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ACCOUNTING CHANGE

PREPARATION OF INCOME STATEMENT UNDER LIFO AND FIFO


INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31
LIFO
year
2010
2011
2012
sales revenue
$
4,000 $
4,000 $
4,000
cost of goods sold
$
800 $
1,000 $
1,130
operating expenses $
1,000 $
1,000 $
1,000
net income
$
2,200 $
2,000 $
1,870
INCOME STATEMENT FOR THE YEAR
FIFO
year
2010
sales revenue
$
4,000 $
cost of goods sold
$
820 $
operating expenses $
1,000 $
net income
$
2,180 $

ENDED DECEMBER 31
2011
4,000
940
1,000
2,060

$
$
$
$

2012
4,000
1,100
1,000
1,900

RETROSPECTIVE APPLICATION OF ACCOUNTING CHANGE FROMLIFO TO FIFO


INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31
year
2012
2011
sales revenue
$
4,000 $
4,000
cost of goods sold
$
1,100 $
940
operating expenses $
1,000 $
1,000
net income
$
1,900 $
2,060
RETAINED EARNINGS STATEMENTS AFTER RETROSPECTIVE
year
2012
retained earning, January 1, as reported
$
less:
adjustment for cumulative
effect of applying new account
method (FIFO) in 2010
$
retained earnings, Janaury 1, as adjusted $
4,240 $
add net income
$
1,900 $
retained earnings, December 31
$
6,140 $

APPLICATION
2011
2,200

20
2,180
2,060
4,240

PREPARATION OF INCOME STATEMENT UNDER LIFO AND FIFO


INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31
LIFO
year
2010
2011
2012
sales revenue
cost of goods sold
operating expenses
$
- $
- $
net income
INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31

year
sales revenue
cost of goods sold
operating expenses
$
net income

FIFO
2010

2011

2012

RETROSPECTIVE APPLICATION OF ACCOUNTING CHANGE FROMLIFO TO FIFO


INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31
year
2012
2011
sales revenue
cost of goods sold
operating expenses
$
- $
net income
RETAINED EARNINGS STATEMENTS AFTER RETROSPECTIVE APPLICATION
year
2012
2011
retained earning, January 1, as reported
less:
adjustment for cumulative
effect of applying new account
$
method (FIFO) in 2010
- $
retained earnings, Janaury 1, as adjusted $
$
- $
add net income
$
- $
retained earnings, December 31

O TO FIFO

O TO FIFO

ACCOUNTING CHANGE
COMPUTATION OF ADJUSTED RETAINED EARNINGS
year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted
year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted
year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted

COMPUTATION OF ADJUSTED RETAINED EARNINGS


year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted
year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted
year
retained earnings, January 1, as reported under FIFO
less:
cumulative effect of change in accounting principle to average cost
sum of prior years net income under new method
less: sum of prior years net income under previous method
retained earnings, January 1, as adjusted

s method

s method

s method

2010

160,000

157000
170000 $
$

(13,000)
147,000

590,000

660000
680000 $
$

(20,000)
570,000

2013

2014

780,000

970000
985000 $
$

(15,000)
765,000

2010

$
$

2013

$
$

2014

$
$

ACCOUNTING CHANGES - DEPRECIATION


COMPUTATION OF DEPRECIATION TO DATE USING THE SUM OF YEARS DIGITS METHOD
remaining service sum of years
life
digits
5
15
2009
4
15
2010
3
15
2011
accumulated depreciation
cost of equipment
depreciation to date
book value (december 31, 2011)

$
$
$

465,000
(360,000)
105,000

book value
less:
salvage value
dpreciable cost

$
$
$

105,000
15,000
90,000

depreciable cost
divided by:
remaining service life
depreciation for 2012

$
$

90,000
2
45,000

journal entry
depreciation expense
accumulated depreciation equipment

COMPUTATION OF DEPRECIATION TO DATE USING THE STRAIGHT LINE METHOD


$
780,000
cost
$
less:
salvage value
30
divided by:
service life
3
multipled by: years to date
$
78,000
depreciation to date

cost of equipment
less: depreciation to date
book value (december 31, 2011)

$
$
$

780,000
(78,000)
702,000

book value
less: salvage value
dpreciable cost

$
$
$

702,000
702,000

depreciable cost
divided by:
remaining service life
service life

40

less:
depreciation for 2012

years to date

journal entry
depreciation expense
accumulated depreciation

COMPUTATION OF DEPRECIATION TO DATE USING THE SUM OF YEARS DIGITS METHOD


remaining service sum of years
life
digits
5
15
2009
4
15
2010
3
15
2011
accumulated depreciation
cost of equipment
less: accumulated depreciation
book value (december 31, 2011)

$
$
$

book value
less: current salvage value
dpreciable cost

depreciable cost
divided by:
current service life
less: prior years
depreciation for 2012

journal entry
depreciation expense
accumulated depreciation equipment

COMPUTATION OF DEPRECIATION TO DATE USING THE STRAIGHT LINE METHOD


cost
less:
salvage value
divided by:
service life
multipled by: years to date
#DIV/0!
depreciation to date

cost of equipment
less: depreciation to date
book value (december 31, 2011)

#DIV/0!
#DIV/0!

book value
less: current salvage value
dpreciable cost
depreciable cost
divided by:
remaining service life
current service life
less:
years to date
depreciation for 2012

journal entry
depreciation expense
accumulated depreciation

#DIV/0!
#DIV/0!

ATION

UM OF YEARS DIGITS METHOD


depreciation base depreciation

$
$
$

450,000 $
450,000 $
450,000 $
$

45,000
$

TRAIGHT LINE METHOD

150,000
120,000
90,000
360,000

702,000
37

45,000

37
$

18,973

18,973
$

18,973

UM OF YEARS DIGITS METHOD


salvage value

cost of equipme depreciation depreciation

$
$

$
$

0
#DIV/0!

#DIV/0!

TRAIGHT LINE METHOD

#DIV/0!

$
$

$
$
$
$

#DIV/0!
0
#DIV/0!

#DIV/0!
#DIV/0!

ERROR AND CHANGE IN ESTIMATE - DEPRECIATION


COMPUTATION OF SUM OF YEARS DIGITS
cost of equipment
$
440,000
estimated service life
10
sum of years digits
55
COMPUTATION OF REMAINING SERVICE LIFE IN 2010
prior years
1
remaining service life
9

JOURNAL ENTRY TO RECORD OMITTED DEPRECIATION EXPENSE FOR 2010


31-Dec-12
retained earnings ($440,000 X 9/55)
$
72,000
accumulated depreciation-equipment
(to correct for the omission of depreciation
expense in 2010)
COMPUTATION OF BOOK VALUE AT JANUARY
cost of equipment
less:
depreciation prior to 2012
2009 $
80,000
2010 $
72,000
2011 $
64,000
book value at January 1, 2012

1,2012
$
440,000

$
$

216,000
224,000

COMPUTATION OF DEPRECIATION EXPENSE FOR 2012 USING THE STRAIGHT-LINE METHOD


book value
$
224,000
less: salvage value
$
depreciation base
$
224,000
divided by: remaining service life
prior years
3
7
depreciation expense
$
32,000
JOURNAL ENTRY TO RECORD DEPRECIATION EXPENSE FOR 2012
depreciation expense
$
accumulated depreciation-equipment (to record
depreciation expense for 2012)

COMPUTATION OF SUM OF YEARS DIGITS


cost of equipment
estimated service life
sum of years digits

COMPUTATION OF REMAINING SERVICE LIFE IN YEAR OF ERROR


prior years

32,000

remaining service life

JOURNAL ENTRY TO RECORD OMITTED DEPRECIATION EXPENSE FOR 2010


31-Dec-12
#DIV/0!
retained earnings ($440,000 X 9/55)
accumulated depreciation-equipment
(to correct for the omission of depreciation
expense in 2010)
COMPUTATION OF BOOK VALUE AT JANUARY 1,2012
$
cost of equipment
less:
depreciation prior to 2012
2009 $
#DIV/0!
2010
#DIV/0!
#DIV/0!
2011
#DIV/0!
book value at January 1, 2012
COMPUTATION OF DEPRECIATION EXPENSE FOR 2012 USING THE STRAIGHT-LINE METHOD
#DIV/0!
book value
less: current salvage value
#DIV/0!
depreciation base
divided by: remaining service life
0
prior years
#DIV/0!
depreciation expense
JOURNAL ENTRY TO RECORD DEPRECIATION EXPENSE FOR 2012
#DIV/0!
depreciation expense
accumulated depreciation-equipment (to record
depreciation expense for 2012)

PRECIATION

OR 2010

72,000

STRAIGHT-LINE METHOD

32,000

OR 2010

#DIV/0!

STRAIGHT-LINE METHOD

#DIV/0!

ERROR CORRECTION ENTRY


PART1
COMPUTATION OF DEPRECIATION CHARGED IN ERROR
cost of equipment
$
510,000
less: salvage value
$
depreciation base
$
510,000
divided by: service life
5
depreciation expense
$
102,000
COMPUTATION OF CORRECT AMOUNT FOR DEPRECIATION
cost of equipment
$
510,000
less: salvage value
$
51,000
depreciation base
$
459,000
divided by: service life
5
depreciation expense
$
91,800
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR PRIOR YEARS
# of prior years
2
depreciation taken
$
204,000
depreciation (correction)
$
183,600
adjusment amount
$
20,400
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR CURRENT YEAR
depreciation taken
$
102,000
depreciation (correction)
$
91,800
adjusment amount
$
10,200
JOURNAL ENTRY TO RECORD ERROR CORRECTION
accumulated depreciation-machinery
$
30,600
depreciation expense
retained earnings

$
$

10,200
20,400

PART 2
JOURNAL ENTRY TORECORD ERROR CORRECTION (FAILURE TO ACCRUE SALES SALARIES of
retained earnings
$
45,000
salaries and wages expense
$
45,000
PART 4
COMPUTATION OF AMORTIZATION EXPENSE
cost of asset
$
50,000
divided by: service life
20
amortization expense
$
2,500
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR PRIOR YEARS
# of prior years
2
adjusment amount
$
5,000

COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR CURRENT YEAR


adjusment amount
$
2,500
JOURNAL ENTRY TO RECORD ERROR CORRECTION
amortization expense 2012
retained earnings (expense for 2010 & 2011)
copyright

$
$

2,500
5,000
$

7,500

PART 5
JOURNAL ENTRY TORECORD ERROR CORRECTION (BYPASSED THE INCOME STATEMENT IN E
loss due to market decline of inventories (or cost of goods sold)
$ 87,000
retained earnings

PART1
COMPUTATION OF DEPRECIATION CHARGED IN ERROR
cost of equipment
less: salvage value
$
depreciation base
divided by: service life
#DIV/0!
depreciation expense
COMPUTATION OF CORRECT AMOUNT FOR DEPRECIATION
cost of equipment
less: salvage value
$
depreciation base
divided by: service life
#DIV/0!
depreciation expense
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR PRIOR YEARS
# of prior years
#DIV/0!
depreciation taken
#DIV/0!
depreciation (correction)
#DIV/0!
adjustment amount
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR CURRENT YEAR
#DIV/0!
depreciation taken
#DIV/0!
depreciation (correction)
#DIV/0!
adjustment amount

JOURNAL ENTRY TO RECORD ERROR CORRECTION


accumulated depreciation-machinery
depreciation expense
retained earnings

#DIV/0!
#DIV/0!
#DIV/0!

PART 2
JOURNAL ENTRY TORECORD ERROR CORRECTION (FAILURE TO ACCRUE SALES SALARIES of

retained earnings
salaries and wages expense
PART 4
COMPUTATION OF AMORTIZATION EXPENSE
cost of asset
divided by: service life
#DIV/0!
amortization expense
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR PRIOR YEARS
# of prior years
#DIV/0!
adjusment amount
COMPUTATION OF ADJUSTMENT NEEDED TO CORRECT ERROR FOR CURRENT YEAR
#DIV/0!
adjusment amount
JOURNAL ENTRY TO RECORD ERROR CORRECTION
amortization expense 2012
retained earnings (expense for 2010 & 2011)
copyright

#DIV/0!
#DIV/0!
#DIV/0!

PART 5
JOURNAL ENTRY TORECORD ERROR CORRECTION (BYPASSED THE INCOME STATEMENT IN E
loss due to market decline of inventories (or cost of goods sold)
retained earnings

OR YEARS

RENT YEAR

E SALES SALARIES of $45,000)

OR YEARS

RENT YEAR

OME STATEMENT IN ERROR, $87,000)


$ 87,000

OR YEARS

RENT YEAR

E SALES SALARIES of $45,000)

OR YEARS

RENT YEAR

OME STATEMENT IN ERROR, $87,000)

ERROR ANALYSIS
PREPARATION OF A SCHEDULE SHOWING THE DETERMIN
PART 1
SALES ERRONEOUSLY INCLUDED IN PRIOR YEAR INCOME
corrections:
sales erroneously included in 2012 income
PART 2
UNDERSTATEMENT OF PRIOR YEAR ENDING INVENTORY
corrections:
understatement of 2012 ending inventory
PART 3
COMPUTATION OF BOND INTEREST EXPENSE
book value of
stated
effective
effective
bonds
interest
interest rate
interest
2012 $
240,000 $
15,000
7% $
16,800
2013 $
241,800 $
15,000
7% $
16,926
ADJUSTMENT TO BOND INTEREST EXPENSE
corrections:
adjustment to bond interest expense
PART 4
REPAIRS ERRONEOUSLY CHARGED TO THE EQUIPMENT ACCOUNT
corrections:
repairs erroneously charged to the equipment account
COMPUTATION OF ERRONEOUS DEPRECIATION TAKEN IN PRIOR YEARS
depreciation
total excess
rate
additions
depreciation
depreciation
2012
10% $
8,000 $
800 $
800
2013
10% $
9,400 $
940 $
1,740
REPAIRS ERRONEOUSLY CHARGED TO THE EQUIPMENT ACCOUNT
corrections:
depreciation recored on improperly captialized repairs
PART 1-4

PREPARATION OF A SCHEDULE SHOWING THE DETERMINATION OF CORRECTED INCOME BEF

income before taxes


corrections:
sales erroneously included in 2012 income
understatement of 2012 ending inventory
adjustment to bond interest expense
repairs erroneously charged to the equipment account
depreciation recored on improperly captialized repairs
corrected income before ta
PART 1
SALES ERRONEOUSLY INCLUDED IN PRIOR YEAR INCOME
corrections:
sales erroneously included in 2012 income
PART 2
UNDERSTATEMENT OF PRIOR YEAR ENDING INVENTORY
corrections:
understatement of 2012 ending inventory
PART 3
COMPUTATION OF BOND INTEREST EXPENSE
book value of
stated
effective
effective
bonds
interest
interest rate
interest
$
2012
- $
0% $
2013 $

ADJUSTMENT TO BOND INTEREST EXPENSE


corrections:
adjustment to bond interest expense
PART 4
REPAIRS ERRONEOUSLY CHARGED TO THE EQUIPMENT ACCOUNT
corrections:
repairs erroneously charged to the equipment account
COMPUTATION OF ERRONEOUS DEPRECIATION TAKEN IN PRIOR YEARS
depreciation
total excess
rate
additions
depreciation
depreciation
$
$
2012
0%
$
$
2013
REPAIRS ERRONEOUSLY CHARGED TO THE EQUIPMENT ACCOUNT

corrections:
depreciation recored on improperly captialized repairs
PART 1-4

PREPARATION OF A SCHEDULE SHOWING THE DETERMINATION OF CORRECTED INCOME BEF


income before taxes
corrections:
sales erroneously included in 2012 income
understatement of 2012 ending inventory
adjustment to bond interest expense
repairs erroneously charged to the equipment account
depreciation recored on improperly captialized repairs
corrected income before ta

THE DETERMINATION OF CORRECTED INCOME BEFORE TAXES

2012
(38,200) $

2013
38,200

2012
8,640 $

2013
(8,640)

2012
(1,800) $

2013
(1,926)

2012
(8,000) $

2013
(9,400)

2012
800 $

2013
1,740

difference
$
(1,800)
$
(1,926)

ORRECTED INCOME BEFORE TAXES


2012

2013

101,000

77,400

$
$
$
$
$
$

(38,200)
8,640
(1,800)
(8,000)
800
62,440

$
$
$
$
$
$

38,200
(8,640)
(1,926)
(9,400)
1,740
97,374

2012

2013

2012

2013

difference

$
$

2012

2012

2013

2013

2012

2013

ORRECTED INCOME BEFORE TAXES


2012

$
$
$
$
$
$

2013

$
$
$
$
$
$

ORE TAXES