Chapter 22.docx - SOLUTIONS TO EXERCISES EXERCISE...

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SOLUTIONS TO EXERCISESEXERCISE 22-1 (10–15 minutes)(a)The net income to be reported in 2015, using the retrospectiveapproach, would be computed as follows:Income before income tax$700,000Income tax (35% X $700,000)245,000Net income$455,000(b)Construction in Process........................................190,000Deferred Tax Liability ($190,000 X 35%).........66,500Retained Earnings..........................................123,500**($190,000 X 65% = $123,500)EXERCISE 22-2 (10–15 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$19,000201323,000201425,000(c)Inventory.....................................................................24,000*Retained Earnings..............................................24,000*($19,000 + $23,000 + $25,000) – ($12,000 + $14,000 + $17,000)
EXERCISE 22-3 (25–30 minutes)(a)TAVERAS CO.Income StatementFor the Year Ended December 31LIFO201220132014Sales..........................................................$3,000$3,000$3,000Cost of goods sold...................................8001,0001,130Operating expenses.................................1,0001,0001,000Net income.........................................$1,200$1,000$ 870Income StatementFor the Year Ended December 31FIFO201220132014Sales..........................................................$3,000$3,000$3,000Cost of goods sold...................................8209401,100Operating expenses.................................1,0001,0001,000Net income.........................................$1,180$1,060$ 900(b)TAVERAS CO.Income StatementFor the Year Ended December 3120142013As adjusted (Note A)Sales..........................................................$3,000$3,000Cost of goods sold...................................1,100940Operating expenses.................................1,0001,000Net income.........................................$ 900$1,060
EXERCISE 22-3 (Continued)(c)Note A:Change in Method of Accounting for Inventory ValuationOn January 1, 2014, Taveras elected to change its method ofvaluing its inventory to the FIFO method, whereas in all prioryears inventory was valued using the LIFO method. The newmethod of accounting for inventory was adopted because itbetter reflects the current cost of the inventory on the balancesheet and comparative financial statements of prior years havebeen adjusted to apply the new method retrospectively. Thefollowing financial statement line items for fiscal years 2014 and2013 were affected by the change in accounting principle.20142013Balance SheetLIFOFIFODifferenceLIFOFIFODifferenceInventory$ 320$ 390$70$ 200240$40Retained Earnings3,0703,140702,2002,24040Income StatementCost of Goods Sold$1,130$1,100$30$1,000$940$60Net Income870900301,0001,06060Statement of Cash Flows(no effect)(d)Retained earnings statements after retrospective application.$20142013
Retained earnings, January 1, as reported$1,200Less: Adjustment for cumulative effect ofapplying new accounting method (FIFO)20Retained earnings, January 1, as adjusted$2,2401,180Net Income9001,060Retained earnings, December 31$3,140$2,240
EXERCISE 22-4 (25–30 minutes)2011 (a)Retained earnings, January 1, as reported.................$160,000Cumulative effect of change in accountingprinciple 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.................$590,000Cumulative effect of change in accountingprinciple 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.................$780,000Cumulative effect of change in accountingprinciple 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 (30–35 minutes)(a)KENSETH COMPANYIncome StatementFor the Year Ended20142013Sales..................................................................$3,000$3,000Cost of goods sold...........................................1,100940Operating expenses1,0001,000Income before profit sharing....................$ 900$1,060Profit sharing expense.....................................96100Net income.................................................$ 804$ 960Under GAAP, Kenseth Company should report $100 as the profitsharing expense in 2013, even though the profit sharing expensewould be $106 if FIFO had been used in 2013.(b)

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