Exam 21: Accounting Corrections and Error Analysis

A financial statement can provide a faithful representation even if it is not perfectly accurate as long as the process used to produce the information is selected and applied with no errors and the description of the transaction is free from error.

Explain why comparability and consistency are considerations for accounting changes.

Changes in accounting principle may be handled prospectively if insufficient information is available to properly account for the change.

Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in uncollectible accounts. In 2018, her sales were $3,200,000 and in 2019, sales were $3,800,000. Before 2019, she estimated that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. She has recorded bad debt expense of 2% for 2018. Does she need to make a retroactive correction for 2018, and should she add an additional adjustment to 2019? If so, write the journal entry for the year-end adjustment in 2019. She has already recorded 2% of sales for bad debts in 2019 for 2019 sales.

Hampton's Construction, Inc. decided to change from the completed-contract method of accounting to the percentage-of-completion method. The following information is available for net income. Ignore income tax effects: Net Income December 31,2018 \ 180,00 \ 125,000 December 31,2019 200,000 149,000 December 31,2020 201,000 180,000 What is the journal entry to record the change in accounting principle on January 1, 2020?

Tarleton Company discovered ending inventory errors in 2017 and 2018. The 2017 ending inventory was overstated by $215,000 whereas the 2018 ending inventory was understated by $85,000. Ignoring income tax effects, by what amount should the beginning retained earnings be adjusted on January 1, 2019?

Changes in reporting entities are accounted for prospectively.

If a firm discovers a self-correcting error in the second year, and the books are still open, it ________.

The State of Alabama filed suit against Edwards Chemical Company for violations of water pollution laws in 2018. During 2018, the company accrued a $300,000 loss for litigation. At the end of 2019, Edwards was able to settle with the State for $245,000. What entry should Edwards make when it pays the State in December, 2019?

Brown Furniture Company decided to go after the younger market to create a newer customer base. In doing so, Ms. Brown offered a liberal credit policy and estimated she would have a 5% bad debt expense. In 2018, sales under this promotion were $600,000. Accordingly, she estimated a bad debt expense of $30,000. Her actual bad debt expenses were far less than expected, at about 3%, and this rate will be used for 2019. Her 2019 sales under the program are $860,000. How much bad debt expense should be reported on the comparative income statements based on this information?

Georgio, Inc. decided to move its business from its current location to another larger plant. Management should examine the salvage value of the building in the future and the change in the useful life to see if a change in the depreciation of the current building is warranted.

Jenkins, Inc. builds custom machines for manufacturers using robotic equipment. In 2018, the company decided to change from straight-line to double-declining balance depreciation for its robotic equipment. It changed the life expectancy as follows: Original cost of robotic equipment \ 2,800,000 Accumulated depreciation thru 2017 860,000 Original life in years 8 Remaining life in years 4 Determine the correct amount of depreciation to expense for 2018.

John Pickens writes mystery novels. His publisher pays him royalties for the number of books sold each year. He is paid royalties for the first half of the year on September 30 and the second half of the year on March 31 of the following year. He received $42,000 in September, 2018. The publisher estimated that his royalties for the second half of the year would be $53,000. On March 31, 2019, he received $57,500. Assuming that he recorded $53,000 in royalties at December 31, 2018, what kind of change does this represent?

At the end of 2017, the payroll supervisor for Claro, Inc. failed to accrue $30,100 in commissions for their outside salespersons. The cost was recorded in 2018 when the commissions were paid and Commission Expense was debited and Cash credited for the full amount. The error was not discovered until late in 2018 while reconciling year-end expenses for 2018. The tax rate for both years was 40%. What is the proper journal entry to correct the error for 2018?

At the end of 2017, the payroll supervisor for Claro, Inc. failed to accrue $24,790 in commissions for the outside salespersons. The cost was recorded in 2018 when the commissions were paid and Commission Expense was debited and Cash credited for the full amount. The error was not discovered until late in 2018 while reconciling year-end expenses for 2018. What is the proper treatment to correct the error? (Ignore income taxes.)

Disclosures are required for all changes in accounting estimate made in normal operations.

A change in reporting entity must be treated retrospectively for a maximum of two prior years.

Retrospective changes require restatement of all periods reported in the annual report as if it had been used in those prior years.

Anzelmo Corporation invested in Jones Manufacturing by purchasing a 10% interest in the company. Anzelmo had no significant influence in Jones. Over time, Anzelmo acquired more shares in Jones, and in 2019, Anzelmo's president became a member of the board of directors when its ownership interest reached 30% of Jones. This change is ________.

Emma's Clothes, Inc. has accounts receivable of $210,000. In the current economy, she has noticed an increase in uncollectible accounts. In 2018, her sales were $3,380,000 and in 2019, sales were $3,960,000. Before 2019, she estimated that 2% of sales would eventually be uncollectible. In 2019, Emma believes that her losses were closer to 3% in 2018. What should be the bad debt expense for 2018 and 2019 in the comparative income statements for 2018 and 2019?