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EXERCISE 22-2

 

(a)      Accumulated Depreciation—Equipment.....................................................            102,000

              ($408,000 – $306,000)

                    Cumulative Effect of Change in Accounting Principle—Depreciation                      102,000

 

Sum-of-the-years’-digits depreciation                                                                  Straight-line depreciation

2002 (5/15 X $510,000)                              $170,000                              2002                                 $102,000

2003 (4/15 X $510,000)                                136,000                              2003                                   102,000

2004 (3/15 X $510,000)                                102,000                              2004                                   102,000

                                                                    $408,000                                                                      $306,000

 (b)     Comparative data:

 

2005

2004

Income before cumulative effect of change in accounting principle

 

 

Cumulative effect on prior years of retroactive application of new depreciation method for equipment

 

 

$391,243*

 

 

$380,000

Net income

  102,000

                  

 

$493,243

$380,000

Per share of common stock:

 

 

Income before cumulative effect of change in accounting principle

 

 

Cumulative effect of change in  depreciation method

 

$3.91

 

$3.80

Net income

1.02

               

 

$4.93

$3.80

 

 

 

Depreciation expense per books 2005 ($693,000 ÷ 30)

 

$23,100

Depreciation per adjustment [$693,000 – ($23,100 X 3) ÷ (40 – 3)]

 

 

  16,857

Increase in net income in 2005

 

$  6,243

           *$385,000 + $6,243 = $391,243

          Pro-forma amounts assuming retroactive application of new deprecia-tion method:

 

2005

2004

Net income

$391,243

$380,000**

Net income per common share

$3.91

$3.80

 

          **Depreciation is the same for both straight-line and sum-of-the-years’-digits in 2004 ($102,000).

 

 

EXERCISE 22-4 (10-15 minutes)

(a)      No entry necessary.

(b)      Depreciation Expense......................................................................................            19,375*

                    Accumulated Depreciation—Equipment..........................................................                                    19,375

          *Original cost                                                                         $510,000

            Accumulated depreciation

                [($510,000 – $10,000) ÷ 10] X 7                                      (350,000)

            Book value (1/1/05)                                                                160,000

            Estimated salvage value                                                           (5,000)

            Remaining depreciable basis                                                  155,000

            Remaining useful life

                (15 years – 7 years)                                                      ÷                8

            Depreciation expense—2005                                               $  19,375

 

EXERCISE 22-7 (10-15 minutes)

(a)      The net income to be reported in 2005, using the retroactive approach, would be computed as follows:

                    Income before income taxes                                                                                     $700,000

                    Income taxes (35% X $700,000)                                                                                245,000

                    Net income                                                                                                                $455,000

(b)      Construction in Process.............................................................................            190,000

                    Deferred Tax Liability...................................................................................                                        66,500

                    Retained Earnings.........................................................................................                                      123,500*

          *($190,000 X 65% = $123,500)

 

EXERCISE 22-11

 (a)                                                                DENISE HABBE INC.

                                                             Comparative Income Statements

                                                                For the Years 2005 and 2004

                                                                                                                                                             

 

2005

2004

Sales

$340,000

$270,000

Cost of sales

  176,000*

   166,000**

Gross profit

164,000

104,000

Expenses

    83,000***

    50,000

Income before cumulative effect of a     change in accounting principle

 

81,000

 

54,000

Cumulative effect on prior years of retro-active application of new depreciation method

 

 

    15,000

 

 

                  

Net income

$  96,000

$  54,000

          ***$200,000 – $24,000

          ***$142,000 + $24,000       ***$88,000 – ($30,000 – $25,000)

                                                                     DENISE HABBE INC.

                                                              Statement of Retained Earnings

                                                                For the Years 2005 and 2004

                                                                                                                                                             

 

2005

2004

Retained earnings (January 1)

$101,000

$  72,000

Net income

96,000

54,000

Dividends

(30,000)

(25,000)

Retained earnings (December 31)

$167,000

$101,000

 

          Note:

          1.       2004 cost of sales increased $24,000; 2005 cost of sales decreased $24,000.

          2.       2004 expenses remained unchanged.

          3.       2005 expenses decreased $5,000 ($30,000 – $25,000).

          4.       2005 cumulative effect is the difference in the prior year’s depre­ciation ($40,000 – $25,000).

          5.       Additional disclosures would be:

                    a.       Footnote describing accounting change.

                    b.       Pro-forma amounts, assuming retroactive application of new depreciation method.

          6.       Another acceptable presentation for the retained earnings state-ment for 2005 is:

                            Retained earnings (January 1),  unadjusted                                                    $125,000

                            Prior period adjustment—inventory error                                                           (24,000)

                            Retained earnings adjusted                                                                                 101,000

                            Net income                                                                                                             96,000

                            Dividends                                                                                                              (30,000)

                            Retained earnings                                                                                              $167,000

 

(b)

DENISE HABBE INC.           

 Income Statement                         

For the Year 2005

DENISE HABBE INC.           

Statement of Retained Earnings For the Year 2005

 

Sales

$340,000

Retained earnings (January 1)

 

      $125,000

 

Cost of sales

  176,000

Prior period adjustment—  inventory correction

 

 

   (24,000)

Gross profit

164,000

Expenses

83,000

 

Income before cumu-lative effect of a change in accounting principle

 

81,000

Retained earnings adjusted

 

101,000

 

Net income

96,000

 

Cumulative effect on prior years of retro-active application of new depreciation method

 

 

    15,000

Dividends

   (30,000)

 

Retained earnings (December 31)

 

$167,000

 

Net income

$  96,000

 

 

 

 

PROBLEM 22-1

 

 

(a)      1.      No entry is necessary. A change in estimate is accounted for prospectively in the current and future years.

          2.      Accumulated Depreciation—Building..................................................          60,000*

                             Cumulative Effect of Change in

                                 Accounting Principle—Depreciation...................................................                                    60,000

                   *($60,000 + $54,000) – ($27,000 + $27,000)

          3.      Accumulated Depreciation—Machine....................................................              2,000

                             Retained Earnings....................................................................................                                      2,000

                                 [($10,000* – $9,000**) X 2   years]

                   *$80,000 ÷ 8    **($80,000 – $8,000) ÷ 8

(b)      Computation of 2004 depreciation expense on the equipment:

          Cost of equipment                                                                                                                   $65,000

          Accumulated depreciation ($6,000 X 3 years)                                                                          18,000

          Book value, 1/2/04                                                                                                                  $47,000

 

          2004 depreciation expense: = = $11,000

 

(c)                                                               BRUESSEN COMPANY

                                                             Comparative Income Statements

                                                                For the Years 2004 and 2003

 

2004

2003

Income before cumulative effect of change in accounting principle

$253,000*

$211,000**

Cumulative effect of change in depreciation methods

    60,000

 

Net income

$313,000

$211,000

            *$300,000 – $11,000 – $27,000 – $9,000

          **$210,000 + ($10,000 – $9,000)

         

Pro-forma amounts, assuming retroactive application of new deprecia­tion method:

Net income

$253,000

$238,000

          ***$211,000 + ($54,000 – $27,000)

 

PROBLEM 22-10

 

b)                                                          LARRY LANDERS COMPANY

                                                                           Journal Entries

                                                                           March 31, 2005

 

                                                                                                                                                             

          Sales                                                                                             ..........................................................................................   5,590

          Merchandise on Consignment.........................................................................              4,300

                    Cost of Goods Sold............................................................................................                                      4,300

                    Accounts Receivable.........................................................................................                                      5,590

                        (To adjust for consignments treated as

                         sales, 3/31/05)

 

          Sales                                                                                                        .....................................................................................................              6,100

                    Retained Earnings.............................................................................................                                      6,100

                        (To adjust for C.O.D. sales not recorded,

                         3/31/04)

 

          Warranty Expense............................................................................................              5,067

          Retained Earnings ($3,908 + $3,443)..............................................................              7,351

                    Estimated Liability Under Warranties..............................................................                                    12,418

                        (To set up allowance for warranty

                         expense)

 

          Retained Earnings ($331 + $594)....................................................................                 925

          Manager’s Bonus Expense..............................................................................                 476

                    Accrued Bonus Payable....................................................................................                                      1,401

                        (To set up accrued bonus payable to

                         manager)

 

          Retained Earnings ($1,584 + $1,237)..............................................................              2,821

          Bad Debt Expense...........................................................................................                 608

                    Allowance for Doubtful Accounts......................................................................                                      3,429

                        (To set up allowance for uncollectible

                         accounts)

 

          Dealers’ Fund Reserve (held by bank)............................................................            12,000

                    Finance Expense...............................................................................................                                      5,100

                    Retained Earnings ($3,000 + $3,900)...............................................................                                      6,900

                        (To record finance charge reserve held

                         by bank)

        Commissions Expense                    320

          Retained Earnings ($1,400 – $600)....................................................................            800

                    Accrued Commissions Payable............................................................................                              1,120

                        (To adjust for accrued commissions)