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Solutions for Chapter 22 exercises and problems

# Intermediate Accounting

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EXERCISE 22-1 (a) The net income to be reported in 2010, 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 .................................................... 170,000 Deferred Tax Liability (\$170,000 X 35%) ................. 59,500 Retained Earnings .................................................... 110,500* *(\$170,000 X 65% = \$110,500) EXERCISE 22-2 (a) Inventory ................................................................................ 11,000* Retained Earnings .......................................................... 11,000 *(\$19,000 + \$21,000 + \$25,000) – (\$16,000 + \$18,000 + \$20,000) (b) Net Income (FIFO) 2009 \$19,000 2010 21,000 2011 25,000 (c) Inventory ............................................................................... 22,000* Retained Earnings ......................................................... 22,000 *(\$19,000 + \$21,000 + \$25,000) – (\$12,000 + \$14,000 + \$17,000)

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EXERCISE 22-3 (a) RAMIREZ CO. Income Statement For the Year Ended December 31 LIFO 2008 2009 2010 Sales ................................................................. \$4,000 \$4,000 \$4,000 Cost of goods sold ........................................... 800 1,000 1,130 Operating expenses .......................................... 1,000 1,000 1,000 Net income ............................................... \$2,200 \$2,000 \$1,870 Income Statement For the Year Ended December 31 FIFO 2008 2009 2010 Sales ................................................................ \$4,000 \$4,000 \$4,000 Cost of goods sold ........................................... 820 940 1,100 Operating expenses ......................................... 1,000 1,000 1,000 Net income .............................................. \$2,180 \$2,060 \$1,900 (b) RAMIREZ CO. Income Statement For the Year Ended December 31 2010 2009 As adjusted (Note A) Sales ................................................................ \$4,000 \$4,000 Cost of goods sold ........................................... 1,100 940 Operating expenses ......................................... 1,000 1,000 Net income .............................................. \$1,900 \$2,060
EXERCISE 22-3 (c) Note A: Change in Method of Accounting for Inventory Valuation On January 1, 2010, Ramirez 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 2010 and 2009 were affected by the change in accounting principle. 2010 2009 Balance Sheet LIFO FIFO Difference LIFO FIFO Difference Inventory \$ 320 \$ 390 \$70 \$ 200 \$ 240 \$40 Retained Earnings 6,070 6,140 70 4,200 4,240 40 Income Statement Cost of Goods Sold \$1,130 \$1,100 \$30 \$1,000 \$940 \$60 Net Income 1,870 1,900 30 2,000 2,060 60 Statement of Cash Flows (no effect) (d) Retained earnings statements after retrospective application. 2010 2009 Retained earnings, January 1, as reported \$2,200 Less: Adjustment for cumulative effect of applying new accounting method (FIFO) 20 Retained earnings, January 1, as adjusted \$4,240 2,180 Net Income 1,900 2,060

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Retained earnings, December 31 \$6,140 \$4,240
EXERCISE 22-4 2008 (a) Retained earnings, January 1, as reported ................................. \$160,000 Cumulative effect of change in accounting principle to average cost ........................................................ (13,000 )* Retained earnings, January 1, as adjusted ................................. \$147,000 *[\$8,000 (2006) + \$5,000 (2007)] 2011 (b) Retained earnings, January 1, as reported ................................. \$590,000 Cumulative effect of change in accounting principle to average cost ........................................................ (20,000 )* Retained earnings, January 1, as adjusted ................................. \$570,000 *[\$8,000 (2006) + \$5,000 (2007) + \$10,000 (2008) – \$10,000 (2009) + \$7,000 (2010)] 2012 (c) Retained earnings, January 1, as reported ................................. \$780,000 Cumulative effect of change in accounting principle to average cost ........................................................

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