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)