Question

Problem 20-14 Errors; change in estimate; change in principle; restatement of previous financial statements (LO20-1, 20-3, 20-4, 20-6) Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2016 and 2017, reported the following amounts and subtotals ($ in millions): 2016 2017 Assets Liabilities $700 $310 780 380 Shareholders' Equity $390 400 Net Income $190 210 Expenses $146 171 In 2018 the following situations occurred or came to light: a. Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2016 inventory 2017 inventory Overstated by Understated by $11,6 million $ 9.6 million b. A liability was accrued in 2016 for a probable payment of $6.2 million in connection with a lawsuit ultimately settled in December 2018 for $3.6 million. C. A patent costing $15.6 million at the beginning of 2016, expected to benefit operations for a total of six years, has not been amortized since acquired. d. Whaley's conveyer equipment was depreciated by the sum-of-the-years-digits (SYD) basis since it was acquired at the beginning of 2016 at a cost of $24.0 million. It has an expected useful life of five years and no expected residual value. At the beginning of 2018, Whaley decided to switch to straight-line depreciation. Required: For each situation: 1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. (Ignore tax effects.) 2. Determine the amounts to be reported for each of the five items shown below from the 2016 and 2017 financial statements when those amounts are reported again in the 2016-2018 comparative financial statements.

Answer 1

Required 1: An accrued liability is also a debt you incur in a period but do not receive an invoice for in the same period.The estimates are principally based on the company’s historical experience.

The development of the provision for claims is shown by the difference between estimates of reserves as of the initial year-end and the re-estimated liability at each subsequent year-end. This is based on actual payments in full or partial settlement of claims, plus re-estimates of the reserves required for claims still open or claims still unreported. Favourable development (redundancies) means that subsequent reserve estimates are lower than originally indicated, while unfavourable development means that the original reserve estimates were lower than subsequently indicated.

Hence the amount in 2016/2017 wont be restated and will be same as reported initially.

Required 2: Retained Earning Dr 5.2

To Patent Cr 5.2