ACCT 6330 Financial Reporting and Analysis Chapter 5 Graded Assignment

Problem 1 - Correction of errors (LO5-2) Krafty Kris, Inc., discovered the following errors after the 20X1 financial statements were issued: a. A major supplier shipped inventory valued at $8,550 to Krafty Kris on consignment. This merchandise was mistakenly included in the inventory taken by Krafty Kris on December 31, 20X0. (Goods shipped on consignment are the property of the consignor and should not have been included in Krafty Kriss inventory.) b. Krafty Kris renewed its liability insurance policy on October 1, 20X0, paying a $36,000 premium and debiting Insurance expense. No further entries have been made. The premium purchased insurance coverage for a period of 36 months. c. Repair expense was debited at the time equipment was purchased for $100,000 on January 1, 20X1. The equipment has a life of five years; its salvage value is considered immaterial. Krafty uses straight-line depreciation method. Required: 1. Prepare journal entries to correct these errors. Ignore income taxes. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

No. Transaction General Journal Account Title Debit Credit 2. Describe the content in the comparative periods in the Krafty Kris, Inc. 20X1 financial statements. That is, how is the correction reflected in the 20X1 financial report.

3. If these errors were to remain uncorrected, what would be the effects on the 20X2 financial statements issued by Krafty Kris, Inc.?

Problem 2 - Reporting a change in accounting principle (LO 5-1) Barden, Inc., operates a retail chain that specializes in baby clothes and accessories that are made to its specifications by a number of overseas manufacturers. Barden began operations 20 years ago and has always employed the FIFO method to value its inventory. Since Bardens inception, prices have generally declined as a result of intense competition among Bardens suppliers. In 20X0, however, prices began to rise significantly as these suppliers succumbed to international pressure and addressed sweatshop conditions in their factories. The improved working conditions and benefits led to increased costs that are being passed on to Barden. In turn, Bardens management believes that FIFO no longer is the best method to value its inventories and thus switched to LIFO on January 1, 20X1. This accounting change was justified because of LIFOs better matching of current costs with current revenues. Barden judges it impractical to apply the LIFO method on a retrospective basis because the company never maintained records on a LIFO basis. As a result of the change, ending 20X1 inventory was reported at $275,000 instead of its $345,000 FIFO value. Barden reported 20X1 net income of $825,000. Ignore income taxes and the EPS disclosure. Required: 1. How should Bardens 20X1 comparative financial statements reflect this change in accounting principle?

2. Prepare whatever disclosure is required under current GAAP as a result of this change.

Problem 3 - Making financial disclosures (LO 5-3) The preliminary draft of the balance sheet at the end of the current fiscal year for Eagle Industries follows. The statement will be incorporated into the annual report to stockholders and will present the dollar amounts at the end of both the current and prior years on a comparative basis. The accounts in the statement are properly classified, and the dollar amounts have been determined in accordance with generally accepted accounting principles. The company does not intend to provide any more detailed information in the body of the statement. Balance Sheet as of December 31, 20X1 ($ in millions) Assets Current assets Cash $ 13.4 Short-term investments 6.8 Accounts receivable (net) 113.0 Inventories 228.0 Prepayments and other 4.8 Total current assets 366.0 Investments in equity securities (available for sale) 55.2 Property, plant, and equipment (net) 787.1 Total assets $ 1,208.3 Liabilities and Stockholders Equity Current liabilities Current maturities on long-term debt $ 36.3 Notes payable 79.5 Accounts payable 139.8 Accrued taxes 42.3 Accrued interest 11.0 Other 4.4 Total current liabilities 313.3 Long-term liabilities 477.2 Total liabilities 790.5 Stockholders equity Preferred stock 30.0 Common stock 77.0 Additional paid-in capital on common stock 65.4 Retained earningsappropriated 40.8 Retained earningsunappropriated 204.6 Total stockholders equity 417.8 Total liabilities and stockholders equity $ 1,208.3 Required: Identify the accounts that most likely would require further disclosure in the notes to the financial statements and describe what information would have to be disclosed in those notes by Eagle Industries before the statement can be included as part of the annual report for presentation to its stockholders.