $220 using FIFO. Show the retained earnings computation for 2011 that would be included in the
On December 31, 2011, Big Company acquired Tiny Company for $150,000. This amount exceeded the recorded value of Tiny Company€™s net assets by $30,000 on the acquisition date. The entire excess was attributable to a Tiny Company building that had a remaining useful life of 15 years as of
The company miscounted its inventory at the end of the year. The correct amount of inventory was $100,000. The error was not discovered until the following May when the books for the preceding year were already closed. Make the correcting entry necessary the following May, assuming that the
The company purchased inventory for $10,000 on December 28. The inventory purchase was not recorded until the following January 5. However, the inventory was appropriately included in the inventory count on December 31. The error was not discovered until the following May when the books for the
Refer to Practice 20-12. Assume that in addition to failing to record the purchase, the company also failed to include the inventory in the ending inventory count. Make the correcting entry necessary the following May, assuming that the company uses (1) The periodic inventory method and (2) The
The company miscounted its total credit sales in the last two weeks of the year. The correct amount of credit sales for this period was $300,000. The error was not discovered until the following year when the books for the preceding year were already closed. Make the correcting entry necessary the
In December 2010, the company neglected to accrue a $1,000 expense for rent. The expense was recognized in January 2011 when the rent was paid in cash. Make the necessary correcting entry, assuming that (1) The error was found in May 2011 after the 2010 books had been closed and (2) The error was
In December 2010, the company paid $1,800 for insurance for the first six months of 2011. This payment was mistakenly recorded as insurance expense in 2010. Make the necessary correcting entry, assuming that (1) The error was found in August 2011 after the 2010 books had been closed and (2) The
In December 2010, the company failed to recognize $4,000 in consulting revenue earned during 2010. This revenue was recognized when the cash was received in January 2011. Make the necessary correcting entry, assuming that (1) The error was found in May 2011 after the 2010 books had been closed and
In December 2010, the company received $6,000 for services to be provided in early 2011. This payment was mistakenly recorded as service revenue in 2010. Make the necessary correcting entry, assuming that (1) The error was found in May 2011 after the 2010 books had been closed and (2) The error was
In January 2009, the company purchased equipment for $10,000. The equipment has a useful life of 10 years with $0 expected salvage value. The company uses straight-line depreciation. The company mistakenly failed to record depreciation expense on this equipment. Make the necessary correcting entry,
On January 1, 2008, equipment was purchased for $10,000. The entire purchase price was expensed immediately. The equipment has a useful life of 10 years with $0 expected salvage value. The company uses straight-line depreciation. On January 1, 2011, the equipment was sold for $5,500 cash. The
In January 2009, the company made $24,000 in expenditures. These expenditures should have been expensed immediately. Instead, the company recorded this $24,000 payment as a purchase of equipment with a useful life of 12 years and $0 expected salvage value. The company uses straight-line
Refer to Practice 20-21. Assume that the error was found in May 2011. Net income for 2011 (correctly stated) was $50,000. Dividends for 2011 were $15,000. The Retained Earnings balance as originally reported at the end of 2010 was $130,000. Prepare a statement of retained earnings for 2011.
Manchester Manufacturing purchased a machine on January 1, 2007, for $50,000. At the time, it was determined that the machine had an estimated useful life of 10 years and an estimated residual value of $2,000. The company used the double-declining balance method of depreciation. On January 1, 2011,
Danje Corporation purchased a machine on January 1, 2008, for $3,600,000. At the date of acquisition, the machine had an estimated useful life of 10 years with no residual value. The machine is being depreciated on a straight-line basis. On January 1, 2011, Danje determined, as a result of
Albrecht Inc. began business in 2008. An examination of the company's allowance for bad debts account reveals the following.In the past, the company has estimated that 3% of credit sales would be uncollectible. The accountant for Albrecht has determined that the percentage used in estimating bad
On January 1, 2011, management of Micro Storage Inc. determined that a revision in the estimates associated with the depreciation of storage facilities was appropriate. These facilities, purchased on January 5, 2009, for $600,000, had been depreciated using the straight-line method with an
Hollow Mining Company purchased a tract of land with estimated copper ore deposits totaling 1,500,000 tons. The purchase price for the land was $4.8 million. During the first year of operation, Hollow mined and sold 160,000 tons of ore. During the second year, Hollow mined and sold 210,000 tons of
Modern Lighting Inc. has in the past depreciated its computer hardware using the straight-line method, assuming a 10% salvage value and an expected useful life of five years. As a result of the rapid obsolescence associated with the computer industry, Modern Lighting has determined that it receives
Keairnes Supplies decided to change from LIFO to FIFO as of January 1, 2011. The change is being made for both book and tax purposes.1. Using LIFO, the beginning retained earnings as of January 1, 2009, was $182,000. Compute adjusted beginning retained earnings, using FIFO, as of January 1, 2009.2.
Refer to Exercise 20-29. Assume that the detailed information for 2009 and 2010 is not available. During 2011, dividends of $20,000 were paid (compared to dividends of $16,500 in both 2009 and 2010). Based on this information, prepare the retained earnings statement for 2011. Note: Do NOT prepare
Due to changing economic conditions and to making its financial statements more comparable to those of other companies in its industry, the management of Kelsea Inc. decided on January 1, 2011, to review its accounting practices.Kelsea decided to change its allowance for bad debts from 2% to 3.5%
The following errors in the accounting records of the Chipp & Simon Partnership were discovered on January 10, 2011.The partners share net income and losses as follows: 65%, Chipp; 35%, Simon.1. Prepare a correcting journal entry on January 10, 2011, assuming that the books were closed for 2010.2.
State the effect of each of the following errors made in 2010 on the balance sheets and the income statements prepared in 2010 and 2011.(a) The ending inventory is understated as a result of an error in the count of goods on hand.(b) The ending inventory is overstated as a result of the inclusion
Comparative statements for Bodie Corporation are as follows:In 2010, Bodie Corporation discovers that ending inventory for 2009 was understated by $11,000.Prepare comparative income and retained earnings statements for 2009 and 2010.Ignore income tax effects, and assume that the 2010 books have not
The first audit of the books for Ringer Company was made for the year ended December 31, 2011. In reviewing the books, the auditor discovered that certain adjustments had been overlooked at the end of 2010 and 2011 and that other items had been improperly recorded. Omissions and other failures for
In early 2010, while reviewing Huffman Inc.’s 2009 financial records, the accountant discovered several errors. For each of the following errors, indicate the effect on net income (i.e., understatement, overstatement, or no effect) for both 2009 and 2010, assuming that no correction had been made
Yuki, Inc., acquired the following assets on January 1, 2008.Equipment, estimated useful life 5 years; residual value $13,000 . . . . . . . . . . . . . . . . . . $513,000Building, estimated useful life 40 years; no residual value . . . . . . . . . . . . . . . . . . . . . . . . 900,000The equipment
Barney Corporation began business on January 1, 2009. The company has released the following financial statements for 2009 and 2010 and has prepared the following proposed statements for 2011.Barney Corporation acquired the equipment for $150,000 on January 1, 2009, and began depreciating the
The following information relates to depreciable assets of Strata Technologies.(a) Machine A was purchased for $80,000 on January 1, 2006. The entire cost was erroneously expensed in the year of purchase. The machine had a 16-year useful life and no residual value.(b) Machine B cost $220,000 and
Johnston Doors began operations on January 1, 2008. On that day, Johnston purchased the following assets, both of which were depreciated using the straight-line method.Equipment: Cost, $48,000; estimated salvage value, $5,000; estimated useful life, 10 years.Building: Cost, $85,000; estimated
The following are two independent, unrelated sets of facts concerning accounting changes.(a) Case 1: Runyon Development Company determined that the amortization rate on its patents is unacceptably low due to current advances in technology. The company decided at the beginning of 2011 to decrease
During 2011, Magma Company changed its inventory valuation method from LIFO to FIFO. The following information shows the effect of this change.Instructions:1. Before the change from LIFO to FIFO, the Retained Earnings balance on January 1, 2009, was $700,000. Magma Company does not pay any
On January 3, 2010, Airflow Corporation, a company selling stunt kites, purchased a large number of personal computers. The cost of these computers was $85,000. On the date of purchase, Sandy’s management estimated that the computers would last approximately four years and would have a salvage
On January 1, 2011, Down Under, Inc. decided to change from the LIFO method of inventory valuation to the FIFO method. The net income (using LIFO) for the four years Down Under has been in business is as follows:Analysis of the inventory records revealed that the following inventories were on hand
Hiatt Textile Corporation is planning to expand its current plant facilities and is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatt has never been audited before. It has prepared the following comparative financial statements for the
A CPA was engaged by Blackbird Company in 2011 to examine its books and records and to make whatever corrections are necessary. An examination of the accounts discloses the following.(a) Dividends had been declared on December 15 in 2008 and 2009 but had not been entered in the books until paid.(b)
Hinckley Company is in the process of adjusting its books at the end of 2011.Hinckley’s records reveal the following information:(a) Hinckley failed to accrue sales commissions at the end of 2009 and 2010 as follows:2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. On January 1, 2009, Frank Company purchased equipment for $200,000. The equipment has an 8-year expected useful life and a $10,000 expected residual value. Initially, Frank Company used double-declining-balance depreciation. On January 1, 2011, Frank Company changed to straight-line
Situation A: Tucker Corporation has determined that the depreciable lives of several operating machines are too long and thus do not fairly match the cost of the assets with the revenues produced. Tucker therefore decides to reduce the depreciable lives of these machines by three years.Situation B:
Jill Stanton, president of Central Company, is confused about why your accounting firm has recommended that she report certain events as changes in principle instead of changes in estimate, which is what Jill thought they should be. She has asked you for an explanation. Describe a change in an
An interesting phenomenon can sometimes occur when companies are in danger of not meeting their projected earnings goals. Management suddenly realizes that they have been far too conservative in their previous estimates associated with bad debts, estimated useful lives of equipment, and residual
Airline A depreciates its airplanes over a 15-year period and estimates a salvage value of 10% of the cost of the plane. At the same time, Airline B depreciates identical airplanes over a 25-year period and provides for a 15% salvage value. These different assumptions resulted in markedly different
During the 1980s, Blockbuster Entertainment became one of the largest national video rental chains in the United States. With its rapid growth came significantly increased stock prices. Then, in 1988, Blockbuster changed the amortization period for its videotapes from nine months to 36 months. Why
Bausch & Lomb, maker of eye-care products, found itself in the news because of certain procedures that were outside accepted accounting and business practices. The note below from its 1995 annual report provides information about the company€™s problems.Prior Period AdjustmentBAUSCH &
Locate the 2007 financial statements for The Walt Disney Company on the Internet. Once you have located these financial statements, consider the following questions.1. Review the income statement and related notes and determine whether the company had any accounting changes for any of the years
As stated in the chapter, most accounting-related errors are detected and corrected in the current period. Of those that go undetected, some will fix themselves over two periods, while other errors may remain undetected for years.The objective of this writing assignment is to have you think about
To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. Access www.fasb.org and click on “Pronouncements & EITF Abstracts.”In this chapter, we discussed issues relating to accounting changes.
This chapter began with an illustration of the impact that Statement No. 106 had on the earnings of several companies. Recall that General Motors reported a $33 billion decline in income in 1992. One-time “hits” such as this can make comparison of financial statements and ratios over time
Your company has recently decided to change its method of depreciating long-term assets to be consistent with major competitors. While your company has used the straight-line method in the past, most other companies in the industry use a declining balance method. Preliminary computations indicate
The company purchased a machine for $40,000. The machine had an estimated residual value of $4,000 and an estimated useful life of nine years. After three full years of experience with the machine, it was determined that its total useful life would be only seven years instead of nine. In addition,
On January 1 of Year 1, the company purchased a mine for $150,000. At that time, it was estimated that the mine contained 2,000 tons of ore. During Year 1, the company extracted 900 tons of ore from the mine. On January 1 of Year 2, the company spent $60,000 on mine improvements. During Year 2, the
On January 1, the company purchased a machine for $80,000. The machine had an estimated useful life of eight years and an estimated salvage value of $8,000. After three full years of using the machine, the company changed its depreciation method from straight-line to double-declining-balance.
The cost and the accumulated depreciation for a piece of equipment are $1,500,000 and $600,000, respectively. Management is concerned that the equipment has become impaired. Management hired several independent appraisers who agreed that the current value of the equipment is $500,000. Management
A building has a cost of $750,000 and accumulated depreciation of $125,000. The current value of the building is estimated to be $300,000. The building is expected to generate net cash inflows of $20,000 per year for the next 30 years.(1) Determine whether the building is impaired and(2) If it is
A building has a cost of $500,000 and accumulated depreciation of $40,000. The current value of the building is estimated to be $730,000. The company that owns the building is based in Genovia and uses international financial reporting standards. The company has chosen to recognize increases in the
On January 1, the company purchased the rights to a valuable Internet domain name for $250,000. Given current market conditions, the company estimates that these rights have an economic life of four years at which time they will have no residual value. Make the journal entry necessary to recognize
Buyer Company acquired Target Company on January 1. As part of the acquisition, $1,000 in goodwill was recognized; this goodwill was assigned to Buyer's Manufacturing reporting unit. On December 31, it was estimated that the future cash flows expected to be generated by the Manufacturing reporting
A building has a cost of $700,000 and accumulated depreciation of $340,000. The building is exchanged for land. Make the necessary journal entry if (1) The land has a market value of $400,000 and (2) The land has a market value of $200,000.
On October 1, 2011, the company has a building with a cost of $375,000 and accumulated depreciation of $225,000. The company commits to a plan to sell the building by February 1, 2012. On October 1, 2011, the building has an estimated selling price of $145,000, and it is estimated that selling
The company exchanged an asset for a similar asset. The exchange was with another company in the same line of business. The old asset had a cost of $1,000 and accumulated depreciation of $850. The old asset had a market value of $400 on the date of the exchange. Make the journal entry necessary to
The company purchased a machine on April 1 for $100,000. The machine has an estimated useful life of five years and an estimated salvage value of $15,000. The company computes partial-year depreciation to the nearest whole month. Compute the amount of depreciation expense for this year and next
The company purchased a ship for $850,000. The ship has an estimated residual value of $100,000. Compute the amount of MACRS depreciation deduction for the first two years of the life of the ship.
A machine is purchased at the beginning of 2011 for $42,000. Its estimated life is eight years. Freight costs on the machine are $3,000. Installation costs are $1,600. The machine is estimated to have a residual value of $600 and a useful life of 32,000 hours. It was used 3,000 hours in 2011.1.
Jen and Barry’s Ice Milk Company used cash to purchase a new ice milk mixer on January 1, 2011. The new mixer is estimated to have a 20,000-hour service life. Jen and Barry’s depreciates equipment on the service-hours method. The total price paid for the machine was $57,000. This price included
The information that follows is from the balance sheet of Hampton Company for December 31, 2011, and December 31, 2010.Hampton did not acquire or dispose of any buildings or equipment during 2011. Hampton uses the straight-line method of depreciation. If residual values are assumed to be 10% of
Limestone Construction purchased a concrete mixer on July 15, 2011. Company officials revealed the following information regarding this asset and its acquisition:Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000Residual value . . .
Equipment was purchased at the beginning of 2009 for $100,000 with an estimated product life of 300,000 units. The estimated salvage value was $4,000. During 2009, 2010, and 2011, the equipment produced 80,000 units, 120,000 units, and 40,000 units, respectively. The machine was damaged at the
Allwood, Inc., a small furniture manufacturer, purchased the following assets at the end of 2010.Compute the following amounts for 2011 using group depreciation on a straight line basis:1. Depreciation expense2. Group depreciation rate3. Average life of theassets
Lundquist, Inc., uses the group depreciation method for its furniture account. The depreciation rate used for furniture is 21%. The balance in the furniture account on December 31, 2010, was $125,000, and the balance in Accumulated Depreciation'Furniture was $61,000. The following purchases and
Jackson Manufacturing acquired a new milling machine on April 1, 2006. The machine has a special component that requires replacement before the end of the useful life. The asset was originally recorded in two accounts, one representing the main unit and the other for the special component.
On January 1, 2011, Major Company purchased a uranium mine for $800,000. On that date, Major estimated that the mine contained 1,000 tons of ore. At the end of the productive years of the mine, Major Company will be required to spend $4,200,000 to clean up the mine site. The appropriate discount
On January 2, 2010, Adelaide Rose purchased land with valuable natural ore deposits for $13 million. The estimated residual value of the land was $4 million. At the time of purchase, a geological survey estimated 3 million tons of removable ore were under the ground. Early in 2010, roads were
Goff Corporation purchased a machine on January 1, 2006, for $500,000. At the date of acquisition, the machine had an estimated useful life of 20 years with no salvage value. The machine is being depreciated on a straight-line basis. On January 1, 2011, as a result of Goff’s experience with the
Finn Corporation purchased a machine on July 1, 2008, for $225,000. The machine was estimated to have a useful life of 12 years with an estimated salvage value of $15,000. During 2011, it became apparent that the machine would become uneconomical after December 31, 2015, and that the machine would
Franklin Company purchased a machine on January 1, 2008, paying $150,000. The machine was estimated to have a useful life of eight years and an estimated salvage value of $30,000. In early 2010, the company elected to change its depreciation method from straight-line to sum-of the-years’-digits
Della Bee Company purchased a manufacturing plant building 10 years ago for $1,300,000. The building has been depreciated using the straight-line method with a 30-year useful life and 10% residual value. Della Bee’s manufacturing operations have experienced significant losses for the past two
Use the information given in Exercise 11–37 and assume that Della Bee Company is located in Hong Kong and uses International Financial Reporting Standards. Della Bee also has chosen to recognize increases in the value of long-term operating assets in accordance with the allowable alternative
The Rockington Co. applied for and received numerous patents at a total cost of $31,195 at the beginning of 2006. It is assumed the patents will have economic value for their remaining legal life of 16 years. At the beginning of 2008, the company paid $9,350 in successfully prosecuting an attempted

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