Ch 22 - Sol to Exercises - SOLUTIONS TO EXERCISES EXERCISE...

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SOLUTIONS TO EXERCISES EXERCISE 22-1 (1015 minutes) (a) The net income to be reported in 2015, using the retrospective approach, would be computed as follows: Income before income tax $700,000 Income tax (35% X $700,000) 245,000 Net income $455,000 (b) Construction in Process .......................................190,000 Deferred Tax Liability ($190,000 X 35%) .........66,500 Retained Earnings .........................................123,500* *($190,000 X 65% = $123,500) EXERCISE 22-2 (1015 minutes) (a) Inventory ....................................................................14,000* Retained Earnings .............................................14,000 *($19,000 + $23,000 + $25,000) ($15,000 + $18,000 + $20,000) (b) Net Income (FIFO) 2012 $19,000 2013 23,000 2014 25,000 (c) Inventory ...................................................................24,000* Retained Earnings ............................................24,000 *($19,000 + $23,000 + $25,000) ($12,000 + $14,000 + $17,000)
EXERCISE 22-3 (2530 minutes) (a) TAVERAS CO. Income Statement For the Year Ended December 31 LIFO 2012 2013 2014 Sales .......................................................$3,000 $3,000 $3,000 Cost of goods sold ................................800 1,000 1,130 Operating expenses ..............................1,000 1,000 1,000 Net income ......................................$1,200 $1,000 $ 870 Income Statement For the Year Ended December 31 FIFO 2012 2013 2014 Sales .......................................................$3,000 $3,000 $3,000 Cost of goods sold ................................820 940 1,100 Operating expenses ..............................1,000 1,000 1,000 Net income ......................................$1,180 $1,060 $ 900 (b) TAVERAS CO. Income Statement For the Year Ended December 31 2014 2013 As adjusted (Note A) Sales .......................................................$3,000 $3,000 Cost of goods sold ................................1,100 940 Operating expenses ..............................1,000 1,000 Net income ......................................$ 900 $1,060
EXERCISE 22-3 (Continued) (c) Note A: Change in Method of Accounting for Inventory Valuation On January 1, 2014, Taveras elected to change its method of valuing its inventory to the FIFO method, whereas in all prior years inventory was valued using the LIFO method. The new method of accounting for inventory was adopted because it better reflects the current cost of the inventory on the balance sheet and comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items for fiscal years 2014 and 2013 were affected by the change in accounting principle. 2014 2013 Balance Sheet LIFO FIFO Difference LIFO FIFO Difference Inventory $ 320 $ 390 $70 $ 240 $40 Retained Earnings 3,070 3,140 70 2,200 2,240 Income Statement Cost of Goods Sold $1,130 $1,100 $30 $1,000 $940 Net Income 870 900 30 1,000 1,060 Statement of Cash Flows (no effect) (d) Retained earnings statements after retrospective application. 200 $ 40 $60 60
Less: Adjustment for cumulative effect of applying new accounting method (FIFO) 20 Retained earnings, January 1, as adjusted $2,240 1,180 Net Income 900 1,060 Retained earnings, December 31 $3,140 $2,240
EXERCISE 22-4 (2530 minutes) 2011 (a) Retained earnings, January 1, as reported ................$160,000 Cumulative effect of change in accounting principle to average cost ..........................................(15,000)* Retained earnings, January 1, as adjusted ................$145,000 *[$10,000 (2009) + $5,000 (2010)] 2014 (b) Retained earnings, January 1, as reported ................$590,000 Cumulative effect of change in accounting principle to average cost ..........................................(25,000)* Retained earnings, January 1, as adjusted ................$565,000 *[$10,000 (2009) + $5,000 (2010) + $10,000 (2011) $10,000 (2012) + $10,000 (2013)] 2015 (c) Retained earnings, January 1, as reported ................$780,000 Cumulative effect of change in accounting principle to average cost ..........................................(20,000)* Retained earnings, January 1, as adjusted ................$760,000 *($25,000 at 12/31/2013 $5,000) 2012 2013 2014 (d) Net Income ..............................$130,000 $290,000 $310,000
EXERCISE 22-5 (3035 minutes) (a) KENSETH COMPANY Income Statement For the Year Ended 2014 2013 Sales .................................................................$3,000 $3,000Cost of goods sold ..........................................1,100 940Operating expenses 1,000 1,000Income before profit sharing....................$ 900 $1,060Profit sharing expense ....................................96 100Net income ................................................$ 804 $ 960Under GAAP, Kenseth Company should report $100 as the profit sharing expense in 2013, even though the profit sharing expense would be $106 if FIFO had been used in 2013.

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