Kế toán tài chính 2 - Chapter 18: Additional reporting issues

CHAPTER 18ADDITIONAL REPORTING ISSUESINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Wyegandt Kieso Changes in accounting principleChanges in accounting estimateReporting a correction of an errorSummaryAccounting ChangesReporting Earnings Per ShareSimple capital structureComplex capital structureEPS summaryAdditional Reporting IssuesIdentify the types of accounting changes.Understand how to account for retrospective accounting changes.Understand how to account for impracticable changes.Describe the accounting for changes in estimates.Describe the accounting for correction of errors.Compute earnings per share in a simple capital structure.Compute earnings per share in a complex capital structure.Learning ObjectivesTypes of Accounting Changes:Change in Accounting Principle.Changes in Accounting Estimate.Change in Reporting Entity.Errors are not considered an accounting change.LO 1 Identify the types of accounting changes.Accounting alternatives: Diminish the comparability of financial information.Obscure useful historical trend data.Accounting ChangesAverage cost to LIFO.Completed-contract to percentage-of-completion.A change from one generally accepted accounting principle to another. Examples include:Changes in Accounting PrincipleAdoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.Retrospective Accounting Change ApproachChanges in Accounting PrincipleLO 2 Understand how to account for retrospective accounting changes.Company reporting the changeadjusts its financial statements for each prior period presented to the same basis as the new accounting principle.adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.Example (Retrospective Change): Buildmore Construction Company used the completed contract method to account for long-term construction contracts for financial accounting and tax purposes in 2007, its first year of operations. In 2008, the company decided to change to the percentage-of-completion method for financial accounting purposes. Income before long-term contracts and taxes in 2007 and 2008 was $80,000 and $100,000. The tax rate is 40% and the company will continue to use the completed contract method for tax purposes.Retrospective Change ExampleLO 2 Understand how to account for retrospective accounting changes.Example Income from Long-Term ContractsLO 2 Understand how to account for retrospective accounting changes.Retrospective Change ExampleExample Comparative Income StatementsLO 2 Understand how to account for retrospective accounting changes.Retrospective Change ExampleExample Retained Earnings StatementLO 2 Understand how to account for retrospective accounting changes.Retrospective Change ExampleImpracticabilityChanges in Accounting PrincipleLO 3 Understand how to account for impracticable changes.Companies should not use retrospective application if one of the following conditions exists:Company cannot determine the effects of the retrospective application.Retrospective application requires assumptions about management’s intent in a prior period.Retrospective application requires significant estimates that the company cannot develop.If any of the above conditions exists, the company prospectively applies the new accounting principle.Changes in Accounting EstimateLO 4 Describe the accounting for changes in estimates.The following items require estimates.Uncollectible receivables.Inventory obsolescence.Useful lives and salvage values of assets.Liabilities for warranty costs and income taxes.Change in depreciation methods.Companies report prospectively changes in accounting estimates.Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2005 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Required:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2005.No Entry RequiredChange in Estimate ExampleLO 4 Describe the accounting for changes in estimates.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2004)Change in Estimate ExampleAfter 7 yearsEquipment cost $510,000Salvage value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.LO 4 Describe the accounting for changes in estimates.Change in Estimate ExampleAfter 7 yearsNet book value $160,000Salvage value (new) 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Second, calculate depreciation expense for 2005.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2005LO 4 Describe the accounting for changes in estimates.Reporting a Correction of an ErrorLO 5 Describe the accounting for correction of errors.Accounting errors include the following types:A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable. Mathematical mistakes.Changes in estimates that occur because a company did not prepare the estimates in good faith. Failure to accrue or defer certain expenses or revenues.Misuse of facts.Incorrect classification of a cost as an expense instead of an asset, and vice versa.Reporting a Correction of an ErrorLO 5 Describe the accounting for correction of errors.All material errors must be corrected. Record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period. Such corrections are called prior period adjustments.For comparative statements, a company should restate the prior statements affected, to correct for the error.Before issuing the report for the year ended December 31, 2007, you discover a $62,500 error that caused the 2006 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2006). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007? Assume a 20% tax rate. Retained Earnings StatementLO 5 Describe the accounting for correction of errors.Retained Earnings StatementLO 5 Describe the accounting for correction of errors.Summary of Accounting Changes and Corrections of ErrorsLO 5 Describe the accounting for correction of errors.Changes in accounting principle are appropriate only when a company demonstrates that the newly adopted generally accepted accounting principle is preferable to the existing one. Companies and accountants determine preferability on the basis of whether the new principle constitutes an improvement in financial reporting, not on the basis of the income tax effect alone.Earnings per share indicates the income earned by each share of common stock.Companies report earnings per share only for common stock.When income statement contains intermediate components of income, companies should disclose earnings per share for each component.Section 2 – Reporting Earnings Per ShareIllustration 18-18LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureSimple Structure--Only common stock; no potentially dilutive securities.Complex Structure--Potentially dilutive securities are present.“Dilutive” means the ability to influence the EPS in a downward direction.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructurePreferred Stock DividendsSubtracts the current year preferred stock dividend from net income to arrive at income available to common stockholders.Illustration 18-19Preferred dividends are subtracted on cumulative preferred stock, whether declared or not. LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureWeighted-Average Number of SharesCompanies must weight the shares by the fraction of the period they are outstanding.Stock dividends or stock splits: companies need to restate the shares outstanding before the stock dividend or split.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureExercise: On January 1, 2008, Wilke Corp. had 480,000 shares of common stock outstanding. During 2008, it had the following transactions that affected the common stock account.Instructions: Determine the weighted-average number of shares outstanding as of December 31, 2008.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureWeighted-Average Number of SharesLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureComplex Capital Structure exists when a business hasconvertible securities, options, warrants, or other rights that upon conversion or exercise could dilute earnings per share. Company reports both basic and diluted earnings per share.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureDiluted EPS includes the effect of all potential dilutive common shares that were outstanding during the period.Illustration 18-28Companies will not report diluted EPS if the securities in their capital structure are antidilutive.Diluted EPS – Convertible SecuritiesMeasure the dilutive effects of potential conversion on EPS using the if-converted method.This method for a convertible bond assumes: the conversion at the beginning of the period (or at the time of issuance of the security, if issued during the period), and the elimination of related interest, net of tax.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (Convertible Bonds) In 2006 Chirac Enterprises issued, at par, 60, $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2007. (Assume that the tax rate is 40%.) Throughout 2007, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.Instructions:(a) Compute diluted earnings per share for 2007.(b) Assume same facts as those for Part (a), except the 60 bonds were issued on September 1, 2007 (rather than in 2006), and none have been converted or redeemed.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (a) Compute diluted EPS for 2007.Calculation of Net IncomeLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureWhen calculating Diluted EPS, begin with Basis EPS.Net income = $2,580Weighted average shares = 2,000=$1.29Basic EPSExercise: (a) Compute diluted EPS for 2007.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureWhen calculating Diluted EPS, begin with Basis EPS.$2,5802,000=$.68Diluted EPS+$4,800 (1 - .40)6,000Basic EPS = 1.29$5,4608,000=Effect on EPS = .48+Exercise: (a) Compute diluted EPS for 2007.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureCalculation of Net IncomeExercise: (b) Assume bonds were issued on Sept. 1, 2007 LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureWhen calculating Diluted EPS, begin with Basis EPS.$4,5002,000=$1.37Diluted EPS$1,600 (1 - .40)6,000 x 4/12 yr.$5,4604,000=Effect on EPS = .48Basic EPS = 2.25++Exercise: (b) Assume bonds were issued on Sept. 1, 2007 LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureProblem: (Variation-Convertible Preferred Stock) Prior to 2007, Prancer Company issued 30,000 shares of 6% convertible, cumulative preferred stock, $100 par value. Each share is convertible into 5 shares of common stock. Net income for 2007 was $1,200,000. There were 600,000 common shares outstanding during 2007. There were no changes during 2007 in the number of common or preferred shares outstanding.Instructions:(a) Compute diluted earnings per share for 2007.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureProblem: (a) Compute diluted EPS for 2007.When calculating Diluted EPS, begin with Basis EPS.Net income $1,200,000 – Pfd. Div. $180,000*Weighted average shares = 600,000=$1.70Basic EPS* 30,000 shares x $100 par x 6% = $180,000 dividendLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureWhen calculating Diluted EPS, begin with Basis EPS.600,000=$1.60Diluted EPS$180,000Basic EPS = 1.70=Effect on EPS = 1.20$1,200,000 – $180,000150,000*$1,200,000750,000*(30,000 x 5)++Problem: (a) Compute diluted EPS for 2007.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital Structure600,000=$1.74Diluted EPS$180,000Basic EPS = 1.70=Effect on EPS = 2.00Problem: (a) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into 3 shares of common stock. $1,200,000 – $180,00090,000*$1,200,000750,000*(30,000 x 3)++LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital Structure600,000=$1.70Diluted EPS$180,000Basic EPS = 1.70=Effect on EPS = 2.00$1,200,000 – $180,00090,000*$1,200,000750,000*(30,000 x 3)AntidilutiveBasic = Diluted EPSProblem: (a) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into 3 shares of common stock. ++Diluted EPS – Options and WarrantsMeasure the dilutive effects of potential conversion using the treasury-stock method.This method assumes: company exercises the options or warrants at the beginning of the year (or date of issue if later), and that it uses those proceeds to purchase common stock for the treasury.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (EPS with Options) Venzuela Company’s net income for 2007 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2006, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding during 2007. The average market price of the stock during 2007 was $20.Instructions:(a) Compute diluted earnings per share. (b) Assume the 1,000 options were issued on October 1, 2007 (rather than in 2006). The average market price during the last 3 months of 2007 was $20.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (a) Compute diluted EPS for 2007.Treasury-Stock Method÷LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (a) Compute diluted EPS for 2007.When calculating Diluted EPS, begin with Basis EPS.$50,00010,000=$4.67Diluted EPS+700Basic EPS = 5.00$50,00010,700=Options+LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureTreasury-Stock Method÷Exercise: (b) Compute diluted EPS assuming the 1,000 options were issued on October 1, 2007.xLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureExercise: (b) Compute diluted EPS assuming the 1,000 options were issued on October 1, 2007.$50,00010,000=$4.91Diluted EPS175Basic EPS = 5.00$50,00010,175=Options+LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureAntidilution RevisitedIgnore antidilutive securities in all calculations and in computing diluted earnings per share. Intent is to inform investor of possible dilution in reported earnings per share and not to be concerned with securities that would result in an increase in earnings per share.EPS Presentation and DisclosureA company should show per share amounts for: income from continuing operations, income before extraordinary items, and net income.Per share amounts for a discontinued operation or an extraordinary item should be presented on the face of the income statement or in the notes.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureCopyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. 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