Acc306 Intermediate Accounting: Week 5 Assignment (E20-18, Analysis Case 20-10, P21-11, P21-14)

Acc306 Intermediate Accounting
Week 5 Assignment (E20-18, Analysis Case 20-10, P21-11, P21-14)
E20–18 Classifying accounting changes
Indicate with the appropriate letter the nature of each situation described below:
PR Change in principle reported retrospectively
PP Change in principle reported prospectively
E Change in estimate
EP Change in estimate resulting from a change in principle
R Change in reporting entity
N Not an accounting change

1. Change from declining balance depreciation to straight-line.
2. Change in the estimated useful life of office equipment.
3. Technological advance that renders worthless a patent with an unamortized cost of $45,000.
4. Change from determining lower of cost or market for inventories by the individual item approach to the aggregate approach.
5. Change from LIFO inventory costing to weighted-average inventory costing.
6. Settling a lawsuit for less than the amount accrued previously as a loss contingency.
7. Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years.
8. Change by a retail store from reporting bad debt expense on a pay-as-you-go basis to the allowance method.
9. A shift of certain manufacturing overhead costs to inventory that previously were expensed as incurred to more accurately measure cost of goods sold. (Either method is generally acceptable.)
10. Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated.

Analysis Case 20–10 Various changes
DRS Corporation changed the way it depreciates its computers from the sum-of-the-year's-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual value used in computing depreciation for its office building. At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.

1. For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be specific.
2. Why should companies disclose changes in accounting principles?

P21–11 Prepare a statement of cash flows; direct method
The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company. Additional information from Arduous's accounting records is provided also.
Arduous Company
Comparative Balance Sheets
December 31, 2011 and 2010
($ in millions) 2011 2010
Cash 116 81
Accounts receivable 200 202
Less: allowance for uncollectible accounts (10) (8)
Investment revenue receivables 6 4
Inventory 205 200
Prepaid insurance 4 8
Long-term investment 156 125
Land 196 150
Buildings and equipment 412 400
Less: Accumulated depreciation (97) (120)
Patent 30 32
1,218 1,074
Accounts payable 50 65
Salaries payable 6 11
Bond interest payable 8 4
Income tax payable 12 14
Deferred income tax liability 11 8
Note payable 23 -
Lease liability 82 -
Bonds payable 215 275
Less: Discount on bonds (22) (25)

Shareholders' Equity
Common stock 430 410
Paid in capital - excess of par 95 85
Preferred stock 75 -
Retained earnings 242 227
Less: Treasury stock (9) -
1,218 1,074

Arduous Company
Income Statement
For Year Ended December 31, 2011
($ in millions)
Sales Revenue 410
Investment revenue 11
Gains on sale of treasury bills 2 423
Cost of goods sold 180
Salaries expense 65
Depreciation expense 12
Patent and amortization expense 2
Bad debt expense 8
Insurance expense 7
Bond interest expense 28
Extraordinary loss (flood) 18
Less: Tax savings (9) 9
Income tax expense 45 356
Net Income 67

Additional information from the accounting records:
a. During 2011, $6 million of customer accounts were written off as uncollectible.
b. Investment revenue includes Arduous Company's $6 million share of the net income of Demur Company, an equity method investee.
c. Treasury bills were sold during 2011 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
d. A machine originally costing $70 million that was one-half depreciated was rendered unusable by a rare flood. Most major components of the machine were unharmed and were sold for $17 million.
e. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $3 million.
f. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
g. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
h. A building was acquired by a 15-year capital lease; present value of lease payments, $82 million.
i. $60 million of bonds were retired at maturity.
j. In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
k. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.

Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.)

P21–14 Statement of cash flows; indirect method; limited information
The comparative balance sheets for 2011 and 2010 are given below for Surmise Company. Net income for 2011 was $50 million.
Surmise Company
Comparative Balance Sheets
December 31, 2011 and 2010
($ in millions) 2011 2010
Cash 45 40
Accounts receivable 92 96
Less: allowance for uncollectible accounts (12) (4)
Prepaid expenses 8 5
Inventory 145 130
Long-term investment 80 40
Land 100 100
Buildings and equipment 411 300
Less: Accumulated depreciation (142) (120)
Patent 16 17
743 604
Accounts payable 17 32
Accrued liabilities (2) 10
Notes payable 35 -
Lease liability 111 -
Bonds payable 65 125

Shareholders' Equity
Common stock 60 50
Paid in capital - excess of par 245 205
Retained earnings 212 182
743 604

Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2011. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful.
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