Anwser To Exercise - Chap 8-Chap 20

Chap 8
Exercise 81
1.
2.
To record the purchase of inventory on account and the payment of freight

charges.
Inventory.........................................................................
Accounts payable........................................................
5,000
Inventory.........................................................................
Cash............................................................................
300
300
To record purchase returns.

Accounts payable............................................................
Inventory.....................................................................
3.
5,000
600
600
To record cash sales and cost of goods sold.

Cash................................................................................
Sales revenue..............................................................
5,200
Cost of goods sold..........................................................

Inventory.....................................................................
2,800
5,200
2,800
Exercise 82
1.
2.
To record the purchase of inventory on account and the payment of freight

charges.
Purchases........................................................................
5,000
Freight-in........................................................................
Cash............................................................................
300
300
To record purchase returns.

Purchase returns..........................................................
3.
5,000
600
600
To record cash sales.

Cash................................................................................
Sales revenue..............................................................
5,200
NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.
5,200
Exercise 84
PERPETUAL SYSTEM
PERIODIC SYSTEM
($ in 000s)
Purchases
Inventory
Accounts payable
155
155
Freight
Inventory
Cash
10
Returns
Accounts payable
Inventory
12
Sales
Accounts receivable
Sales revenue
Cost of goods sold
Inventory
End of period
No entry
Purchases
Accounts payable
155
155
Freight-in
Cash
10
10
Accounts payable
Purchase returns
12
12
250
250
Accounts receivable
Sales revenue
250
148
10
12
250
No entry
148
Cost of goods sold (below)
Inventory (ending)
Purchase returns
Inventory (beginning)
Purchases
Freight-in
Cost of goods sold:
Beginning inventory
Purchases
Less: Returns
Plus: Freight-in
Net purchases
Cost of goods available
Less: Ending inventory
Cost of goods sold
148
30
12
25
155
10
$25
$155
(12)
10
153
178
(30)
$148
Exercise 85
Beginning inventory
Cost of goods sold
Ending inventory
Cost of goods available for sale
Purchases (gross)
Purchase discounts
Purchase returns
Freight-in
2016
275 (1)
627
249 (2)
876
630
18
24
13
2017
249 (3)
621
225
846 (4)
610 (5)
15
30
32
2018
225
584 (6)
216
800
585
12 (7)
14
16
Net purchases = Purchases (gross) Purchase returns Purchase discounts + Freight-in

Beginning inventory + Net purchases = Cost of goods available for sale
Cost of goods available for sale Ending inventory = Cost of goods sold
2016:
(1) Cost of goods available for sale Net purchases = Beginning inventory
876 (630 18 24 + 13) = 275 = Beginning inventory
(2) Cost of goods available for sale Cost of goods sold = Ending inventory
876 627 = 249 = Ending inventory
2017:
(3) 2017 beginning inventory = 2016 ending inventory = 249
(4) Cost of goods sold + Ending inventory = Cost of goods available for sale
621 + 225 = 846 = Cost of goods available for sale
(5) Cost of goods available for sale Beginning inventory = Net purchases
846 249 = 597 = Net purchases
Net purchases + Purchases discounts + Purchase returns Freight-in = Purchases(gross)
597 + 15 + 30 32 = 610 = Purchases (gross)
2018:
(6) Cost of goods available for sale Ending inventory = Cost of goods sold
800 216 = 584 = Cost of goods sold
Exercise 85 (concluded)
(7) Cost of goods available for sale Beginning inventory = Net purchases
800 225 = 575 = Net purchases
Purchases (gross) Purchase returns + Freight-in Net purchases = Purchase
discounts
585 14 + 16 575 = 12 = Purchase discounts
Exercise 86
Inventory balance before additional transactions
Add:
2. Goods shipped to Kwok f.o.b. shipping point on Dec. 28
3. Goods shipped to customer f.o.b. destination on December 27
Correct inventory balance
Exercise 88
1.
2.
3.
4.
5.
6.
7.
Excluded
Included
Included
Excluded
Included
Excluded
Included
$165,000
17,000
22,000
$204,000
Exercise 89
Requirement 1
Purchase price = 1,000 units x $50 = $50,000
July 15, 2016
Purchases........................................................................
July 23, 2016

Cash (98% x $50,000)....................................................
Purchase discounts (2% x $50,000)...............................
50,000
50,000
50,000
49,000
1,000
Requirement 2
August 15, 2016
Cash............................................................................
50,000
50,000
Requirement 3
The July 15 entry would include a debit to the inventory account instead of to
purchases, and the July 23 entry would include a credit to the inventory account
instead of to purchase discounts.
Exercise 810
Requirement 1
July 15, 2016
Purchases (98% x $50,000)................................................
Accounts payable .......................................................
49,000
July 23, 2016

Cash............................................................................
49,000
49,000
49,000
Requirement 2
August 15, 2016
Interest expense..............................................................
Cash............................................................................
49,000
1,000
50,000
Requirement 3
The July 15 entry would include a debit to the inventory account instead of to
purchases.
Exercise 813
Cost of goods available for sale:
Beginning inventory (2,000 x $6.10)
Purchases:
10,000 x $5.50
$55,000
6,000 x $5.00
30,000
Cost of goods available (18,000 units)
$12,200
85,000
$97,200
First-in, first-out (FIFO)

Cost of goods available for sale (18,000 units)
Less: Ending inventory (determined below)
Cost of goods sold
$97,200
(15,000)
$82,200
Cost of ending inventory:

Date of
purchase
August 18
Units Unit cost

3,000
$5.00
Total cost
$15,000
Last-in, first-out (LIFO)

Cost of goods sold
Date of
purchase
Units Unit cost
Beg. Inv.
2,000
$6.10
August 8
1,000
5.50
Total
Total cost
$12,200
5,500
$17,700
$97,200
(17,700)
$79,500

Average cost
Cost of goods sold
$97,200
(16,200)
$81,000 *

$97,200
Weighted-average unit cost =
= $5.40
18,000 units
3,000 units x $5.40 = $16,200

* Alternatively, could be determined by multiplying the units sold by the average
cost: 15,000 units x $5.40 = $81,000
Exercise 814
First-in, first-out (FIFO)
Cost of goods sold:
Date of
Sale
Aug. 14
Aug. 25
Total
Cost of
Units Sold
Units Sold
2,000 (from Beg. Inv.)
6,000 (from 8/8 purchase)
15,000
$6.10
5.50
5.50
5.00
Total Cost
$12,200
33,000
22,000
15,000
$82,200
Ending inventory = 3,000 units x $5.00 = $15,000
Last-in, first-out (LIFO)

Date
Purchased
Sold
Balance
Beginning
inventory
2,000 @ $6.10 = $12,200
2,000 @ $6.10
$12,200
August 8
10,000 @ $5.50 = $55,000
2,000 @ $6.10
10,000 @ $5.50
$67,200
2,000 @ $6.10
2,000 @ $5.50
$23,200
8,000 @ $ 5.50 =
August 14
August 18
$44,000
6,000 @ $5.00 = $30,000
2,000 @ $6.10
2,000 @ $5.50
6,000 @ $5.00
6,000 @ $5.00 =
1,000 @ $5.50 =
August 25
$30,000
$ 5,500
2,000 @ $6.10
1,000 @ $5.50
$53,200
$17,700
Ending
inventory
Total cost of goods sold
$79,500

(Note: the perpetual inventory LIFO results in this exercise are the same as
periodic LIFO results, due to the timing of sales and purchases. The same LIFO
layers are on hand at the end of the period under each method. This is unusual.
LIFO perpetual and LIFO periodic normally produce different results for ending
inventory and cost of goods sold.)
Average cost
Date
Beginning
inventory
August 8
Available
Purchased
Sold
Balance
2,000 @ $6.10 = $12,200
2,000 @ $6.10
$12,200
8,000 @ $5.60 =
$44,800 4,000 @ $5.60
$22,400
7,000 @ $5.24 =
$36,680 3,000 @ $5.24
$15,720
10,000 @ $5.50 = $55,000

$67,200
= $5.60/unit
12,000 units
August 14
August 18
Available
6,000 @ $5.00 =
$30,000
$52,400
= $5.24/unit
10,000 units
August 25
Ending
inventory
Total cost of goods sold
$81,480
Exercise 823
Date
1/1/16
12/31/16
Ending Inventory
at Base Year Cost
Inventory Layers
at Base Year Cost
$660,000
= $660,000
1.00
$660,000 (base)
$690,000
Inventory Layers
Converted to Cost
$660,000 x 1.00 = $660,000
Ending
Inventory
DVL Cost
$660,000
= $663,462
1.04
12/31/17
$760,000
= $703,704
1.08
$660,000 (base)
3,462 (2016)
$660,000 x 1.00 = $660,000

3,462 x 1.04 =
3,600
663,600
$660,000 (base)
3,462 (2016)
40,242 (2017)
$660,000 x 1.00 = $660,000

3,462 x 1.04 =
3,600
40,242 x 1.08 =
43,461
707,061
CPA / CMA REVIEW

QUESTIONS
CPA Exam Questions
1. d.
2. c.
Under the net method, purchases are recorded net of the discount:
$3,600 x 98% = $3,528
3. b. Average Cost = $4,950 / 140 units = $35.36 per unit

Ending Inventory = $35.36 x 5 = $176.79
4. a. 5 units x $30 = $150
5. c. 5 units x $50 = $250
6. b. If the inventory balance was lower using FIFO than LIFO, then prices
during the period were moving downward. By using FIFO during such a
period, the higher priced items are sold first with lower-priced goods
remaining in the ending inventory.
7. b.
Date
1/1/16
12/31/16
12/31/17
Inventory
at Base
Year Cost
$100,000
120,000
128,000
Layer
at Base Cost
Year Cost Index
1.00
$20,000
1.05
8,000
1.10
Layer
at Current
Ending
Year Cost Inventory
$100,000
$21,000
121,000
8,800
129,800
8. a. IAS No. 2 does not permit the use of LIFO.
CMA Exam Questions

1. c. The company began March with 3,200 units in inventory at $64.30 each.
The March 4 purchase added 3,400 additional units at $64.75 each.
Under FIFO, the 3,600 units sold on March 14 were the oldest units.
That sale eliminated all of the 3,200 units priced at $64.30 and 400 of the
units priced at $64.75, leaving an inventory of 3,000 units at $64.75 prior
to the March 25 purchase. On March 25, 3,500 units were acquired at
$66. The 3,450 units sold on March 28 were the 3,000 remaining units
priced at $64.75 and 450 units priced at $66. The ending inventory
consists of 3,050 units at $66 each, or $201,300. The answer would have
been the same under the periodic FIFO method.
2. a. The ending inventory consists of 3,050 units (beginning inventory plus
purchases, minus sales). Under the periodic LIFO method, those units
are valued at the oldest prices for the period, which is $64.30 of the
beginning inventory. Multiplying $64.30 times 3,050 units produces a
total inventory value of $196,115.
3.
a. Under the perpetual LIFO method, the company begins with 3,200
units at $64.30. Added to this is the March 4 purchase of 3,400 units at
$64.75. The March 14 sale uses all of the March 4 purchase and 200 of
the original inventory units. Thus, the firm is left with 3,000 units at
$64.30. The March 25 purchase of 3,500 at $66 is added to the previous
3,000 units. The March 28 sale of 3,450 units comes entirely from the
March 25 purchase, leaving just 50 of those units at $66 each. Thus, at
the end of the month, the inventory consists of two layers: 3,000 units at
$64.30 ($192,200), and 50 units at $66 ($3,300). Adding the two
together produces a total ending inventory of $196,200.
Problem 82
1. The transaction is not correctly accounted for. Inventory held on consignment
by another company should be included in the inventory of the consignor.
Rasul should include this merchandise in its 2016 ending inventory.
2. The transaction is not correctly accounted for. Legal title to merchandise
shipped f.o.b. shipping point changes hands when the goods are shipped. Rasul
should record the purchase and corresponding account payable in 2016 and
include the merchandise in its 2016 ending inventory.
3. The transaction is not correctly accounted for. Since the merchandise was
shipped f.o.b. destination and did not arrive at the customer's location until
2017, it should be included in Rasuls 2016 ending inventory. The sale should
be recorded in 2017.
4. The transaction is correctly accounted for. Merchandise held on consignment
from another company belongs to the consignor and should be excluded from
the inventory of the consignee.
5. The transaction is correctly accounted for. Since the merchandise was shipped
f.o.b. destination and did not arrive at Rasuls location until 2017, it should not
be included in Rasuls 2016 ending inventory. The purchase is correctly
recorded in 2017.
Problem 84
Requirement 1
Beginning inventory (10,000 x $8.00)
Net purchases:
Purchases (50,000* units x $10.00)
Less: Returns (1,000 units x $10.50)
Less: Purchase discounts
($490,000 x 2%)
Plus: Freight-in (50,000 units x $.50)
Cost of goods available (59,000 units)
Less: Ending inventory (below)
$ 80,000
$500,000
(10,500)
(9,800)
25,000
Cost of goods sold
504,700
584,700
(121,200)
$463,500
* The 5,000 units purchased on December 28 are not included. The

merchandise was shipped f.o.b. destination and did not arrive at Johnsons
warehouse until 2017.
Date of
purchase
Beg. Inv.
2016
Total
Units Unit cost

Total cost
10,000
$ 8.00
$ 80,000
4,000
10.30**
41,200
14,000
$121,200
**$10 x 98% = $9.80 + .50 in freight charges = $10.30

Requirement 2
Sales (45,000 units x $18.00)
Less:
Cost of goods sold (above)
Other operating expenses
Income before income taxes
$810,000
$463,500
150,000
(613,500)
$196,500
Problem 87
Requirement 1
Beginning inventory ($60,000 + 60,000 + 63,000)
Purchases:
211
$63,000
212
63,000
213
64,500
214
66,000
215
69,000
216
70,500
217
72,000
218
72,300
219
75,000
Cost of goods available
Ending inventory:
213
$64,500
216
70,500
219
75,000
Cost of goods sold
$183,000
615,300
798,300
(210,000)
$588,300
Requirement 2
Cost of goods sold
$798,300
(219,300)
$579,000
Cost of ending inventory (3 autos):

Car ID
219
218
217
Total
Cost
$ 75,000
72,300
72,000
$219,300
Problem 87 (concluded)
Requirement 3
Cost of goods sold
$798,300
(183,000)
$615,300
Cost of ending inventory (3 autos):

Car ID
203
207
210
Total
Cost
$ 60,000
60,000
63,000
$183,000
Requirement 4
Cost of goods available for sale (12 units)
Cost of goods sold
$798,300
(199,575)
$598,725*

$798,300
Weighted-average unit cost =
= $66,525
12 units
3 units x $66,525 = $199,575

* Alternatively, could be determined by multiplying the units sold by the average
cost: 9 units x $66,525 = $598,725
Problem 815
Date
Ending Inventory
at Base Year Cost
Inventory Layers
Inventory Layers
at Base Year Cost Converted to Cost
Ending
Inventory
DVL Cost
1/1/16
$260,000
= $260,000
$260,000 (base)
$260,000 x 1.00 =
$260,000
$260,000
$260,000 (base)
73,333 (2016)
$260,000 x 1.00 =
73,333 x 1.02 =
$260,000
74,800
334,800
$260,000 (base)
70,189 (2016)
$260,000 x 1.00 =
70,189 x 1.02 =
$260,000
71,593
331,593
$260,000 (base)
70,189 (2016)
43,643 (2018)
$260,000 x 1.00 =
70,189 x 1.02 =
43,643 x 1.07 =
$260,000
71,593
46,698
378,291
$260,000 (base)
70,189 (2016)
43,643 (2018)
17,077 (2019)
$260,000
70,189
43,643
17,077
$260,000
71,593
46,698
18,785
397,076
1.00
12/31/16
$340,000
= $333,333
1.02
12/31/17
$350,000
= $330,189
1.06
12/31/18
$400,000
= $373,832
1.07
12/31/19
$430,000
= $390,909
1.10
x 1.00
x 1.02
x 1.07
x 1.10
=
=
=
=
Chap 9
BriefExercise94
Beginning inventory (from records)
Plus: Net purchases (from records)
Less: Cost of goods sold:
Net sales
Less: Estimated gross profit
Estimated cost of goods sold
Estimated cost of inventory lost
$150,000
450,000
600,000
$700,000
( ? )
Estimated cost of goods sold = $600,000 75,000 = $525,000*

Estimated gross profit = $700,000 525,000* = $175,000
$175,000 $700,000 = 25% gross profit ratio
( ? )
$ 75,000
BriefExercise95
Beginninginventory
Plus: Netpurchases
Freightin
Netmarkups
Less: Netmarkdowns
Goodsavailableforsale
Cost
$300,000
861,000
22,000
______
1,183,000
Retail
$450,000
1,210,000
48,000
(18,000)
1,690,000
$1,183,000
Costtoretailpercentage: =70%
$1,690,000
Less: Netsales
Estimatedendinginventoryatretail
Estimatedendinginventoryatcost(70%x$490,000) (343,000)
Estimatedcostofgoodssold
$840,000
(1,200,000)
$490,000
BriefExercise96
Beginning inventory
Plus: Net purchases
Freight-in
Net markups
Less: Net markdowns
Goods available for sale (excluding beg. Inventory)
Goods available for sale (including beg. Inventory)
Cost
$ 300,000
861,000
22,000
_______
883,000
1,183,000
Retail
$ 450,000
1,210,000
48,000
(18,000)
1,240,000
1,690,000
$883,000
Cost-to-retail percentage:
= 71.21%
$1,240,000
Less: Net sales

Estimated ending inventory at retail
Estimated ending inventory at cost:
Retail
Cost
Beginning inventory $ 450,000
$ 300,000
Current periods layer
40,000 x 71.21 % =
28,484
Total
$ 490,000
$328,484 (328,484)
$ 854,516
(1,200,000)
$ 490,000
BriefExercise97
Cost
$ 300,000
861,000
22,000
Beginning inventory
Plus: Net purchases
Freight-in
Net markups
Goods available for sale
Retail
$ 450,000
1,210,000
48,000
1,708,000
$1,183,000
= 69.26%
$1,708,000
Less: Net markdowns

______
1,183,000
Less: Net sales
Estimated ending inventory at cost (69.26% x $490,000) (339,374)
$ 843,626
(18,000)
1,690,000
(1,200,000)
$ 490,000
BriefExercise913
The 2014 error caused 2014 net income to be overstated, but since 2014
ending inventory is 2015 beginning inventory, 2015 net income was understated
by the same amount. So, the income statement was misstated for 2014 and 2015,
but the balance sheet (retained earnings) was incorrect only for 2014. After that,
no account balances are incorrect due to the 2014 error.
Analysis of 2014 ending inventory error effects:
U = Understated
O = Overstated
2014
Beginning inventory
Plus: net purchases
Less: ending inventory
Cost of goods sold
Revenues
Less: cost of goods sold
Less: other expenses
Net income
Retained earnings
O
U
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
O
U
corrected
Brief Exercise 913 (concluded)

However, the 2015 error has not yet self-corrected. Both retained earnings
and inventory still are overstated as a result of the second error.
U = Understated
O = Overstated
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
O
U
U
O
O
Retained earnings on January 1, 2016, in this case, would be overstated by

$500,000 (ignoring income taxes).
BriefExercise914
The financial statements that were incorrect as a result of both errors (effect of
one error in 2014 and effect of two errors in 2015) would be retrospectively
restated to report the correct inventory amounts, cost of goods sold, income, and
retained earnings when those statements are reported again for comparative
purposes in the current annual report. A prior period adjustment to retained
earnings would be reported, and a disclosure note should describe the nature of the
error and the impact of its correction on each years net income, income before
extraordinary items, and earnings per share.
Exercise91
(1)
Product
Cost
(2)
NRV (*)
Per Unit
Inventory Value
[Lower of (1)
and (2)]
$ 20
$34
$20
90
80
80
50
60
50
* Selling price less costs to sell.
Exercise97
Merchandise inventory, January 1, 2016

Purchases
Freight-in
Sales
Less: Estimated gross profit of 20%
Estimated loss from fire
$1,900,000
5,800,000
400,000
8,100,000
$8,200,000
(1,640,000)
(6,560,000)
$1,540,000
Exercise98
Requirement1
Plus: Net purchases ($110,000 4,000)
Freight-in (from records)
Net sales ($180,000 5,000)
Less: Estimated gross profit of 40%
Estimated cost of inventory before theft
Less: Stolen inventory
Estimated ending inventory
$ 58,500
106,000
3,000
167,500
$175,000
(70,000)
(105,000)
62,500
(8,000)
$ 54,500
Requirement2
Plus: Net purchases ($110,000 4,000)
Freight-in (from records)
Net sales ($180,000 5,000)
Less: Estimated gross profit of 50%*
Estimated cost of inventory before theft
Less: Stolen inventory
Estimated ending inventory
$ 58,500
106,000
3,000
167,500
$175,000
(87,500)
(87,500)
80,000
(8,000)
$ 72,000
*Gross profit as a % of cost (1 + Gross profit as a % of cost) = Gross profit as a

% of sales.
100%
200%
=
50%
Exercise910
Cost
$35,000
19,120
Beginning inventory
Plus: Net purchases
Net markups
Less: Net markdowns
______
54,120
Retail
$50,000
31,600
1,200
(800)
82,000
$54,120
= 66%
$82,000
Less: Net sales

Estimated ending inventory at cost (66% x $50,000)
(32,000)
$50,000
(33,000)
$21,120
Exercise911
Cost
$190,000
600,000
8,000
Beginning inventory
Plus: Purchases
Freight-in
Net markups
Retail
$ 280,000
840,000
20,000
1,140,000
$798,000
= 70%
$1,140,000
Less: Net markdowns

Less: Net sales
_______
798,000
(4,000)
1,136,000
(800,000)
$ 336,000
$235,200
Exercise912
Beginning inventory
Plus: Net purchases
Net markups
Less: Net markdowns
Goods available for sale (excluding beg. inventory)
Goods available for sale (including beg. inventory)
Cost
$160,000
607,760
_______
607,760
767,760
Retail
$ 280,000
840,000
20,000
(4,000)
856,000
1,136,000
$607,760
= 71%
$856,000
Less: Net sales

Retail
Cost
Beginning inventory
$280,000
$160,000
Current periods layer
56,000 x 71% = 39,760
Total
$336,000
$199,760
(800,000)
$ 336,000
(199,760)
$568,000
Exercise914
Requirement1
Cost
$ 40,000
207,000
14,488
(4,000)
Beginning inventory
Plus: Purchases
Freight-in
Less: Purchase returns
Plus: Net markups
Retail
$ 60,000
400,000
(6,000)
5,800
459,800
$257,488
= 56%
$459,800
Less: Net markdowns

Less:
Normal breakage
Sales:
Net sales
Employee discounts
_______
257,488
(6,000)
(280,000)
(1,800)
$168,500
(94,360)
$163,128
Requirement2
Net markdowns are included in the cost-to-retail percentage:
$257,488
= 56.43%
$456,300
(3,500)
456,300
Exercise921
Requirement 1
Retained earnings..................................................................
Inventory ($83,000 78,000).............................................
5,000
5,000
Requirement 2
Effect on cost of goods sold:
Decrease in beginning inventory ($78,000 71,000)
- $7,000
Decrease in ending inventory ($83,000 78,000)

Decrease in cost of goods sold
+ 5,000
$2,000
Cost of goods sold for 2015 would be $2,000 lower in the revised income
statement.
Exercise922
Requirement 1
The 2014 error caused 2014 net income to be understated, but since 2014
ending inventory is 2015 beginning inventory, 2015 net income was overstated by
the same amount. So, the income statement was misstated for 2014 and 2015, but
the balance sheet (retained earnings) was incorrect only for 2014. After that, no
account balances are incorrect due to the 2014 error.
Analysis of 2014 ending inventory effects:
U = Understated
O = Overstated
2014
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
U
O
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
U
O
corrected

U = Understated
O = Overstated
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
O
U
U
O
O
Requirement 2
Retained earnings (overstatement of 2015 income).............. 150,000
Inventory (overstatement of 2016 beginning inventory)....
150,000
Requirement 3
restated to report the correct inventory amount, cost of goods sold, net income, and
earnings would be reported, and a disclosure note should describe the nature of the
error and the impact of its correction on each years net income, income before
extraordinary items, and earnings per share.
Exercise923
U = understated
O = overstated
NE = no effect
1. Overstatement of ending inventory
2. Overstatement of purchases
3. Understatement of beginning inventory
4. Freight-in charges are understated
5. Understatement of ending inventory
6. Understatement of purchases
7. Overstatement of beginning inventory
8. Understatement of purchases +
understatement of ending inventory by
the same amount
Cost of
Goods Sold
U
O
U
U
O
U
O
NE
Net
Income
O
U
O
O
U
O
U
NE
Retained
Earnings
O
U
O
O
U
O
U
NE
Exercise924
1.
To include the $4 million in year 2016 purchases and increase retained

earnings to what it would have been if 2015 cost of goods sold had not
included the $4 million purchases:
Analysis:
2015
Beginning inventory
Purchases
Less: Ending inventory
Cost of goods sold
Revenues
Less: Cost of goods sold
Less: Other expenses
Net income
Retained earnings
2016
Beginning inventory
Purchases
O
O
U = Understated
O = Overstated
U
U
($ in millions)
Purchases ...........................................................
Retained earnings ..........................................
4
4
2.
The 2015 financial statements that were incorrect as a result of the errors
would be retrospectively restated to reflect the correct cost of goods sold,
(income tax expense if taxes are considered), net income, and retained
earnings when those statements are reported again for comparative purposes
in the 2016 annual report.
3.
A prior period adjustment to retained earnings would be reported, and a

disclosure note should describe the nature of the error and the impact of its
correction on each years net income, income before extraordinary items, and
earnings per share.
CPA/CMAREVIEW
QUESTIONS
CPAExamQuestions
1. c. Net realizable value = 388,000 ($408,000 selling price $20,000 costs to
sell.)
The inventory would be valued at $388,000, the net realizable value, as it
is
lower than the $400,000 FIFO cost.
2. c.
Inventory, 1/1
$ 80,000
Add: Purchases
Less: Cost of goods sold ($360,000 120%)
Estimated inventory, 5/2
330,000
410,000
300,000
$110,000
Note: Although the estimated inventory is $110,000, the estimated fire

loss would be $70,000 because of the $40,000 of goods in transit
included in inventory.
CPAExamQuestions(concluded)
3. d.
Beginning inventory and purchases
Net markups
Available for sale
$600,000 $960,000 = 62.5%
Less: Net markdowns
Sales
($120,000 x 62.5%)
Cost
$600,000
_______
600,000
Retail
$920,000
40,000
960,000
(60,000)
(780,000)
$120,000
75,000
$525,000
Conventional retail is the lower of average cost and net realizable value
(NRV). For the lower of cost and NRV retail method, net markdowns are
excluded from the cost to retail percentage.
4. c. The understatement of beginning inventory and the overstatement of

ending inventory both cause the cost of goods sold to be understated. The
total understatement is $78,000 ($26,000 + 52,000).
5. b. The write-down can only be reversed under IFRS.
CMAExamQuestions
1. b. The conventional retail inventory method adds beginning inventory, net
purchases, and markups (but not markdowns) to calculate a cost
percentage. The purpose of excluding markdowns is to approximate a
lower of cost and net realizable value valuation. The cost percentage is
then used to reduce the retail value of the ending inventory to cost.
FCLs cost-retail ratio is 40% ($90,000 $225,000), and ending
inventory at cost is therefore $20,000 (40% x $50,000 ending inventory
at retail).
2. d. The failure to record a sale means that both accounts receivable and sales
will be understated. However, inventory was correctly counted, so that
account and cost of goods sold were unaffected.
3. d. The overstatement (double counting) of inventory at the end of year 1
caused year 1 cost of goods sold (BI + Purchases EI) to be understated
and both inventory and income to be overstated. The year 1 ending
inventory equals year 2 beginning inventory. Thus, the same
overstatement caused year 2 beginning inventory and cost of goods sold
to be overstated and income to be understated. This is an example of a
self-correcting error. By the end of year 2, the balance sheet is correct.
Problem91
Requirement 1
Product
A
B
C
D
E
NRV per unit

$16 (15% x $16) = $13.60
$18 (15% x $18) = $15.30
$ 8 (15% x $8) = $ 6.80
$ 6 (15% x $6) = $ 5.10
$13 (15% x $13) = $11.05
(1)
(2)
NRV
Inventory
Value
[Lower of
(1) and (2)]
Product
(units)
Cost
A (1,000)
$10,000
$13,600
$10,000
B (800)
12,000
12,240
12,000
C (600)
1,800
4,080
1,800
D (200)
1,400
1,020
1,020
E (600)
8,400
6,630
6,630
$33,600
$31,450
Inventory book value would be $31,450.

Requirement 2
Inventory book value would be $31,450, the lower of aggregate inventory cost
($33,600) and aggregate inventory net realizable value ($31,450). The amount of
the loss from inventory write-down is $2,150 ($33,600 31,450).
Problem93
Requirement 1
Fruit
Toppings
Estimate of cost of goods sold:
Cost percentage
x Net sales
Marshmallow
Toppings
Chocolate
Topping
80%
$200,000
$160,000
70%
$55,000
$38,500
65%
$20,000
$13,000
$ 20,000
150,000
170,000
$ 7,000
36,000
43,000
$ 3,000
12,000
15,000
Less: Estimate of cost of goods sold
160,000
38,500
13,000
Estimate of cost of inventory lost
$ 10,000
$ 4,500
$ 2,000
Beginning inventory
Plus: Net purchases
Requirement 2
The two main factors that could cause the estimates of the inventory lost to be
over- or understated are:
1. The historical cost percentages used may not be representative of the current
relationship between cost and selling price.
2. Theft or spoilage losses may not be appropriately considered in the cost
percentage.
Problem97
Cost
$ 80
671
30
(1)
($ in 000s)
Beginning inventory
Purchases
Freight-in on purchases
Purchase returns
Net markups
Net markdowns
___
$780
Cost-to-retail percentages:
Average cost ratio:
$780 $1,125 =
Conventional cost ratio:
$780 ($1,125 + 8) =
Deduct: Net sales
Ending inventory:
At retail (sales price)
Average cost
Conventional
Retail
$ 125
1,006
(2)
4
(8)
1,125
.6933
.6884
(916)
$ 209
($209 x .6933)
($209 x .6884)
$144.90
$143.88
Note that the lower of average cost and net realizable value cost-to-retail
percentage is approximated by excluding net markdowns.
Problem98
($ in 000s)
Cost
$ 80
671
30
Beginning inventory
Plus: Net purchases
Freight-in
Net markups
Less: Purchase returns
Net markdowns
Goods available for sale (excluding beginning inventory)
Goods available for sale (including beginning inventory)
(1)
___
700
780
Retail
$ 125
1,006
4
(2)
(8)
1,000
1,125
$80
Base layer cost-to-retail percentage:
= 64%
$125
$700
2016 layer cost-to-retail percentage:
= 70%
$1,000
Less: Net sales

Estimated ending inventory at current year retail prices
Estimated ending inventory at cost (calculated below)
(916)
$ 209
(130)
$650
___________________________________________________________________________
Ending
Inventory
at Year-End
Retail Prices
Step 1
Ending
Inventory
at Base Year
Retail Prices
Step 2
Inventory
Layers
at Base Year
Retail Prices
Step 3
Inventory
Layers
Converted to
Cost
$125 (base)
65 (2016)
x 1.00 x 64% =
x 1.10 x 70% =
$209
$209
(above)
= $190
1.10
Total ending inventory at dollar-value LIFO retail cost ......................
$ 80
50
$130
BriefExercise101
Capitalized cost of the machine:
Purchase price
Freight
Installation
Testing
Total cost
$35,000
1,500
3,000
2,000
$41,500
Note: Personal property taxes on the machine for the period after acquisition
are not part of acquisition cost. They are expensed in the period incurred.
BriefExercise102
Capitalized cost of land:
Purchase price
Brokers commission
Title insurance
Miscellaneous closing costs
Demolition of old building
Total cost
$600,000
30,000
3,000
6,000
18,000
$657,000
All of the expenditures, including the costs to demolish the old building, are
included in the initial cost of the land.
BriefExercise103
Cost of land and building:
Purchase price
Brokers commission
Title insurance
Miscellaneous closing costs
Total cost
$600,000
30,000
3,000
6,000
$639,000
The total must be allocated to the land and building based on their relative fair
values:
Initial
Valuation
Percent of Total
Fair Value
Asset
Land
Building
Fair Value
$420,000
280,000
$700,000
(Percent x
$639,000)
60%
40
100%
$383,400
255,600
$639,000
BriefExercise106
Calculation of goodwill:
Consideration exchanged
Less fair value of net assets:
Book value of assets
Plus: Excess of fair value over book value
of intangible assets
Goodwill
$14,000,000
$8,300,000
2,500,000
(10,800,000)
$ 3,200,000
BriefExercise1010
Proceeds
$16,000
Less book value: Cost

Accum. depreciation
Gain on sale of equipment
$80,000
(71,000)
9,000
$ 7,000
Journal entry (not required):

Cash................................................................................
Accumulated depreciation (account balance) ....................
Gain (difference)...........................................................
Equipment (account balance)..........................................
16,000
71,000
7,000
80,000
BriefExercise1011
Pickup trucks = Fair value of equipment plus cash paid
$17,000 + 8,000 = $25,000
Loss on exchange = $20,000 (book value) 17,000 (fair value) = $3,000
Pickup trucks (determined above) ......................................
Loss (difference)................................................................
Cash ...........................................................................
25,000
45,000
3,000
8,000
65,000
BriefExercise1012
Pickup trucks = Fair value of equipment plus cash paid
$24,000 + 8,000 = $32,000
Gain on exchange = $24,000 (fair value) 20,000 (book value) = $4,000
Cash ...........................................................................
Gain (difference)...........................................................
32,000
45,000
8,000
4,000
65,000
BriefExercise1013
Pickup trucks = Book value of equipment plus cash paid
$20,000 + 8,000 = $28,000
No gain is recognized in this situation.
Cash ...........................................................................
28,000
45,000
8,000
65,000
Exercise102
To record the purchase of equipment.
Equipment ($45,000 + 2,200 + 700 + 1,000).........................
Cash............................................................................
48,900
47,200
1,700
To record prepaid insurance for the equipment.

Prepaid insurance............................................................
Cash............................................................................
900
900
Exercise108
Percent of Total
Fair Value
Asset
Land .................
Building A ........
Building B ........
Fair Value
$ 300,000
450,000
250,000
$1,000,000
30%
45
25
100%
Initial
Valuation
(Percent x
$900,000)
$270,000
405,000
225,000
$900,000
Exercise1016
Equipmentnew ($200,000 + 60,000)............................... 260,000
Accumulated depreciation (account balance)..................... 220,000
Cash............................................................................
60,000
Equipmentold (account balance)................................
400,000
Gain ($200,000 180,000)..............................................
20,000
Exercise1017
Equipmentnew ($170,000 + 60,000)............................... 230,000
Loss ($180,000 170,000).................................................. 10,000
Accumulated depreciation (account balance)..................... 220,000
Cash............................................................................
60,000
Equipmentold (account balance)................................
400,000
Exercise1018
Requirement 1
Fair value of land + Cash given = Fair value of equipment
$150,000
+ 10,000
=
$160,000
Requirement 2
Equipment ($150,000 + 10,000).......................................... 160,000
Cash............................................................................
10,000
Land (book value)..........................................................
120,000
Gain ($150,000 120,000)..............................................
30,000
Exercise1019
Requirement 1
Fair value of land Cash received = Fair value of equipment
$150,000
10,000
=
$140,000
Requirement 2
Equipment ($150,000 10,000).......................................... 140,000
Cash................................................................................ 10,000
Land (book value)..........................................................
120,000
Gain ($150,000 120,000)..............................................
30,000
CPAExamQuestions
1. d. Simons Company should value the land at $170,500. All expenditures
incurred to purchase land should be part of the capitalized asset.
$150,000 + ($150,000 x .07) + 5,000 + 5,000
2. c. Costs attributable to land: $60,000 + 2,000 + 5,000 3,000 = $64,000

Costs attributable to building: $8,000 + 350,000 = $358,000
3. d. There are eight payments due, the first one due immediately, and the
remaining seven due each year on December 31. Therefore, the correct
factor to use is the present value of an annuity in advance (annuity due)
for eight periods, or 5.712 x $20,000 = $114,240, the present value at the
inception of the note and therefore the initial value of the machine.
Another way to calculate the answer is to view the annuity as a sevenperiod ordinary annuity, with a down payment today of $20,000. This
would yield a calculation of $20,000 + ($20,000 x 4.712) or $114,240.
4. b. The recorded cost of the new asset is equal to the fair value of the asset
given up, $20,000. In this case, there are two new assets acquired: new
truck, $15,000, and cash, $5,000. The gain on the trade is $8,000 (FV old
truck $20,000 12,000 book value).
5. c. Dahl Corporation should capitalize the materials, engineering fees, and
labor and electricity for construction and testing: ($20,000 + 5,000 +
3,000 + 1,000 + 1,000 + 1,000). The labor and electricity to run the
machine should not be capitalized. These should be expensed because
they are not part of the construction costs and were not incurred prior to
activating the asset.
6. b. The interest cost capitalized is the lesser of the formula amount based on
average accumulated expenditures or the actual interest cost incurred. In
this case the formula amount ($40,000) is the smaller amount and should
be the amount capitalized as part of the cost of the building.
7. a. Amortization of capitalized software is the greater of the amount
calculated using the percentage-of-revenue method and the straight-line
method. In this case, the straight-line percentage is 20% (1/5) and the
percentage-of-revenue method is 30%. Therefore, we amortize 30% of
the cost yielding book value of 70%.
8. d. All of the expenditures are considered research and development.
9. c. Only development costs that meet certain criteria can be capitalized.
10. d. Both methods are acceptable.
CMAExamQuestions
1. a. The costs of fixed assets (plant and equipment) are all costs necessary to
acquire these assets and to bring them to the condition and location
required for their intended use. These costs include shipping, installation,
pre-use testing, sales taxes, and interest capitalization. The original cost
of the machinery to be recorded in the books is the sum of the purchase
price, installation, and delivery charges.
2. d. GAAP states that the basic principle to be followed in these exchanges is
to value the asset received at fair value and to recognize gain or loss (the
difference between the fair value and the book value of the asset given
up). Harpers used machine has a book value of $64,000 ($162,500 cost
$98,500 accumulated depreciation). The fair value of the used machine
is $80,000, resulting in a gain of $16,000 ($80,000 64,000). The only
exceptions to using fair value are (1) when fair value is not determinable
and (2) when the exchange lacks commercial substance.
3. c. The answer is the same as question 2.
Problem101
1. To record the acquisition of land and building.
Land (determined below).........................................................................

Building (determined below)..............................................
Cash............................................................................
Percent of Total
Fair Value
Asset
Land
Building
Fair Value
$ 75,000
45,000
$120,000
62,500
37,500
100,000
Initial
Valuation
(Percent x
$100,000)
62.5%
37.5
100.0%
$ 62,500
37,500
$100,000
2. To record the acquisition of equipment for cash and a note.

Equipment (determined below)...........................................
Discount on note payable (difference)..............................
Note payable (face amount)...........................................
37,037
2,963
40,000
Present value of note payments:

PV = $40,000 (.92593) = $37,037
Present value of $1: n = 1, i=8% (from Table 2)
3. To record the acquisition of a truck by donation.

Truck...............................................................................
Revenuedonation of asset.......................................
2,500
2,500
Problem101(concluded)
4. To capitalize organization costs.
Organization cost expense..............................................
Cash............................................................................
3,000
3,000
5. To record the purchase of equipment.

Equipment ($15,000 + 500)................................................
Cash............................................................................
15,500
15,500
6. To record the acquisition of office equipment by the issuance of common

stock.
Office equipment............................................................
Common stock............................................................
5,500
5,500
7. To record the acquisition of land in exchange for cash and a note.

Land................................................................................
Cash............................................................................
Note payable...............................................................
20,000
2,000
18,000
Problem103
Requirement 1
PELL CORPORATION
Analysis of Changes in Plant Assets
For the Year Ended December 31, 2016
Land
Land improvements
Building
Machinery and
equipment
Automobiles
Totals
Balance
12/31/15
$ 350,000
180,000
1,500,000
1,158,000
150,000
$3,338,000
Increase
$438,000 [1]
287,000 [2]
19,000 [3]
$744,000
Explanation of Amounts:
[1] Cost of land acquired 11/1/16:
Pell stock exchanged (10,000 shares x $38)
Legal fees and title insurance
Razing existing building
[2]
[3]
Cost of machinery and equipment purchased 1/2/16:

Invoice cost
Installation cost
Cost recorded for new automobile 12/31/16:
Fair value of trade-in
Cash paid
Balance
12/31/16
$ 788,000
180,000
1,500,000
Decrease
$58,000
18,000
$76,000
1,387,000
151,000
$4,006,000
$380,000
23,000
35,000
$438,000
$260,000
27,000
$287,000
$
3,750
15,250
$ 19,000
Requirement 2
Pell Corporation
Gain or Loss from Plant Asset Disposals
For the Year Ended December 31, 2016
Sale of machine on 3/31/16:
Selling price
Less: Book value of machine ($58,000 24,650)
Gain on sale of machine
$36,500
(33,350)
$ 3,150
Trade-in of automobile on 12/31/16:

Book value of trade-in ($18,000 13,500)
Less: Fair value of trade-in
Loss on trade-in
$ 4,500
(3,750)
$ 750
Problem107
Robers:
Cash................................................................................
New equipment ($75,000 5,000)......................................
Accumulated depreciationold asset (account balance)...
Old equipment (account balance)...................................
Gain on exchange of assets ($75,000 65,000)..............
5,000
70,000
55,000
120,000
10,000
Phifer:
New equipment ($70,000 + 5,000).....................................
Accumulated depreciationold asset (account balance)...
Loss ($77,000 70,000) ..............................................................
Cash............................................................................
Old equipment (account balance)...................................
75,000
63,000
7,000
5,000
140,000
Chap12Exercise112
1. Straight-line:
$115,000 5,000
= $11,000 per year
10 years
2. Sum-of-the-years digits:
Sum-of-the-digits is ([10 (10 + 1)] 2) = 55
2016
2017
$110,000 x 10/55
$110,000 x 9/55
= $20,000
= $18,000
3. Double-declining balance:
Straight-line rate is 10% (1 10 years) x 2
= 20% DDB rate
2016
2017
= $23,000
= $18,400
$115,000 x 20%
($115,000 23,000) x 20%
4. One hundred fifty percent declining balance:

Straight-line rate is 10% (1 10 years) x 1.5
= 15% rate
2016
2017
= $17,250
= $14,663
$115,000 x 15%
($115,000 17,250) x 15%
5. Units-of-production:
$115,000 5,000
= $.50 per unit depreciation rate
220,000 units
2016
2017
30,000 units x $.50 = $15,000

25,000 units x $.50 = $12,500
Exercise116
Requirement 1
1. Straight-line:
$260,000 20,000
= $40,000 per year
6 years
2016
2017
$40,000 x 8/12
$40,000 x 12/12
= $26,667
= $40,000
2. Sum-of-the-years digits:
Sum-of-the-years digits is ([6 (6 + 1)] 2) = 21
2016
$240,000 x 6/21 x 8/12 = $45,714
2017
$240,000 x 6/21 x 4/12 = $22,857

+ $240,000 x 5/21 x 8/12 = 38,095
$60,952
3. Double-declining balance:
1/6 (the straight-line rate) x 2
= 1/3 DDB rate
2016
= $57,778
2017
or,
2017
$260,000 x 1/3 x 8/12

$260,000 x 1/3 x 4/12
+ ($260,000 86,667) x 1/3 x 8/12
= $28,889
= 38,518
$67,407
($260,000 57,778) x 1/3
= $67,407
Exercise1111
Requirement 1
Cost of the equipment:
Purchase price
Freight charges
Installation charges
$154,000
2,000
4,000
$160,000
Straight-line rate of 12.5% (1 8 years) x 2 = 25% DDB rate.
Year
2016
2017
2018
2019
2020
2021
2022
2023
Total
Book Value
Beginning
Depreciation
of Year
X Rate per Year =
$160,000
25%
120,000
25%
90,000
25%
67,500
25%
50,625
*
45,625
*
40,625
*
35,625
*
Depreciation
$ 40,000
30,000
22,500
16,875
5,000
5,000
5,000
5,000
$129,375
Book Value
End of Year
$120,000
90,000
67,500
50,625
45,625
40,625
35,625
30,625
* Switch to straight-line in 2020:

Straight-line depreciation:
$50,625 30,625
= $5,000 per year
4 years
Requirement 2
For plant and equipment used in the manufacture of a product, depreciation is
a product cost and is included in the cost of inventory. Eventually, when the
product is sold, depreciation will be included in cost of goods sold.
Exercise1112
Requirement 1
$4,500,000
Depletion per ton
= $5.00 per ton

900,000 tons
2016 depletion
= $5.00 x 240,000 tons
= $1,200,000
Requirement 2
Depletion is part of product cost and is included in the cost of the inventory of
coal, just as the depreciation on manufacturing equipment is included in inventory
cost. The depletion is then included in cost of goods sold in the income statement
when the coal is sold.
Exercise1115
Requirement 1
a. To record the purchase of a patent.
January 1, 2014
Patent.............................................................................. 700,000
Cash............................................................................
700,000
To record amortization on the patent.
December 31, 2014 and 2015
Amortization expense ($700,000 10 years)......................
Patent..........................................................................
70,000
70,000
b. To record the purchase of a franchise.

2016
Franchise......................................................................... 500,000
Cash............................................................................
500,000
c. To record research and development expenses.
2016
Research and development expense............................... 380,000
Cash............................................................................
380,000
Exercise1115(concluded)
2016 Year-end adjusting entries
Patent: To record amortization on the patent after change in useful life.
December 31, 2016
Amortization expense (determined below)......................... 112,000
Patent..........................................................................
112,000
Calculation of annual amortization after the estimate change:
($ in thousands)
$700
$70
x 2 years
140
560
5
$112
Cost
Previous annual amortization ($700 10 years)
Amortization to date (20142015)
Unamortized cost (balance in the patent account)
Estimated remaining life
New annual amortization
Franchise: To record amortization of franchise.

December 31, 2016
Amortization expense ($500,000 10 years)......................
Franchise.....................................................................
Requirement 2
Intangible assets:
Patent
Franchise
Total intangibles
[1] $560,000 112,000
[2] $500,000 50,000
$448,000 [1]
450,000 [2]
$898,000
50,000
50,000
Exercise1119
Requirement 1
Depreciation expense (determined below)..........................
Accumulated depreciationcomputer.......................
3,088
3,088
Calculation of annual depreciation after the estimate change:

$40,000
$7,200
x 2 years
14,400
25,600
900
24,700
8
$ 3,088
Cost
Previous annual depreciation ($36,000 5 years)
Depreciation to date (20142015)
Undepreciated cost
Revised residual value
Revised depreciable base
Estimated remaining life (10 years 2 years)
New annual depreciation
Requirement 2
Depreciation expense (determined below)..........................
Accumulated depreciationcomputer.......................
3,889

$40,000
$12,000
9,600
21,600
18,400
900
17,500
x 8/36
$ 3,889
Cost
Previous depreciation:
2014 ($36,000 x 5/15)
2015 ($36,000 x 4/15)
Undepreciated cost
Estimated remaining life 8 years
2016 depreciation
3,889
Exercise1120
SYD depreciation
[10 + 9 + 8 x ($1.5 .3) million] = $589,091
55
$1,500,000
589,091
910,909
300,000
610,909
7 yrs.
$ 87,273
Cost
Depreciation to date, SYD (20132015)
Undepreciated cost as of 1/1/16
Less residual value
Depreciable base
Remaining life (10 years 3 years)
Adjusting entry (2016 depreciation):
Depreciation expense (calculated above)............................

Accumulated depreciation..........................................
87,273
87,273
Exercise1122
Requirement 1
Analysis:
Correct
(Should Have Been Recorded)
2013 Equipment
Cash
350,000
350,000
Incorrect
(As Recorded)
Expense
Cash
350,000
350,000
2013 Expense
70,000
Accum. deprec.
70,000
Depreciation entry omitted
2014 Expense
70,000
Accum. deprec.
70,000
2015 Expense
70,000
Accum. deprec.
70,000
During the three-year period, depreciation expense was understated by

$210,000, but other expenses were overstated by $350,000, so net income
during the period was understated by $140,000, which means retained
earnings is currently understated by that amount.
During the three-year period, accumulated depreciation was understated,
and continues to be understated by $210,000.
To correct incorrect accounts
Equipment ..........................................................
Accumulated depreciation ($70,000 x 3 years)...
Retained earnings ($350,000 210,000).............
350,000
210,000
140,000
Requirement 2
Correcting entry:
Assuming that the equipment had been disposed of, no correcting entry
would be required because, after five years, the accounts would show
appropriate balances.
Exercise1123
Requirement 1
Book value
Fair value
Impairment loss
$6.5 million
3.5 million
$3.0 million
Requirement 2
Because the undiscounted sum of future cash flows of $6.8 million exceeds
book value of $6.5 million, there is no impairment loss.
Exercise1126
Requirement 1
An impairment loss is indicated because the estimated undiscounted sum of
future cash flows of $15 million is less than the book value of $18.3 million.
The amount of the loss to be reported is calculated using the estimated fair
value rather than the undiscounted future cash flows:
Book value
Estimated fair value
Impairment loss
$18,300,000
11,000,000
$ 7,300,000
Requirement 2
The loss would appear in the income statement along with other operating
expenses.
Requirement 3
Loss on impairment ............................................
Accumulated depreciation ..................................
Plant assets......................................................
7,300,000
14,200,000
21,500,000
Requirement 4
An impairment loss is indicated because the estimated undiscounted sum of
future cash flows of $12 million is less than the book value of $18.3 million.
The amount of the loss to be reported is calculated using the estimated fair
value rather than the undiscounted future cash flows:
Book value
Estimated fair value
Impairment loss
$18,300,000
11,000,000
$ 7,300,000
Requirement 5
Because the estimated undiscounted sum of future cash flows of $19 million
exceeds the book value of $18.3 million, no impairment loss is indicated.
Exercise1129
Requirement 1
Calculation of goodwill:
Consideration exchanged
Less fair value of net assets:
Assets
Less: Liabilities assumed
Goodwill
$420 million
$512 million
(150) million
(362) million
$ 58 million
Requirement 2
Because the book value of the net assets ($410 million) exceeds fair value
($400 million), an impairment loss is indicated.
Determination of implied fair value of goodwill:
Fair value of Harman, Inc.
Fair value of Harmans net assets (excluding goodwill)
Implied fair value of goodwill
$400 million
370 million
$ 30 million
Measurement of impairment loss:

Book value of goodwill (determined in requirement 1)
Implied fair value of goodwill
Impairment loss
$ 58 million
30 million
$ 28 million
Requirement 3
Entry to record the impairment loss:
($ in millions)
Loss on impairment of goodwill ........................

Goodwill .........................................................
28
28
CPAExamQuestions
1. a. Double-declining-balance depreciation rate = 2 x 1/8 = or 25%
First year depreciation will be $7,500 x 0.25 = $1,875
Second year depreciation will be ($7,500 1,875) x 0.25 = $1,406

2. b. The depreciation method used must be straight line because year 1
depreciation is $7,400 (($40,000 3,000) / 5 = $7,400). Year 2
depreciation would also be $7,400.
3. b. $20,000/5,000,000 gallons = $0.004/gallon
($0.004/gallon) x (250,000 gallons) = $1,000
4. d. Goodwill is an indefinite life intangible asset and is therefore not
amortized.
5. c. $50,000 10 years = $5,000 per year in amortization. $50,000 5,000 =
$45,000. The 3% franchise fee is a period expense and is not capitalized.
6. c. First two years = ($60,000 0) 10 = $6,000 per year

Year 2016
= [$60,000 (2 x $6,000) 3,000] 3 = $15,000
7. d. The book value of the stamping machine is its cost less accumulated
depreciation. Depreciation taken through 2016 was [($22,000,000
4,000,000) / 12] x 7 = $10,500,000 so book value is ($22,000,000
10,500,000) = $11,500,000. Because the $11,500,000 book value is more
than expected future cash flows of [(5 x $1,500,000) + 1,000,000] =
$8,500,000, the stamping machine is impaired.
8. d. $147,000. All of the expenditures are capitalized.
9. c. $12,000.
$80,000 10 years =
20,000 5 years =
$ 8,000
4,000
Total depreciation =
$12,000
10. a. When as asset is revalued, the entire class of property, plant, and
equipment to which the asset belongs must be revalued.
11. b. A decrease in income. If book value is higher than fair value, the
difference is reported as an expense in the income statement.
12. b. An active market must exist for an intangible asset to be revalued.
13. c. $70 million. Book value of $400 million 330 million recoverable
amount (higher of fair value less costs to sell and present value of future
cash flows).
14. d. $45 million. Book value of $500 million 455 million recoverable
amount (higher of fair value less costs to sell and present value of future
cash flows).
CMAExamQuestions
1. d. Because 50% of the original estimate of quality ore was recovered during
the years 2008 through 2015, recorded depletion of $250,000 [50% x
($600,000 100,000 salvage value)]. In 2016, the earlier depletion of
$250,000 is deducted from the $600,000 cost along with the $100,000
salvage value. The remaining depletable cost of $250,000 will be
allocated over the 250,000 tons believed to remain in the mine. The $1
per ton depletion is then multiplied times the tons mined each year.
2. a. Given that the company paid $6,000,000 for net assets acquired with a
fair value of $5,496,000, goodwill was $504,000. According to GAAP,
acquired goodwill is not amortized but is qualitatively assessed and/or
tested annually for impairment.
3. a. The cost should be amortized over the remaining legal life or useful life,
whichever is shorter. In addition to the initial costs of obtaining a patent,
legal fees incurred in the successful defense of a patent should be
capitalized as part of the cost, whether it was internally developed or
purchased from an inventor. The legal fees capitalized then should be
amortized over the remaining useful life of the patent.
Problem115
(1)
$65,000
Allocation in proportion to appraised values at date of exchange:
% of
Amount
Total
Land
$72,000
8
Building 828,000
92
$900,000
100
Land
$812,500 x 8% =
Building $812,500 x 92% =
(2) $747,500 [From (1)]

(3)
50 years
$747,500 47,500
$14,000 annual depreciation
$ 65,000
747,500
$812,500
(4)
$ 14,000
Same as prior year, since method used is straight line.
(5)
$ 85,400
3,000 shares x $25 per share =

Plus demolition of old building
(6)
None
(7)
$ 16,000
Fair value.
(8)
$ 2,400
$16,000 x 15% (1.5 x Straight-line rate of 10%).
(9)
$ 2,040
($16,000 2,400) x 15%.
$75,000
10,400
$85,400
No depreciation before use.
(10) $ 99,000
Total cost of $110,000 11,000 in normal repairs.
(11) $ 17,000
($99,000 5,500) x 10/55.
(12) $ 5,100
($99,000 5,500) x 9/55 x 4/12.
(13) $ 30,840
PVAD = $4,000 (7.71008 )

Present value of an annuity due of $1: n = 11, i = 8% (from Table 6)
(14) $ 2,056
$30,840
15 years
Problem1110
a. This is a change in estimate.
No entry is needed to record the change.
2016 adjusting entry:
Depreciation expense (determined below) ......................... 370,000
Accumulated depreciation .........................................
370,000
$10,000,000
Cost
$250,000
Previous depreciation ($10,000,000 40 years)
x 3 yrs
(750,000) Depreciation to date (20132015)
9,250,000 Undepreciated cost
25 yrs. Estimated remaining life (25 years: 20162040)
$ 370,000 New annual depreciation
A disclosure note should describe the effect of a change in estimate on income
before extraordinary items, net income, and related per-share amounts for the
current period.
b. This is a change in accounting principle that is accounted for as a change in
estimate.
Depreciation expense (below) .......................21,000
Accumulated depreciation .............
21,000
SYD
2012 depreciation
2013 depreciation
2014 depreciation
2015 depreciation
$ 60,000
54,000
48,000
42,000
Accumulated depreciation $204,000
$330,000
204,000
126,000
0
126,000
6 yrs.
$ 21,000
($330,000 x 10/55)
($330,000 x 9/55)
($330,000 x 8/55)
($330,000 x 7/55)
Cost
Depreciation to date, SYD (above)
Undepreciated cost as of 1/1/16
Less residual value
Depreciable base
Remaining life (10 years 4 years)
A disclosure note reports the effect of the change on net income and earnings
per share along with clear justification for changing depreciation methods.
c. This is a change in accounting principle accounted for as a change in
estimate.
Because the change will be effective only for assets placed in service after the
date of change, depreciation schedules do not require revision because the change
does not affect assets depreciated in prior periods. A disclosure note still is
required to provide justification for the change and to report the effect of the
change on current years income.
Chap13
Brief Exercise 131

Cash ................................................................
Notes payable..............................................
60,000,000
Interest expense ($60,000,000 x 12% x 3/12)........

Interest payable..........................................
1,800,000
Brief Exercise 133

a.
December 31
$100,000 x 12% x 6/12 = $6,000
b.
September 30
$100,000 x 12% x 3/12 = $3,000
60,000,000
1,800,000
Brief Exercise 136

December 12
Cash.......................................................................
Deferred sales revenue ......................................
24,000
January 16
Cash.......................................................................
Deferred sales revenue...........................................
Sales revenue.....................................................
216,000
24,000
24,000
240,000
Brief Exercise 137

In 2016 Lizzie would recognize $11,500 of revenue ($4,000 + 3,000 + 2,500
+ 2,000). In 2017 Lizzie would recognize the remainder of $6,500 ($18,000
11,500), either because gift cards were redeemed (the $1,000 in January and
the $500 in February) or because they are viewed as expired.
Brief Exercise 138

Accounts receivable...............................................
Sales revenue ....................................................
Sales taxes payable ([6% + 1.5%] x $600,000).......
645,000
600,000
45,000
Brief Exercise 1312

This is a loss contingency and the estimated warranty liability is credited and
warranty expense is debited in the period in which the products under
warranty are sold. Right will report a liability of $130,000:
Warranty Liability
__________________________________________
150,000Warranty expense (1% x $15,000,000)
Actual expenditures 20,000

130,000Balance
Brief Exercise 1316

Only the third situations costs should be accrued. A liability should be
accrued for a loss contingency if it is both probable that the confirming event
will occur and the amount can be at least reasonably estimated. If one or both
of these criteria is not met, but there is at least a reasonable possibility that the
loss will occur, a disclosure note should describe the contingency. Both
criteria are met only for the warranty costs.
Exercise 135
Requirement 1
Wages expense (700 x $900)..............................................
Liabilitycompensated future absences ............
630,000
630,000
Requirement 2
Liabilitycompensated future absences ..................
Wages expense ($31 million + [5% x $630,000])...............
Cash (or wages payable) (total).............................
630,000
31,031,500
31,661,500
Exercise 138
Requirement 1
Cash.......................................................................
Deferred sales revenue ......................................
7,500
7,500
Requirement 2
Cash.......................................................................
Liabilityrefundable deposits .........................
25,500
25,500
Requirement 3
Accounts receivable...............................................
Sales revenue ....................................................
Sales taxes payable ([5% + 2%] x $800,000)..........
856,000
800,000
56,000
Exercise 1320
Requirement 1
Warranty expense ([4% x $2,000,000] $30,800).............
Estimated warranty liability ..................................
49,200
49,200
Requirement 2
Bad debt expense (2% x $2,000,000).................................
Allowance for uncollectible accounts ...................
40,000
40,000
Requirement 3
This is a loss contingency. Classical can use the information
occurring after the end of the year and before the financial statements are
issued to determine appropriate disclosure.
Losslitigation......................................................... 1,500,000
Liabilitylitigation...............................................
1,500,000
A disclosure note also is appropriate.
Requirement 4
This is a gain contingency. Gain contingencies are not accrued even if
the gain is probable and reasonably estimable. The gain should be
recognized only when realized. A disclosure note is appropriate.
Requirement 5
Lossproduct recall....................................................
Liabilityproduct recall..........................................
500,000
500,000
A disclosure note also is appropriate.

Requirement 6
Promotional expense ([60% x $25 x 10,000] $105,000)...
Estimated premium liability ....................................
45,000
45,000
Exercise 1324
Requirement 1
Accrued liability and expense
Warranty expense (3% x $3,600,000)................................................ 108,000
Estimated warranty liability ...............................................
108,000
Actual expenditures (summary entry)
Estimated warranty liability ...................................................
Cash, wages payable, parts and supplies, etc. ...................
88,000
88,000
Requirement 2
Estimated warranty liability ($50,000 23,000).......................
Loss on product warranty (3% 2%] x $2,500,000)...................
*(3% x $2,500,000) $23,000 = $52,000
27,000
25,000
52,000*
CPA / CMA REVIEW QUESTIONS

CPA Exam Questions
1. d. The accrued interest at end of the first year, February 28, 2016, is $1,200
($10,000 x 12% = $1,200). The interest for the remaining ten months is
compounded based on the carrying amount of the total liability at
February 28, 2014, $11,200 ($10,000 principal plus the $1,200 accrued
interest). Therefore, the interest is $11,200 x 12% x 10/12 = $1,120 for
the last ten months. The accrued interest liability at December 31, 2016,
would be the total interest for the two time periods, $1,200 + 1,120 =
$2,320.
2. a. The liability for compensated absences at December 31, 2016, is

$15,000 for the 150 vacation days times $100 per day. The key word in
dealing with sick pay is the word required. The problem asks what is
the liability required at December 31, 2016. Since the accrual of sick
pay is optional, North Corp. would not be required to accrue a liability
for sick pay.
3. a. The amount excluded from current liabilities through refinancing cannot

exceed the amount actually refinanced. Therefore, Largo should consider
the $500,000 paid by the refinancing to be a long-term liability and the
$250,000 a current liability on the December 31, 2016, balance sheet.
The refinancing was completed before the issuance of the financial
statements and meets both criteria (intent and financial ability) for the
classification of the $500,000 as a long-term liability.
4. a. Gain contingencies should not be recognized in the financial statements
until realized. Adequate disclosure should be made in the notes but care
should be taken to avoid misleading implications as to the likelihood of
realization of the contingent gain.
CPA Exam Questions (concluded)

5. c.
For an extended warranty, revenue is deferred upon initial sale and then
recognized over the warranty period. No contingent liability is recorded.
6. d.
2016 and 2017 sales =
Warranty %
2016 and 2017 allowance
Actual expenditure
12/31/17 remaining liability
$ 400,000
6%
$ 24,000
(9,750)
$ 14,250
7. a.
Under IFRS, contingent liabilities (called provisions) are accrued if

the probability of payment is more likely than not, defined as a
probability of greater than 50%.
8. a.
Under IFRS, contingent assets are accrued if they are virtually certain to
occur.
9. c.
Under IFRS, contingent liabilities (called provisions) are accrued

equal to the expected value of a range of equally likely amounts. In this
case, $15 million is the expected value of the range of $10 million to $20
million.
CMA Exam Questions

1. b. If an enterprise intends to refinance short-term obligations on a longterm basis and demonstrates an ability to consummate the refinancing,
the obligations should be excluded from current liabilities and classified
as noncurrent. Under U.S. GAAP the ability to consummate the
refinancing may be demonstrated by a post-balance-sheet-date issuance
of a long-term obligation or equity securities, or by entering into a
financing agreement.
2. d. There are four requirements that must be met before a liability is
accrued for future compensated absences. These requirements are that
the obligation must arise for past services, the employee rights must vest
or accumulate, payment is probable, and the amount can be reasonably
estimated. If the amount cannot be reasonably estimated, no liability
should be recorded. However, the obligation should be disclosed.
3. c.
GAAP requires a contingent liability to be recorded, along with
the related loss, when it is probable that an asset has been impaired or a
liability has been incurred, and the amount of the loss can be reasonably
estimated. The key words are probable and reasonably estimated.
4. c. The likelihood of contingencies is divided into three categories:
probable (likely to occur), reasonably possible, and remote. When
contingent losses are probable and the amount can be reasonably
estimated, the amount of the loss should be charged against income. If
the amount cannot be reasonably estimated but the loss is at least
reasonably possible, full disclosure should be made, including a
statement that an estimate cannot be made.
Problem 134
Requirement 1
a. Interest expense ($600,000 x 10% x 5/12)......................
Interest payable.................................................
25,000
25,000
b. No adjusting entry since interest has been paid up to December 31.

$950,000 can be reported as a noncurrent liability, because (a) intent and
(b) ability to refinance has been demonstrated for that amount.
c. Accounts receivable (to eliminate the credit balance)...
Deferred revenue..............................................
18,000
d. Rent revenue (10/12 x $30,000)..................................

Deferred rent revenue ......................................
25,000
18,000
25,000
Requirement 2
CURRENT LIABILITIES:
Accounts payable
Current portion of long-term debt250,000
Accrued interest payable
Advances from customers
Deferred rent revenue
Bank notes payable
Total current liabilities
LONG-TERM LIABILITIES:
Mortgage note payable
$ 35,000
25,000
18,000
25,000
600,000
$953,000
$950,000
Problem 136
a. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. It is unlikely that
Eastern would choose to accrue the $122 million loss because the judgment
will be appealed and that outcome is uncertain. A disclosure note is
appropriate:
_______________________________
Note X: Contingency
In a lawsuit resulting from a dispute with a supplier, a judgment was rendered
against Eastern Manufacturing Corporation in the amount of $107 million plus
interest, a total of $122 million at February 3, 2017. Eastern plans to appeal the
judgment. While management and legal counsel are presently unable to predict
the outcome or to estimate the amount of any liability the company may have
with respect to this lawsuit, it is not expected that this matter will have a
material adverse effect on the company.
b. This is a loss contingency. Eastern can use the information occurring after the
end of the year in determining appropriate disclosure. Eastern should accrue
the $140 million loss because the ultimate outcome appears settled and the loss
is probable.
Losslitigation...........................................
Liabilitylitigation.................................
140,000,000
140,000,000
A disclosure note also is appropriate:

_________________________________
Notes: Litigation
In November 2015, the State of Nevada filed suit against the Company, seeking
civil penalties and injunctive relief for violations of environmental laws
regulating hazardous waste. On January 12, 2017, the Company announced
that it had reached a settlement with state authorities on this matter. Based upon
discussions with legal counsel, the Company has accrued and charged to
operations in 2016, $140 million to cover the anticipated cost of all violations.
The Company believes that the ultimate settlement of this claim will not have a
material adverse effect on the Company's financial position.
Problem 136 (concluded)

c. This is a gain contingency. Gain contingencies are not accrued even if the gain
is probable and reasonably estimable. The gain should be recognized only
when realized.
Though gain contingencies are not recorded in the accounts, they should be
disclosed in notes to the financial statements.
_______________________________
Note X: Contingency
Eastern is the plaintiff in a pending lawsuit filed against United Steel for
damages due to lost profits from rejected contracts and for unpaid receivables.
The case is in final appeal. No amount has been accrued in the financial
statements for possible collection of any claims in this litigation.
d. No disclosure is required because the claim is as yet unasserted (no lawsuit has
been filed), and it is not probable that a claim will be asserted in the future.
Even if an unfavorable outcome is thought to be probable in the event a lawsuit
is filed, and even if the amount of losses that could result from the lawsuit is
estimable, disclosure is not required unless an unasserted claim is probable.
Chap 20
BriefExercise20-2
To record the change:
Inventory ($47.6 million 64 million).........................................
Retained earnings ......................................................................................
($ in millions)
16.4
16.4
BriefExercise20-3
When a company changes to the LIFO inventory method from another
inventory method, accounting records of prior years often are inadequate to
determine the cumulative income effect of the change for prior years. For instance,
it would be necessary to make assumptions as to when specific LIFO inventory
layers were created in years prior to the change. So, a company changing to LIFO
generally does not revise the balance in retained earnings. This is the case for J J
Dishes. No entry is made. Instead, the beginning inventory in the year the LIFO
method is adopted ($96 million for J J) becomes the base year inventory for all
future LIFO calculations. A disclosure note would be included in the financial
statements describing the nature of and justification for the change as well as an
explanation as to why retrospective application was impracticable.
BriefExercise20-4
A change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change
in the depreciation method is similar to changing the economic useful life of a
depreciable asset, and therefore the two events should be reported the same way.
Accordingly, Irwin reports the change prospectively; previous financial statements
are not revised. Instead, the company simply employs the straight-line method
from then on. The undepreciated cost remaining at the time of the change would
be depreciated straight line over the remaining useful life.
($ in millions)
Assets cost
Accumulated depreciation to date (calculated below)
Undepreciated cost, Jan. 1, 2016
Estimated residual value
To be depreciated over remaining 7 years
Annual straight-line depreciation 20162022
$35.0
(16.2)
$18.8
(2.0)
$16.8
7
years
$ 2.4
Calculation of SYD depreciation

(10 + 9 + 8) x [$35 2] million) = $16.2 million
55*
* n (n = 1) 2 = [10 (11)] 2 = 55

($ in millions)
Depreciation expense (calculated above)..............................................

Accumulated depreciation............................................................
2.4
2.4
BriefExercise20-5
in the depreciation method is similar to changing the economic useful life of a
depreciable asset, and therefore the two events should be reported the same way.
Accordingly, Irwin reports the change prospectively; previous financial statements
are not revised. Instead, the undepreciated cost remaining at the time of the change
would be depreciated by the sum-of-the-years-digits method over the remaining
useful life.
($ in millions)
Assets cost
$35.0
(9.9)
$25.1
(2.0)
$23.1
Calculation of straight-line depreciation to date

($35 2) 10 years = $3.3 x 3 years = $9.9
($ in millions)
Depreciation expense (calculated below).............................................

Accumulated depreciation............................................................
Calculation of SYD depreciation
7 x 23.1 million = $5.775 million
28*
* n (n + 1) 2 = [7 (8)] 2 = 28
5.78
5.78
Brief Exercise 20-7

The fact that claims were less than expected represents a change in
estimate. As a result, no adjustments are made to any 2015 financial
statements, and the 2016 warranty expense is unaffected by any previous
estimates. 2016 warranty expense is $350,000 times 4%, or $14,000.
Quapau would record the following entry to record the expense (not
required):
Warranty expense (4% x $350,000)...................................................
14,000
14,000
Brief Exercise 20-9

To correct the error:
Machinery...............................................................................
Buildings.............................................................................
65,000
65,000
Other step(s) that would be taken in connection with the error:

When comparative balance sheets are reported that include 2015, the 2015
balance sheet would be restated to reflect the correction. A disclosure note should
describe the error and the impact of its correction on each years net income,
income from continuing operations, and earnings per share. In this case, because
the machine was purchased at the end of 2015, depreciation in 2015 is correct and
net income for 2015 is not impacted by the error.
Exercise 20-10
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
in the depreciation method reflects a change in the (a) estimated future benefits
from the asset, (b) the pattern of receiving those benefits, or (c) the companys
knowledge about those benefits, and therefore the two events should be reported
the same way. Accordingly, Clinton reports the change prospectively; previous
financial statements are not revised. Instead, the company simply employs the
straight-line method from now on. The undepreciated cost remaining at the time of
the change would be depreciated straight line over the remaining useful life. A
disclosure note should justify that the change is preferable and describe the effect
of the change on any financial statement line items and per share amounts affected
for all periods reported.
Requirement 2
Assets cost
Accumulated depreciation to date (given)
Annual straight-line depreciation 2014-2016
$2,560,000
(1,801,000)
$ 759,000
(160,000)
$ 599,000
3 years
$ 200,000
Adjusting entry (2016):

Depreciation expense (calculated above)..........................
Accumulated depreciation .......................................
200,000
200,000
Exercise 20-11
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
in the depreciation method reflects a change in the (a) estimated future benefits
from the asset, (b) the pattern of receiving those benefits, or (c) the companys
knowledge about those benefits, and therefore the two events should be reported
the same way. Accordingly, Canliss reports the change prospectively; previous
financial statements are not revised. Instead, the company simply employs the
SYD method from now on. The undepreciated cost remaining at the time of the
change would be depreciated by the SYD method over the remaining useful life
(three years). A disclosure note should justify that the change is preferable and
describe the effect of the change on any financial statement line items and per
share amounts affected for all periods reported.
Requirement 2
Assets cost
Accumulated depreciation to date ($160,000 x 2)
2016 SYD depreciation:
3
(3 + 2 + 1)
$800,000
(320,000)
$ 480,000
x $480,000 = $240,000
Adjusting entry:
Depreciation expense (calculated above)..........................
Not required:
2
(3 + 2 + 1)
1
240,000
x $480,000 = $160,000
x $480,000 =
$80,000
240,000
(3 + 2 + 1)
Exercise 20-14
Requirement 1
Warranty expense (3% x $3,600,000)................................................ 108,000
108,000
Estimated warranty liability ...................................................
88,000
88,000
Requirement 2
Estimated warranty liability ($50,000 23,000)........................
Loss on product warranty (3% 2%] x $2,500,000)...................
*(3% x $2,500,000) $23,000 = $52,000
27,000
25,000
52,000*
Exercise 20-16
Requirement1
This is a change in accounting estimate.
Requirement 2
When an estimate is revised as new information comes to light, accounting for
the change in estimate is quite straightforward. We do not recast prior years'
financial statements to reflect the new estimate. Instead, we merely incorporate the
new estimate in any related accounting determinations from there on. If the aftertax income effect of the change in estimate is material, the effect on net income
and earnings per share must be disclosed in a note, along with the justification for
the change.
Requirement 3
$800,000
$160,000
x 2 years
320,000
480,000
__ 6
$ 80,000
Cost
Old annual depreciation ($800,000 5 years)
Book value
New estimated remaining life (8 years 2 years used)
Exercise 20-17
Requirement1
Depreciation expense (determined below)... 3,088
Accumulated depreciation ..................
3,088
$40,000
Cost
$7,200
Old annual depreciation ($36,000 5 years)
x 2 years
14,400
$25,600
Book value
(900)
$24,700
8
Estimated remaining life (10 years 2 years used)
$ 3,088
Requirement 2
Depreciation expense (determined below)... 3,889
Accumulated depreciation...................
3,889
$40,000
$12,000
9,600
21,600
$18,400
(900)
$17,500
x 8/36*
$ 3,889
Cost
Previous depreciation:
2014: ($36,000 x 5/15)
2015: ($36,000 x 4/15)
Book value
Estimated remaining life: 8years
2016 depreciation
* n (n + 1) 2 = 8 (9) 2 = 36
Exercise 20-18
EP
1. Change from declining balance depreciation to straight-line.
2. Change in the estimated useful life of office equipment.
3. Technological advance that renders worthless a patent with an

unamortized cost of $45,000.
PR
4. Change from determining lower of cost or market for inventories by

the individual item approach to the aggregate approach.
PR
5. Change from LIFO inventory costing to weighted-average inventory

costing.
6. Settling a lawsuit for less than the amount accrued previously as a

loss contingency.
7. Including in the consolidated financial statements a subsidiary

acquired several years earlier that was appropriately not included in
previous years.
N*
8. Change by a retail store from reporting warranty expense on a payas-you-go basis to estimating the expense in the period of sale.
PR
9. A shift of certain manufacturing overhead costs to inventory that

previously were expensed as incurred to more accurately measure
cost of goods sold. (Either method is generally acceptable.)
10. Pension plan assets for a defined benefit pension plan achieving a
rate of return in excess of the amount anticipated.
*Error correction: change from an unacceptable method to GAAP.
Exercise 20-19
Requirement 1
The 2014 error caused 2014 net income to be understated, but since 2014
ending inventory is 2015 beginning inventory, 2015 net income was overstated by
the same amount. So, the income statement was misstated for 2014 and 2015, but
the balance sheet (retained earnings) was incorrect only for 2014 with regard to
this error. After that, no account balances are incorrect due to the 2014 error.
Analysis:
2014
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
U = Understated
O = Overstated
U
O
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
U
O
corrected
Exercise 20-19 (concluded)

Analysis:
2015
Beginning inventory
Plus: net purchases
Cost of goods sold
Revenues
Net income
Retained earnings
U = Understated
O = Overstated
O
U
U
O
O
Requirement 2
Retained earnings (overstatement of 2015 income)......................... 150,000
Inventory (overstatement of 2016 beginning inventory)..............
150,000
Requirement 3
earnings would be reported, net of tax, and a disclosure note should describe the
nature of the error and the impact of its correction on each years income from
continuing operations, net income, and earnings per share.
Exercise 20-24
U = understated
O = overstated
NE = no effect
1.
2.
3.
4.
5.
6.
7.
8.
Overstatement of ending inventory

Overstatement of purchases
Understatement of beginning inventory
Freight-in charges are understated
Understatement of ending inventory
Understatement of purchases
Overstatement of beginning inventory
Understatement of purchases and
understatement of ending inventory, by
the same amount
Cost of
Goods Sold
U
O
U
U
O
U
O
NE
Net
Income
O
U
O
O
U
O
U
NE
Retained
Earnings
O
U
O
O
U
O
U
NE
CPA Exam Questions

1. b. The depreciation prior to the change is as follows:
SYD Depreciation:
2014 depreciation
$11,400 ($34,200 x 5/15)
2015 depreciation
Accumulated depreciation
9,120 ($34,200 x 4/15)

$20,520
Since a change in depreciation method is considered a change in

accounting estimate resulting from a change in accounting principle, Kap
reports the change prospectively, just like a change in estimate. Kap
depreciates the remaining undepreciated cost on a straight-line basis over
the remaining useful life:
Assets cost
$36,000
Accumulated depreciation to date (calculated above) (20,520)

$15,480
(1,800)
$13,680
3
years
$ 4,560
2. b. Most changes in accounting principle are accounted for retrospectively.

That is, financial statements of prior periods are restated to report the
financial information for the new reporting entity in all periods. Changes in
estimate are accounted for prospectively.
3. a. The change in the estimate for warranty costs is based on new information
obtained from experience and qualifies as a change in accounting estimate. A
change in accounting estimate affects current and future periods and is not
accounted for by restating prior periods. The accounting change is a part of
continuing operations but is not reported net of taxes.
CPA Exam Questions (continued)

4. b. This is a change in reporting entity to be accounted for retrospectively. That
is, financial statements of prior periods are restated to report the financial
information for the new reporting entity in all periods.
5. b. The insurance premiums of $60,000 were charged in error to insurance
expense on the 2015 income statements. The premiums should have been
allocated equally at $20,000 per year for 2015, 2016, and 2017. Therefore,
the beginning retained earnings at 2016 are understated by $28,000the
effect of the error ($40,000) less the $12,000 tax effect ($40,000 30%).
The corrected retained earnings would be the beginning balance plus the
correction of the error ($400,000 + 28,000 = $428,000).
6. c. The $60,000 understated ending inventory would cause the 2015 cost of
goods sold to be overstated, understating net income and retained earnings.
That same error would cause 2016 beginning inventory to be understated,
overstating net income and retained earnings by the same amount,
effectively correcting the retained earnings balance. The $75,000 overstated
ending inventory would cause the 2016 cost of goods sold to be understated,
overstating net income and retained earnings.
IFRS CPA Exam Questions

7. b According to IAS 8: Accounting Policies, Changes in Accounting Estimates
and Errors, a change in accounting policy normally should be recognized
retrospectively for all periods presented in the financial statements. This is
true also for U.S. GAAP.
CPA Exam Questions (continued)

8. d Errors discovered in reporting periods subsequent to the error that has
occurred should be recognized in the financial statements as if the error had
not occurred by restating those financial statements both in all periods
affected and cumulatively in opening retained earnings for the earliest period
presented if the error occurred before that date. As an adjustment to
beginning retained earnings for the reporting period in which the error was
discovered is incorrect because when an error is corrected all affected
financial statement captions for the current and prior periods should be
restated. A note disclosure is necessary when an error is corrected but a note
disclosure is never sufficient for error correction. The only amounts
recognized in the current statement of comprehensive income for an error
that occurred in a prior period are the amounts specific to the current period.
This is true also for U.S. GAAP. When correcting errors in previously
issued financial statements, IFRS (IAS No. 81) permits the effect of the error
to be reported in the current period if its not considered practicable to report
it retrospectively as is required by U.S. GAAP.
9.d
IAS 8 states that a change in accounting policy because of the entitys initial
application of an IFRS should be applied in accordance with the transitional
guidance in that IFRS. If the IFRS does not include specific transitional
guidance or if the change is being made voluntarily, the change should be
applied retrospectively, unless it is impracticable to do so. Prospectively is
incorrect because the default application required by IAS 8 is not
prospective application. Practicably is incorrect because practicability is a
separate issue that is not considered in isolation from other IFRS guidance.
In accordance with managements judgment is incorrect because while
management is responsible for all financial reporting matters, it must apply
IFRS to its financial statements in accordance with the applicable IFRS.
1 Accounting Policies, Changes in Accounting Estimates and Errors, International

Accounting Standard No. 8 (IASCF), as amended effective January 1, 2014.
CPA Exam Questions (concluded)

10. c Errors discovered in reporting periods subsequent to the error that has
occurred should be recognized in the financial statements as if the error had
not occurred by restating those financial statements both in all periods
affected and cumulatively in opening retained earnings for the earliest
period presented if the error occurred before that date. As an adjustment to
beginning retained earnings for the reporting period in which the error was
discovered is incorrect because when an error is corrected all affected
financial statement captions for the current and prior periods should be
restated. A note disclosure is necessary when an error is corrected but a note
disclosure is never sufficient for error correction. The only amounts
recognized in the current statement of comprehensive income for an error
that occurred in a prior period are the amounts specific to the current
period. When correcting errors in previously issued financial statements,
IFRS (IAS No. 82) permits the effect of the error to be reported in the
current period if its not considered practicable to report it retrospectively as
is required by U.S. GAAP.
11.a
According to IAS 8: Accounting Policies, Changes in Accounting Estimates

and Errors, a change in accounting policy is permitted if the change will
result in a more reliable and more relevant presentation of the financial
statements.
12. c Upon first-time adoption of IFRS, an entity may elect to use fair value as
deemed cost for any individual item of property, plant, and equipment.
Intangible assets can be revalued to fair value only when there is an active
market. Neither of the other two asset responses is allowed to be revalued.
13. a A companys first IFRS financial statements must include at least three
balance sheets and two of each of the other financial statements. If the
companys first IFRS reporting period is as of and for the year ended
December 31, year 2, the first balance sheet will be the opening balance
sheet of year 1. The date of transition to IFRS is the date of the opening
balance sheet. Thus, the companys date of transition to IFRS is January 1,
year 1.
2 Accounting Policies, Changes in Accounting Estimates and Errors, International
Accounting Standard No. 8 (IASCF), as amended effective January 1, 2014.
14. a
15. b
LIFO is not a permissible method for accounting for inventory under IFRS.
CMA Exam Questions

1.
d.Achangeintheliabilityismerelyachangeinanestimate;itisnotachangein
principle.Achangeinestimateshouldbeaccountedforprospectively,thatis,in
thecurrentandfutureperiods.
2.a. Priorperiodadjustments(errorcorrections)aretobeaccountedforthrough
retainedearnings,nottheincomestatement.Thus,thebeginningbalanceof
retainedearningsshouldbecreditedforrevenuethatwaserroneouslynot
accruedinapriorperiod.TheamountofthecreditatMay31,2016,is
$91,800(2015accruedinterestrevenue).
3. c.Thecorrectionofanerrorinthefinancialstatementsofapriorperiodis
accountedforandreportedasapriorperiodadjustmentandexcludedfrom
thedeterminationofnetincomeforthecurrentperiod.
Problem 20-3
1. This is a change in accounting principle to be recorded retrospectively.
($ in 000s)
Retained earnings ($3,550 3,140) ..........................................

Inventory (reduction to Average method)..................................
410
410
Weihrich will recast its financial statements to appear as if the average method
always had been used. It also will reduce retained earnings to the balance it would
have had if the average method had been used previously; that is, by the
cumulative income difference between the average and FIFO methods.
Simultaneously, inventory is reduced to the balance it would have been if the
average method had always been used. A disclosure note should justify that the
change is preferable and describe the effect of the change on any financial
statement line items and per share amounts affected for all periods reported.
2. This is a change in accounting principle that usually is reported
prospectively.

inventory method, it usually does not report the change retrospectively. Instead,
the base year inventory for all future LIFO calculations is the beginning inventory
in the year the LIFO method is adopted. A disclosure note should describe the
nature of and justification for the change as well as an explanation of why
retrospective application was impracticable.
3. This is a change in accounting principle to be partially recorded
retrospectively.
($ in 000s)
Retained earnings ($750 540) ................................................

Inventory (decrease to LIFO for 2015 difference only)...............
210
210
In its comparative 20162015 financial statements, Weihrich should report

numbers for 2015 as if it had carried forward the 2014 ending balance in inventory
(measured on the previous FIFO inventory costing basis) and then had begun
applying LIFO as of January 1, 2015. There would be no adjustment to accounts
for the cumulative income effect of not using LIFO prior to that.
Problem 20-8
a. This is a change in estimate.
No entry is needed to record the change
Warranty expense (2% x $4,000,000)....................................
Estimated warranty liability ....................................
80,000
80,000
If the effect is material, a disclosure note should describe the effect of a

change in estimate on income from continuing operations, net income, and related
per share amounts for the current period.
b. This is a change in estimate.
Depreciation expense (determined below) .....................
45,000
45,000

$1,000,000
Cost
$25,000
Old depreciation ($1,000,000 40 years)
x 3 yrs
(75,000)
Depreciation to date (2013-2015)
$ 925,000
Undepreciated cost
(700,000)
New estimated salvage value
$ 225,000
To be depreciated
5
Estimated remaining life (5 years: 20162020)
$ 45,000
from continuing operations, net income, and related per share amounts for the
current period.
Problem 20-8 (continued)

c. This is a change in accounting principle that usually is reported prospectively.

inventory method, accounting records usually are insufficient to determine the
cumulative income effect of the change necessary to retrospectively revise
accounts. So, a company changing to LIFO usually reports the beginning
inventory in the year the LIFO method is adopted ($690,000 in this case) as the
base year inventory for all future LIFO calculations. The disclosure required is a
note to the financial statements describing the nature of and justification for the
change as well as an explanation as to why the retrospective application was
impracticable.
d. This is a change in accounting estimate resulting from a change in accounting

principle.
Depreciation expense (determined below) .....................
24,000
24,000
Problem 20-8 (concluded)

estimate resulting from a change in accounting principle. Accordingly, the
Hoffman Group reports the change prospectively; previous financial statements are
not revised. Instead, the company simply employs the straight-line method from
now on. The undepreciated cost remaining at the time of the change is depreciated
straight line over the remaining useful life.
($ in 000s)
Assets cost
$330
(162)
$168
(0)
$168
7
$ 24
years
Calculation of SYD depreciation:

(10 + 9 + 8) x $330,000) = $162,000
55
e. This is a change in estimate.
To revise the liability on the basis of the new estimate:
Losslitigation.................................................................. 150,000
Liabilitylitigation ($350,000 200,000).........................
150,000
from continuing operations, net income, and related per share amounts for the
current period.
f. This is a change in accounting principle accounted for prospectively.
Because the change will be effective only for assets placed in service after the
date of change, the change doesnt affect assets depreciated in prior periods. The
nature of and justification for the change should be described in the disclosure
notes. Also, the effect of the change on the current periods financial statements
should be disclosed.
Problem 20-9
P
1.
By acquiring additional stock, Wagner increased its investment in

Wise, Inc., from a 12% interest to 25% and changed its method
of accounting for the investment to the equity method.
2.
Wagner instituted a postretirement benefit plan for its employees

in 2016. Wagner did not previously have such a plan.
EP
3.
Wagner changed its method of depreciating computer equipment

from the SYD method to the straight-line method.
4.
Wagner determined that a liability insurance premium it both

paid and expensed in 2015 covered the 20152017 period.
5.
By selling shares in Launch Corp, Wagner decreased its

investment in the company from a 23% interest to 15% and
changed its method of accounting for the investment from the
equity method the to the cost method.
6.
Due to an unexpected relocation, Wagner determined that its

office building previously depreciated using a 45-year life should
be depreciated using an 18-year life.
7.
Wagner offers a three-year warranty on the farming equipment it

sells. Manufacturing efficiencies caused Wagner to reduce its
expectation of warranty costs from 2% of sales to 1% of sales.
8.
Wagner changed from LIFO to FIFO to account for its materials

and work in process inventories.
9.
Wagner changed from FIFO to average cost to account for its

equipment inventory.
10.
Wagner sells extended service contracts on some of its equipment

sold. Wagner performs services related to these contracts over
several years, so in 2016 Wagner changed from recognizing
revenue from these service contracts on a cash basis to the
accrual basis.
Problem 20-10
Requirement1
Analysis:
2014
Beginninginventory
Plus:Netpurchases
Less:Endinginventory
Costofgoodssold
Revenues
Less:Costofgoodssold
Less:Otherexpenses
Netincome
Retainedearnings
U6,000
O6,000
U=Understated
O=Overstated
2015
Beginninginventory
Plus:Netpurchases
Less:Endinginventory
Costofgoodssold
U6,000
U3,000
O9,000
U18,000
U6,000
Revenues
Less:Costofgoodssold U18,000
Less:Otherexpenses
Netincome
O18,000
U6,000
O12,000
O6,000
Retainedearnings
Requirement 2
Retained earnings.................................... 12,000
Inventory..............................................
9,000
Purchases.............................................
3,000
Requirement3
one error in 2014 and effect of three errors in 2015) would be retrospectively
purposes in the 2016 annual report. A prior period adjustment to retained earnings
would be reported, and a disclosure note should describe the nature of the error and
the impact of its correction on each years net income, income from continuing
operations, and earnings per share.
Problem 20-15
1a. To correct the error:
Equipment (cost)....................................................................
Accumulated depreciation ([$45,000 5] x 2 years).............
Retained earnings ($45,000 [$9,000 x 2 years]).....................
45,000
18,000
27,000
Depreciation expense ($45,000 5) ......................................

Accumulated depreciation.................................................
9,000
9,000
b. To reverse erroneous entry:

Cash ......................................................................................
Office supplies .................................................................
17,000
To record correct entry:

Tools .....................................................................................
Cash ..................................................................................
17,000
17,000
17,000
Note: These entries can, of course, be combined.
c. To correct the error:

Inventory ..........................................................................................
Retained earnings ......................................................................
78,000
d. To correct the error:

Retained earnings ([$12 x 2,000 shares] $2,000)......................
Paid-in capitalexcess of par...........................................
22,000
78,000
22,000
Note: A small stock dividend (< 25%) requires that the market value of the additional
shares be capitalized.
Problem 20-15 (concluded)

e. To correct the error:
Retained earnings (overstatement of 2015 income).......................
Interest expense (overstatement of 2016 interest) ...................
104,000

Interest expense (4/6 x $156,000).............................................
Interest payable (4/6 x $156,000).........................................
104,000
f. To correct the error:

Prepaid insurance ($72,000 3 yrs x 2 years: 20162017) ..........
Retained earnings ($72,000 [$72,000 3 years]) ...............
48,000

Insurance expense ($72,000 3 years) .........................................
Prepaid insurance .............................................................
104,000
104,000
48,000
24,000
24,000

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Chap 8

To record the purchase of inventory on account and the payment of freight

To record purchase returns.

To record cash sales and cost of goods sold.

Cost of goods sold..........................................................

To record the purchase of inventory on account and the payment of freight

To record purchase returns.

To record cash sales.

NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.

Net purchases = Purchases (gross) Purchase returns Purchase discounts + Freight-in

July 23, 2016

July 23, 2016

First-in, first-out (FIFO)

Cost of ending inventory:

Units Unit cost

Last-in, first-out (LIFO)

Exercise 813 (concluded)

Cost of ending inventory:

3,000 units x $5.40 = $16,200

Ending inventory = 3,000 units x $5.00 = $15,000

Last-in, first-out (LIFO)

2,000 @ $6.10 = $12,200

10,000 @ $5.50 = $55,000

6,000 @ $5.00 = $30,000

Exercise 814 (concluded)

2,000 @ $6.10 = $12,200

$44,800 4,000 @ $5.60

$36,680 3,000 @ $5.24

10,000 @ $5.50 = $55,000

$660,000 x 1.00 = $660,000

$660,000 x 1.00 = $660,000

CPA / CMA REVIEW

3. b. Average Cost = $4,950 / 140 units = $35.36 per unit

remaining in the ending inventory.

8. a. IAS No. 2 does not permit the use of LIFO.

CMA Exam Questions

Cost of goods sold

* The 5,000 units purchased on December 28 are not included. The

Units Unit cost

**$10 x 98% = $9.80 + .50 in freight charges = $10.30

Cost of ending inventory (3 autos):

Cost of ending inventory (3 autos):

Cost of ending inventory:

3 units x $66,525 = $199,575

Estimated cost of goods sold = $600,000 75,000 = $525,000*

Less: Net sales

Less: Net markdowns

Brief Exercise 913 (concluded)

Retained earnings on January 1, 2016, in this case, would be overstated by

* Selling price less costs to sell.

Merchandise inventory, January 1, 2016

*Gross profit as a % of cost (1 + Gross profit as a % of cost) = Gross profit as a

Less: Net sales

Less: Net markdowns

Less: Net sales

Less: Net markdowns

Decrease in ending inventory ($83,000 78,000)

Exercise 922 (concluded)

To include the $4 million in year 2016 purchases and increase retained

A prior period adjustment to retained earnings would be reported, and a

Note: Although the estimated inventory is $110,000, the estimated fire

4. c. The understatement of beginning inventory and the overstatement of