Copy of Chap020solutions2011

Copy of Chap020solutions2011 - Chapter 20 - Accounting...

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Unformatted text preview: Chapter 20 - Accounting Changes and Errors BRIEF EXERCISES Brief Exercise 20-1 To record the change: ($ in millions) Retained earnings ............................................................................................ 8.2 Inventory ($32 million 23.8 million)..................................... 8.2 Carney applies the average cost method retrospectively; that is, to all prior periods as if it always had used that method. In other words, all financial statement amounts for individual periods that are included for comparison with the current financial statements are revised for period-specific effects of the change. Then, the cumulative effects of the new method on periods prior to those presented are reflected in the reported balances of the assets and liabilities affected as of the beginning of the first period reported and a corresponding adjustment is made to the opening balance of retained earnings for that period. Lets say Carney reports 2011-2009 comparative statements of shareholders equity. The $8.2 million adjustment above is due to differences prior to the 2011 change. The portion of that amount due to differences prior to 2009 is subtracted from the opening balance of retained earnings for 2009. The effect of the change on each line item affected should be disclosed for each period reported as well as any adjustment for periods prior to those reported. Also, the nature of and justification for the change should be described in the disclosure notes. 20-1 Chapter 20 Accounting Changes and Errors Chapter 20 - Accounting Changes and Errors Brief Exercise 20-2 To record the change: ($ in millions) Inventory ($47.6 million 64 million)......................................... 16.4 Retained earnings ...................................................................................... 16.4 20-2 Chapter 20 - Accounting Changes and Errors Brief Exercise 20-3 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 Dorsey Markets. No entry is made. Instead, the beginning inventory in the year the LIFO method is adopted ($96 million for Dorsey) 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....
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Copy of Chap020solutions2011 - Chapter 20 - Accounting...

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