Depreciation Expense Accounting Worksheet

Brief Exercise 20-10Analysis:
Correct
(Should Have Been Recorded)
Incorrect
(As Recorded)
2021 Equipment…… 350,000
Cash…………
350,000
Expense… 350,000
Cash…
350,000
2021 Expense………. 70,000
Accum. deprec.
70,000
depreciation entry omitted
2022 Expense………. 70,000
Accum. deprec.
70,000
depreciation entry omitted
2023 Expense………. 70,000
Accum. deprec.
70,000
depreciation entry omitted
During the three-year period, depreciation expense was understated by
$210,000, but other expenses were overstated by $350,000, so net income
during the period was understated by $140,000, which means retained
earnings is currently understated by that amount.
During the three-year period, accumulated depreciation was understated,
and continues to be understated by $210,000.
To correct incorrect accounts
Equipment ………………………………………………….
Accumulated depreciation ($70,000 x 3 years)
Retained earnings ($350,000 – $210,000) ……
350,000
210,000
140,000
Brief Exercise 20-11
No correcting entry would be required because, after five years, the accounts
would show appropriate balances.
Brief Exercise 20-12
Error a
1.
2023 Income Statement:
Expenses understated, net income overstated.
2023 Balance Sheet: Liabilities understated, retained earnings overstated.
The journal entry for the correction in 2024 is:
($ in
millions)
Retained earnings…………………………………………………………..
Salaries expense ……………………………………………………….
2
2
2.
The 2023 financial statements that were incorrect as a result of the error would
be retrospectively restated to reflect the correct salaries expense, (income tax
expense if taxes are considered), net income, and retained earnings when those
statements are reported again for comparative purposes in the 2024 annual
report.
3.
Because retained earnings is one of the accounts incorrectly stated accounts, the
correction to that account is reported as a prior period adjustment to the 2024
beginning retained earnings balance in the comparative statements of
shareholders’ equity.
4.
Also, a disclosure note should describe the nature of the error and the impact of
its correction on each financial statement line item and any per-share amounts
affected for each prior period presented.
Brief Exercise 20-12 (concluded)
Error b
1. To include the $3 million in year 2024 purchases and increase retained earnings
to what it would have been if 2023 cost of goods sold had not included the $3
million purchases.
Analysis:
2023
Beginning inventory
Purchases
O
Less: Ending inventory
Cost of goods sold
O
2024
Beginning inventory
Purchases
U
Less: Ending inventory
Cost of goods sold
U
Revenues
Less: Cost of goods sold O
Less: Other expenses
Net income
U

Retained earnings
U
U = Understated
O = Overstated
($ in millions)
Purchases ………………………………………………….
Retained earnings ……………………………………
3
3
2. The 2023 financial statements that were incorrect as a result of the error would
be retrospectively restated to reflect the correct cost of goods sold, (income tax
expense if taxes are considered), net income, and retained earnings when those
statements are reported again for comparative purposes in the 2024 annual
report.
3. Because retained earnings is one of the accounts incorrectly stated, the
correction to that account is reported net of tax as a prior period adjustment to
the 2024 beginning retained earnings balance in the comparative statements of
shareholders’ equity.
4. Also, a disclosure note should describe the nature of the error and the impact of
its correction on each financial statement line item and any per-share amounts
affected for each prior period presented.
EXERCISES
Exercise 20-1
Requirement 1
January 1, 2024
($ in millions)
Retained earnings ………………………………………………………………..
Inventory (cumulative effect) * …………………………………………..
Total
* Cost of goods sold (FIFO) ………………………………………………..
Cost of goods sold (average) …………………………………………….
Difference ……………………………………………………………………
30
30
2022
2023
$38
52
$14
$40
56
$16
$30
Since the cost of goods available for sale each period is the sum of the cost of goods sold
and the cost of goods unsold (inventory), a $30 million difference ($14 + $16) in cost of
goods sold due to using FIFO rather than Average means there also is a $30 million
difference in inventory. The cumulative prior year difference in cost of goods sold is
reflected as a difference in prior years’ income and, therefore, the balance in retained
earnings.
Requirement 2
COMPARATIVE INCOME STATEMENTS
($ in millions)
Revenues
Cost of goods sold (average)
Operating expenses
Net income
2024
$420
(62)
(254)
$104
2023
$390
(56)
(250)
$ 84
Exercise 20-1 (continued)
Requirement 3
Calculations ($ in millions):
Revenues
Cost of goods sold (FIFO)
Operating expenses
Net income
Dividends
Retained earnings, Jan. 1, 2022
Retained earnings, Jan. 1, 2023
2022
$380
(38)
(242)
100
(20)
0
$ 80
Exercise 20-1 (concluded)
Requirement 4
Calculations ($ in millions): 2022 cumulative effect for January 1, 2023
retained earnings restatement:
FIFO
Average Difference
Revenues
$380
$380
Cost of goods sold
(38)
(52)
Operating expenses
(242)
(242)
Net income
$100
$ 86
$14
Comparative Statements of Shareholders’ Equity
(not required)
Additional
Common
Paid-in
Stock
Capital
Retained
Earnings
Total
Shareholders’
Equity
($ in millions)
Jan. 1, 2023*
Net income
Dividends
Jan. 1, 2024
Net income
Dividends
Jan. 1, 2025
66
84**
(20)
130
104**
(20)
214
* Decreased from $80 million to $66 million to reflect the effect of the
$14 cumulative effect of the change in inventory methods prior to
restated financial statements.
**Calculations ($ in millions):
Revenues
Cost of goods sold (average)
Operating expenses
Net income
2023
$390
(56)
(250)
$ 84
2024
$420
(62)
(254)
$104
Exercise 20-2
Requirement 1
Balance at January 1, 2024, using LIFO
$780,000
Prior to 2024, using FIFO:
Inventory would have been higher by $60,000, so
Cost of goods sold would have been lower by $60,000, so
Pretax income would have been higher by:
Less: Income tax at 25%
Cumulative net income and thus retained earnings
would have been higher by:
$60,000
(15,000)
45,000
Balance at January 1, 2024, using FIFO
$825,000
Requirement 2
January 1, 2024
Inventory (additional inventory if FIFO had been used) …………………..
Retained earnings (additional net income if FIFO had been
used) ……………………………………………………………………………………
Income tax payable (25% x
$60,000) …………………………………………………………………………………
0
60,000
45,000
15,00
Exercise 20-3
This is a change in accounting principle.
($ in millions)
Common stock ($1 par x 4 million shares retired) …………………….
Paid-in capital—excess of par (average amount above par
at which the retired shares originally sold: $800 million ………………
÷ 200 million shares = $4; $4 x 4 million shares retired)……………
Retained earnings (difference) …………………………………………..
Treasury stock (cost of the shares retired) …………………………..
4
16
5
25
UMC applies the new way of reporting reacquired shares retrospectively; that
is, to all prior periods as if it always had used that method. In other words, all
financial statement amounts for individual periods affected by the change and that
are included for comparison with the current financial statements are revised.
In each prior period reported, then, UMC would reduce Common stock by $4
million, Paid-in capital – excess of par by $16 million, Retained earnings by $5
million, and Treasury stock by $25 million.
The effect of the change on each line item affected should be disclosed for each
period reported as well as any adjustment for periods prior to those reported. Also,
the nature of and justification for the change should be described in the disclosure
notes.
Exercise 20-16
Requirement 1
This is a change in accounting estimate.
Requirement 2
No. When an estimate is revised as new information comes to light, accounting
for the change in estimate is quite straightforward. We do not recast prior years’
financial statements to reflect the new estimate. Instead, we merely incorporate the
new estimate in any related accounting determinations from there on.
Requirement 3
Yes. If the after-tax income effect of the change in estimate is material, the effect
on income from continuing operations, net income, and earnings per share must be
disclosed in a note, along with the justification for the change.
Requirement 4
$800,000
$160,000
x 2 years
320,000
480,000
Cost
Old annual depreciation ($800,000 ÷ 5 years)
Depreciation to date (2022–2023)
Book value
÷ 6
$ 80,000
New estimated remaining life (8 years – 2 years used)
New annual depreciation
Exercise 20-17
Requirement 1
Depreciation expense (determined below) … 3,088
Accumulated depreciation ………………
3,088
Calculation of annual depreciation after the estimate change:
$40,000
Cost
$7,200
Old annual depreciation ($36,000 ÷ 5 years)
x 2 years
14,400
Depreciation to date (2022–2023)
$25,600
Book value
(900)
Revised residual value
$24,700
Revised depreciable base
÷ 8
Estimated remaining life (10 years – 2 years used)
$ 3,088
New annual depreciation
Requirement 2
Depreciation expense (determined below) … 3,889
Accumulated depreciation ……………….
3,889
Calculation of annual depreciation after the estimate change:
$40,000
$12,000
9,600
21,600
$18,400
(900)
$17,500
x 8/36*
$ 3,889
Cost
Previous depreciation:
2022: ($36,000 x 5/15)
2023: ($36,000 x 4/15)
Depreciation to date (2022–2023)
Book value
Revised residual value
Revised depreciable base
Estimated remaining life: 8 years
2024 depreciation
* n (n + 1) ÷ 2 = 8 (9) ÷ 2 = 36
Exercise 20-18
EP
1. Change from declining balance depreciation to straight-line.
E
2. Change in the estimated useful life of office equipment.
E
3. Technological advance that renders worthless a patent with an
unamortized cost of $45,000.
PR
4. Change from determining lower of cost or net realizable value
(LCNRV) for inventories by the individual item approach to the
aggregate approach.
PR
5. Change from LIFO inventory costing to weighted-average inventory
costing.
E
6. Settling a lawsuit for less than the amount accrued previously as a loss
contingency.
R
7. Including in the consolidated financial statements a subsidiary
acquired several years earlier that was appropriately not included in
previous years.
N*
8. Change by a retail store from reporting warranty expense on a pay-asyou-go basis to estimating the expense in the period of sale.
PR
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.)
E
10. Pension plan assets for a defined benefit pension plan achieving a rate
of return in excess of the amount anticipated.
*Error correction: change from an unacceptable method to GAAP.
Exercise 20-19
Requirement 1
The 2022 error caused 2022 net income to be understated, but since 2022
ending inventory is 2023 beginning inventory, 2023 net income was overstated by
the same amount. So, the income statement was misstated for 2022 and 2023, but
the balance sheet (retained earnings) was incorrect only for 2022 with regard to this
error. After that, no account balances are incorrect due to the 2022 error.
Analysis:
2022
Beginning inventory
Plus: net purchases
Less: ending inventory
Cost of goods sold
Revenues
Less: cost of goods sold
Less: other expenses
Net income
U = Understated
O = Overstated
→

U →
O
O
U

Retained earnings
2023
Beginning inventory
Plus: net purchases
Less: ending inventory
Cost of goods sold
Revenues
Less: cost of goods sold
Less: other expenses
Net income
U
U
U
O

U
Retained earnings
corrected
Exercise 20-19 (concluded)
However, the 2023 error has not yet self-corrected. Both retained earnings and
inventory still are overstated as a result of the second error.
Analysis:
2023
Beginning inventory
Plus: net purchases
Less: ending inventory
Cost of goods sold
Revenues
Less: cost of goods sold
Less: other expenses
Net income
U = Understated
O = Overstated
O
U
U
O

Retained earnings
O
Requirement 2
Retained earnings (overstatement of 2023 income) …………………… 150,000
Inventory (overstatement of 2024 beginning inventory) …………..
150,000
Requirement 3
Retrospectively. The financial statements that were incorrect as a result of both
errors (effect of one error in 2022 and effect of two errors in 2023) would be
retrospectively restated to report the correct inventory amounts, cost of goods sold,
income, and retained earnings when those statements are reported again for
comparative purposes in the current annual report. A prior period adjustment to the
balance of retained earnings would be reported, net of tax, and a disclosure note
should describe the nature of the error and the impact of its correction on each year’s
affected line items, net income, and earnings per share.
Exercise 20-23
Error a
2023
Income Statement:
Balance Sheet:
Expenses understated, net income overstated.
Liabilities understated, retained earnings overstated.
2024
Retained earnings…………………………………………………………..
Salaries expense ……………………………………………………….
1,800
1,800
Error b
2023
Income Statement:
Balance Sheet:
Revenue overstated, net income overstated.
Liabilities understated, retained earnings overstated.
2024
Retained earnings…………………………………………………………..
Rent revenue ……………………………………………………………..
Deferred rent revenue …………………………………………………
90,000
45,000
45,000
Error c
2023
Income Statement:
Balance Sheet:
Revenue understated, net income understated.
Assets understated, retained earnings understated.
2024
Interest revenue ……………………………………………………………..
Retained earnings……………………………………………………….
8,000
8,000
Exercise 20-24
U = understated
O = overstated
NE = no effect
Cost of
Goods Sold
U
Net
Income
O
Retained
Earnings
O
2. Overstatement of purchases
O
U
U
3. Understatement of beginning inventory
U
O
O
4. Freight-in charges are understated
U
O
O
5. Understatement of ending inventory
O
U
U
6. Understatement of purchases
U
O
O
7. Overstatement of beginning inventory
O
U
U
8. Understatement of purchases and
understatement of ending inventory, by
the same amount
NE
NE
NE
1. Overstatement of ending inventory
Exercise 19–2
Requirement 1
$2.50
x 12 million
= $30 million
fair value per share
shares represented by RSUs granted
total compensation
Requirement 2
no entry
Requirement 3
($ in millions)
Compensation expense ($30 million ÷ 3 years)…
Paid-in capital—restricted stock ……………..
10
10
Requirement 4
Compensation expense ($30 million ÷ 3 years)…
Paid-in capital—restricted stock ……………..
10
10
Requirement 5
Compensation expense ($30 million ÷ 3 years)…
Paid-in capital—restricted stock ……………..
10
10
Requirement 6
Paid-in capital—restricted stock …………………
Common stock (12 million shares x $1 par) …..
Paid-in capital—excess of par (remainder) …
30
12
18
Exercise 19–5
Requirement 1
At January 1, 2024, the estimated value of the award is:
$12
estimated fair value per share
x 30 million
RSUs granted
= $360 million
total compensation
($ in millions)
Compensation expense ($360 million ÷ 3 years) ………………………
Paid-in capital—restricted stock ……………………………………
120
120
Requirement 2
We adjust the cumulative amount of compensation expense recorded to
date in the year a forfeiture occurs.
2 years of the 3-year
vesting period have
passed
2025
Compensation expense ([$360 – (5% x $360) x 2/3] – $120)..
Paid-in capital—restricted stock ……………………………………
108
108
All of the 3-year vesting
period has passed
Requirement 3
2026
Compensation expense ([$360 – (5% x $360) x 3/3] – $120 – $108)
Paid-in capital—restricted stock ……………………………………
Note:
114
114
As a practical expedient, companies can elect to account for forfeitures of
stock options or restricted stock when they occur rather than estimating
them. So rather than reduce in advance the amount to be recorded as
compensation expense and paid-in capital, companies choosing this
approach reduce those same accounts only if and when a forfeiture occurs.
This election only applies to forfeitures related to turnover. For share-based
plans with performance conditions, companies must assess the probability
that such conditions will be achieved. A company must disclose its policy
election for forfeitures (estimated or recorded as they occur).
Exercise 19–8
Requirement 1
At January 1, 2024, the estimated value of the award is:
$ 1
estimated fair value per option
x 40 million
options granted
= $40 million
total compensation
Requirement 2
($ in millions)
Compensation expense ($40 million ÷ 2 years)…
Paid-in capital—stock options ……………….
20
20
Requirement 3
Compensation expense ($40 million ÷ 2 years)…
Paid-in capital—stock options ……………….
20
20
Requirement 4
Cash ($8 exercise price x 30 million shares) ……………………
Paid-in capital—stock options
(3/4 account balance of $40 million) ……………………………
Common stock (30 million shares at $1 par per share) ….
Paid-in capital—excess of par (remainder) ……………….
240
30
30
240
Note: The market price at exercise is irrelevant.
Requirement 5
Paid-in capital—stock options ($40 – $30 million) ………
Paid-in capital—expiration of stock options ……….
10
10
Exercise 19–10
Cash ($12 x 50,000 x 85%)
Compensation expense ($12 x 50,000 x 15%)
Common stock ($1 x 50,000)
Paid-in capital—in excess of par ($11 x 50,000)
510,000
90,000
50,000
550,000
Exercise 19–13
1. EPS in 2024
(amounts in thousands, except per share amount)
net
income
Earnings
Per Share
$400
$400
——————————————————————————
–––– =
$2.00
202
– 6 (10/12)
+ 6 (2/12)
+ 24 (1/12)
200
shares
at Jan. 1
treasury
shares
treasury shares
sold
new
shares
2. EPS in 2025
(amounts in thousands, except per share amount)
net
income
Earnings
Per Share
$400
$400
——————————————————————————
–––– =
$0.88
(202 – 6 + 6 + 24)
x (2.00)
452
shares
at Jan. 1
stock split
adjustment
3. 2024 EPS in the 2025 comparative financial statements
(amounts in thousands, except per share amount)
net
income
Earnings
Per Share
$400
$400
——————————————————————————
–––– =
$1.00
200
x (2.00)
400
weighted-average shares
as previously calculated
stock split
adjustment
Exercise 19–16
(amounts in millions, except per share amount)
net
income
preferred
dividends
Earnings
Per Share
$150
– $27*
——————————————————————
$0.65
200 (1.05) – 24 (10/12) (1.05)
+ 4 (3/12)
shares
at Jan. 1
treasury
shares
new
shares
___ stock dividend ___
adjustment
*9% x $100 x 3 million shares = $27 million preferred dividends
$123
= ———
190
=
Exercise 19–20
(amounts in thousands, except per share amount)
Basic EPS
net
income
$720
$720
———————————————————— = ——
80
+ 15 (4/12)
85
shares
at Jan. 1
= $8.47
new
shares
Diluted EPS
net
income
$720
$720
————————————————————— = —— = $8.09
80
+ 15 (4/12)
+ (24 – 20*)
89
shares
at Jan. 1
new
shares
assumed exercise
of options
*Purchase of treasury shares
24,000
x
$37.50
$900,000
÷
$45
20,000
shares
(exercise price)
(average market price)
shares
Exercise 19–21
(amounts in thousands, except per share amounts)
Basic EPS
net
income
preferred
dividends
$500
– 60*
$440
——————————————————————— = ——— = $4.40
100
100
shares
at Jan. 1
Diluted EPS
net
income
preferred
dividends
preferred
dividends
after-tax
interest savings
$500
– 60*
+ 60*
+ $80** – 25% ($80)
$560
——————————————————————————— = —— =
$3.46
100
+ 32
+ 30
162
shares
at Jan. 1
* 12,000 shares x $5
** $1,000,000 x 8%
conversion
of preferred
stock
conversion
of bonds
Order of Entry:
Note that we included in our calculation, the convertible security with the lowest
“incremental effect” ($60 ÷ 32 = $1.87) before the one with the higher effect ($60
÷ 30 = $2.00).
After including the conversion of the preferred stock only, EPS is $500 ÷ 132 =
$3.79. The $2.00 incremental effect of the conversion of the bonds is less than that
amount, so in this instance the order of entry was unimportant. But there are
situations in which the incremental effect of the second convertible security is
higher than the calculation prior to its inclusion. In those situations, including the
second security is antidilutive. That’s why we should include securities in the
calculation in reverse order, beginning with the lowest incremental effect (most
dilutive).
Exercise 19–29
Requirement 1
The SARs are considered to be equity because IE will settle in shares of IE
stock at exercise.
January 1, 2024
No entry
Calculate total compensation expense:
$ 3
estimated fair value per SAR
x 24 million SARs granted
= $72 million total compensation
The total compensation is allocated to expense over the four-year service
(vesting) period: 2024 – 2027
$72 million ÷ 4 years = $18 million per year
Requirement 2
December 31, 2024, 2025, 2026, 2027
($ in millions)
Compensation expense ($72 million ÷ 4 years)…
18
Paid-in capital—SAR plan………………….
18
Requirement 3
The total compensation is measured once — at the grant date — and is not remeasured subsequently.
Requirement 4
June 6, 2029
Paid-in capital—SAR plan (account balance)………… 72.00
Common stock ($1 par per share x [$96 million* ÷ $50])
1.92
Paid-in capital—in excess of par (to balance)…….
70.08
*$50 – $46 = $4 appreciation per share times 24 million units = $96 million
Exercise 19–30
Requirement 1
The SARs are considered to be a liability because employees can elect to receive
cash at exercise.
January 1, 2024
No entry
Requirement 2
December 31, 2024
($ in millions)
Compensation expense ($4 x 24 million x 1/4)………………………….
24
Liability—SAR plan ……………………………………….…….
24
December 31, 2025
Compensation expense ([$3 x 24 million x 2/4] – $24)…………….…….
Liability—SAR plan ……………………………………………..
12
December 31, 2026
Compensation expense ([$4 x 24 million x 3/4] – $24 – $12)……….……
Liability—SAR plan………………………………………….……
36
December 31, 2027
Liability—SAR plan …………………………………………………
Compensation expense ([$2.50 x 24 million x 4/4] – $24 – $12 – $36).
12
Requirement 3
December 31, 2028
Compensation expense ([$3 x 24 million x all] – $24 – $12 – $36 + $12).
Liability—SAR plan ………………………………………..…….
12
36
12
12
12
Requirement 4
June 6, 2029
Compensation expense ([($50 – $46) x 24 million x all]
– $24 – $12 – $36 + $12 – $12)…………………………………………….…….
24
Liability—SAR plan ………………………………………………
Liability—SAR plan (account balance)…………………………….……..
Cash………………………………………………………………..
24
96
96